Sakhalin page debuts This issue marks the debut of the Vladivostok News’ Web page on Sakhalin, a place where Russian and foreign investors are drooling over vast oil reserves lying offshore.

Fishing company to tow Sakhalin platform By Mike Eckel A Vladivostok-based fishing company is the first of many Primorye businesses expected to benefit from the influx of money to the oil projects of Sakhalin Island. Sakhalin View A trip to “hell” opens a visitor’s eyes to Sakhalin’s potential By Andrew Wilson Raised in the eastern half of the U.S., I didn’t see the Pacific Ocean until I was 26, and I had to fly all the way around the world to get to it. And then I walked on it. Eurasia fund opens Sakhalin office The Vladivostok News The Eurasia Fund opened a new office on Sakhalin Island, officials announced recently. The organization hopes the office will foster growth in the region by dispersing grants and working closely with grant sponsors. Archives Black gold By Heidi Brown Investors, residents dream of oil riches. Sakhalin page debuts This issue marks the debut of the Vladivostok News’ Web page on Sakhalin, a place where Russian and foreign investors are drooling over vast oil reserves lying offshore. Andrew Wilson, president of Links, Ltd., launches “Sakhalin View,” a column on business and investment on the island just north of Japan. We reprint an overview of Sakhalin from the Vladivostok News’ archives. And we will be adding news stories to these pages over the next few weeks and months.     In addition, we are also looking for a Sakhalin-based stringer willing to Write occasional stories for us. Send an e-mail, including a resume and some clips of your writing, to russellworking@hotmail.com. Russell Working Editor The Vladivostok News Fishing company to tow Sakhalin platform By Mike Eckel A Vladivostok-based fishing company is the first of many Primorye businesses expected to benefit from the influx of money to the oil projects of Sakhalin Island.     DalRyba was recently awarded a contract by the Sakhalin Energy Investment Co. Ltd. to tow a $35 million steel oil platform base, or «spacer,» from Bolshoi Kamen to Pusan, South Korea. According to Anatoly Tsygankov, chief of the Expeditionary Division for the DalRyba’s Rescue Fleet, three of the fleet’s eight tugboats at the end of March will tow the spacer to the South Korean port. There it will be mated with an existing arctic offshore drilling unit before being towed to Sakhalin.     Tsygankov noted that while this sort of work was somewhat unusual for his boats, which typically support DalRyba’s fishing fleet, the tugboats are fully capable of towing the spacer.     Once the platform is fully assembled in August of this year, it will be towed from South Korea to the Sakhalin II Piltun-Astokhskoye oil field off the island’s north shore, said David Loran, regional director of Sakhalin Energy Investment Co. Ltd. Contracts for towing the 24,000-plus-ton platform to its final destination off Sakhalin will be awarded later this year, said Loran. Drilling is expected to begin at the field in October.     The DalRyba towing contract -- along with the spacer itself, which the Amur Shipbuilding Factory constructed in Komsomolsk-na-Amure -- is further evidence of the far-reaching economic effects that the island’s oil and gas projects will have on Sakhalin, Primorye, and the entire Russian Far East.     Collectively, the five oil fields of the two primary Sakhalin projects, Sakhalin I and Sakhalin II, are estimated to be worth $25 billion in foreign investment. That sum, when considered with the potential economic multiplier effect of eight times per dollar invested, is expected to bring substantial benefits to companies and individuals throughout the region.     By March of last year, Exxon Neftegas Ltd., one of four operators for Sakhalin I, had awarded 90 contracts to Russian and foreign firms, mostly for surveying and test drilling, according to Tanya Shuster, senior Russia trade specialist with the Business Information Service for the Newly Independent States. As the oil and gas projects further develop, many oil companies will contract out other services such as communications inspection and security services, transportation, fuel supplies, and housing construction, Shuster said.     In addition to requiring to substantial infrastructure improvements on Sakhalin Island and in the neighboring krais, the projects will also attract expatriate workers whose demands for consumer goods and services not readily available on the island may also provide business opportunities. [Back to the top]  [Back to Front page]  [Write to us] Sakhalin View A trip to “hell” opens a visitor’s eyes to Sakhalin’s potential By Andrew Wilson Raised in the eastern half of the U.S., I didn’t see the Pacific Ocean until I was 26, and I had to fly all the way around the world to get to it. And then I walked on it.     It was my first trip to Sakhalin Island, in January 1991, a visit which was more of a lark than anything else. I was working in Moscow at the time, and three colleagues and I decided to spend 18 hours on an airplane for a frigid three-day weekend on Sakhalin. I desperately wanted to see the ocean, and so we arranged to drive from the capital city of Yuzhno-Sakhalinsk to a fishing town called Dolinsk.     When we got out of the car to take pictures, we were amazed to see that the ice, battered and buckled by the wind, extended as far eastward into the ocean as we could see. Later that day, after watching an extensive fishing operation consisting of casting large nets under the ice of the Dolinsk River, I saw some of the steepest snow banks and felt some of the fiercest wind of my life.     Anton Chekhov called this island “hell” after a visit in 1890, and he wasn’t referring to torturously high temperatures, to be sure. The island’s southernmost coast (visible on a clear day from the northern tip of Japan), barely gets warm enough for a chilly late summer dip. By contrast, the northern half of the island can only be described appropriately as arctic. What Chekhov saw on the island was a different kind of hell: The island served as a penal colony for criminal and political prisoners for 30 years at the end of the 19th century. But the turn of the century brought great change to Sakhalin, most notably in the form of invasion in 1905 by the Japanese, who held and administered the lower half of the island through the end of World War II.     