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. Last Updated: 07/27/2016

Sakhalin Island Fears Oil Wealth Passes It By

bloombergWhile $10 billion in investment has boosted Sakhalin's economy, many residents feel left out of the boom.
YUZHNO-SAKHALINSK -- The Far East island of Sakhalin, home to one of the world's most ambitious energy developments, promises a windfall for the Kremlin, but local residents fear the oil-and-gas boom will pass them by.

International oil companies, including ExxonMobil and Royal Dutch Shell, are investing billions of dollars to tap the vast reserves of this island the size of Scotland, off the Pacific coast and north of Japan.

Sakhalin presents a microcosm of the problems facing Russia as it struggles to use its resource riches to strengthen the economy and lift millions out of poverty, economists say.

The task has, ironically, become more challenging as rising oil prices boost state coffers.

The petrodollars flooding Russia's economy are boosting growth but leaving some rural areas untouched, widening the gap between rich and poor regions.

Some in Sakhalin -- a starkly beautiful storm-lashed island that used to rely on coal mining, paper pulp milling and fishing -- feel they too are being forgotten, despite the oil and gas reserves in their backyards.

"While there are pockets of prosperity and a growing 'petro elite,' the wider population of Sakhalin has relatively little to show for a decade of development," said Michael Bradshaw, an expert on Sakhalin's economy and professor of human geography at Britain's Leicester University.

One of the main energy projects on the island -- the ExxonMobil-led Sakhalin-1, which started pumping oil this month -- has created 13,000 jobs, but numbers will drop as soon as contracting work runs out.

"A lot of local people have got building work on energy projects on the island, but much of that will stop in a year," said Mikhail Bugayev, an editor at Free Sakhalin newspaper.

The Sakhalin oil fields hold one of the largest reserves under development in the world, with 1.2 billion barrels of crude oil and 500 billion cubic meters of natural gas.

More than $10 billion in investment has already poured into Sakhalin, and an enclave economy seems to be taking shape with small pockets of prosperity around the oil and gas fields.

The island's capital of Yuzhno-Sakhalinsk, home to about one-fifth of the island's 600,000 inhabitants, bustles with life.

There are new hotels, shopping centers and supermarkets -- classic symbols of the post-Soviet path to consumer capitalism.

Japanese cars, many with right-hand drive, clog the streets, and there are few European vehicles to be seen -- a reminder to visitors that Sakhalin lies firmly in Asia's economic sphere of influence.

But crumbling, prefabricated housing blocks still blight the urban landscape, a grim reminder of the collectivist past.

ExxonMobil and Shell are both at pains to explain the unimagined prosperity they are helping to bring to the island.

Sakhalin Energy, the consortium led by Shell developing Sakhalin-2, says it alone has spent some $300 million modernizing roads, railways and hospitals.

The Shell consortium has also joined forces with ExxonMobil to build a new airport at Nogliki, in the north of the island, and to upgrade one of the main ports in Sakhalin at Kholmsk.

Some 17,000 people are also working on the Sakhalin-2 natural gas venture. But that is set to fall to around 2,400 when work is completed on the liquefied natural gas terminal.

Locals are resentful that only 5 percent of royalties from the oil and gas business will be given to the island.

The balance will go to the government in Moscow in a sign of the growing centralization of state finances under President Vladimir Putin.

Islanders were originally promised a much larger slice of royalties under former President Boris Yeltsin.

Dmitry Lisitsyn, a campaigner who worries the industry is damaging the environment, says a unique opportunity to secure Sakhalin's long-term economic future risks being frittered away.

Both the ExxonMobil and Shell-led ventures have paid tens of millions of dollars into the Sakhalin Development Fund, set up to help finance improvements to the crumbling infrastructure.

"Of course there has been an improvement in the roads, but it's much less than people expected," Lisitsyn said.

The island's main airport at Yuzhno-Sakhalinsk is still struggling to cope with the higher number of travelers passing through.

There are also wildlife concerns: Sakhalin-2 is near the feeding ground of endangered Western gray whales, and Greenpeace has protested about the danger to the mammals.

Sakhalin was woefully ill-prepared for the oil boom when international oil companies signed production-sharing deals in the 1990s with Moscow to develop the hydrocarbon riches.

The island's paper industry collapsed with the fall of the Soviet Union, and the coal industry was run-down, throwing thousands out of their jobs.

Many young people have left Sakhalin.

"All things have led to a situation where the level of local involvement is modest," Bradshaw said.

"Two-thirds of the work force engaged on the energy projects is not from Sakhalin."

He warned the island could miss out again when a second wave of energy ventures came on stream later in the decade because it lacked an industrial base to support the offshore industry.

Lisitsyn said local officials had not planned for economic development. Fisheries were unable to secure credits to expand and tourist potential had been neglected, he said.

Despite a gloomy past as a penal colony, whose brutality was chronicled by playwright Anton Chekhov in a graphic survey of the island's prison population on a visit in 1890, Sakhalin has breathtaking scenery and mild weather for half the year.

"Many good hotels have been built, and a lot of people are using them as a result of the boom," said Lisitsyn.