Natural resources like timber, coal and fish fueled the Sakhalin economy through the second half of the 20th century, but these days the island’s oil reserves are grabbing all the headlines. The biggest opportunities lie offshore on the “shelf,” a climatic and seismic challenge of considerable enormity, even for the most well-endowed oil corporations. As the biggies wonder whether to sink billions of dollars into the construction of specialized offshore drilling equipment and a pipeline to the southern port of Korsakov, most of Sakhalin’s population remains skeptical about the future. But seasoned expatriate oil men think that Sakhalin is going to witness a boom to rival Alaska’s.     This bodes well for the flailing economy of this thin, 500-mile-long, ice-encased tract of land, and it promises to make the start of the next century as dramatic for the island as the beginning of this century was. Eurasia fund opens Sakhalin office The Vladivostok News The Eurasia Fund opened a new office on Sakhalin Island, officials announced recently. The organization hopes the office will foster growth in the region by dispersing grants and working closely with grant sponsors.     The new office started by appointing Oksana Stepanyuk project sales specialist. The Fund also approved grants for five projects proposed by Sakhalin organizations: The Sakhalin-Alaska College will create a Web server called Science on the Internet, with the goal of posting information on economic development of Sakhalin Oblast, use of natural resources, and disaster protection measures. The project is partially funded by oil drilling company Sakhalin Energy. The Contemporary Humanities Institute will establish a remote home-study center for young Sakhalin residents who study economics, business, management, law, information technology, and office administration. Sakhalin Energy also helped fund this grant. The information technology center Systema plans to create an integrated information network of learning institutions on Sakhalin. The project will set up a unified education server with news and education databases, as well as other on-line services. A final grant was given to Sakhalin Oblast’s Department of Education, Culture and Sports to implement the “Training for Trainers” project. The program will help Marshak Fund trainers teach management to 20 business educators from Sakhalin and Khabarovsky Krai. [Back to the top]  [Back to Front page]  [Write to us] Exxon Photo Crews drill an appraisal well that confirmed oil and gas off Sakhalin last year. Black gold Investors, residents dream of oil riches Huge deposits of crude oil and natural gas off Sakhalin Island could bring billions to foreign investors — and the Russians who work with them. But residents of the remote island are hoping they have something to gain from the black gold rush. By Heidi Brown For 50 years, scientists and companies around the world have known about the huge crude oil and natural gas deposits lying just off the coast of Sakhalin Island. But the Soviet government lacked the money to drill it, and the regime’s laws made international projects impossible. Now, two colossal projects on the Sakhalin shelf, known as Sakhalin I and Sakhalin II, are poised to begin within the next few years. Thanks to cooperative agreements between Russia and the oil companies, the projects have already brought millions of dollars and scores of foreigners to the island and promise benefits for the entire Russian Far East. “We’ll gain employment on Sakhalin, and private enterprise here will grow,” said Oleg Konyukh, head of the Sakhalin Oblast’s Department of Economics. “Our manufacturers will get more business, and the entire Russian Far East will profit from the shelf development.” Sakhalin needs whatever help it can get right now. Like much of Russia, the island faces rising unemployment. Its doctors, teachers and coal miners take turns in hunger strikes, desperate for months of back pay. The primitive train system takes passengers only halfway up the island. In addition, Sakhalin’s isolation (and stagnant manufacturing) means consumer goods are up to 50 percent more expensive than in Vladivostok. The oil companies won’t be able to control prices in the stores or pay state employees’ salaries, but the local administration has proof the projects will help local residents. For the first time in Russia, the Sakhalin oblast government and the Russian Federation have signed special agreements that assure profits for both the companies and Russians, said Frank Duffield, president of Sakhalin Energy, the consortium developing Sakhalin II. The production-sharing agreements obligate the operating companies to pay royalties to Russia for using its resources. In this case, Russia will also receive bonuses after each stage of the project’s development has been completed. According to a recent agreement, the Sakhalin administration and the federal government will divide these funds, with the larger share going to the island. And after pumping begins, the oil companies will pay the Sakhalin administration $100 million over the next five years for improvements to its railroads, highways and agriculture. In return, the government guarantees the main investing partners access to the oil for marketing, transport and sale. But the agreements offer further benefits, not just for Sakhalin but for the entire Russian Far East: an agreement by the oil companies to give up to 70 percent of contracts to Russian or joint-venture Russian companies. At a recent conference in Yuzhno-Sakhalinsk, Russian business people gathered to hear contracting opportunities with the oil consortiums that are leading Sakhalin I and II. The presenters stressed that Russian firms need to offer competitive pricing and high quality, on-time service to win the contracts. The consortiums want Russian participation on a host of project details, from ecological geologists to housing contractors for employee residences on the island. And to give information on financing the projects, several for-profit and non-profit funding entities attended the event. Sakhalin I is led by Exxon, in partnership with the Japanese company Sedeko and the recently-privatized Russian enterprises SakhMorNefteGas and RosNeft. Sakhalin Energy is carrying out Sakhalin II and consists of Marathon, Royal Dutch Shell, McDermott, Mitsubishi and Mitsui. Accustomed to world-class quality, the oil companies say they’re facing a new challenge in guiding Russian businesses to work in competition with Western firms. Mostly, they say, they hope the Russian companies will form joint ventures; this will give them access to the experience and financing that would be hard to get on their own. Without Western partners, Russian firms will have a hard time getting financing, says Ronald Scherpenhuijsen Rom, senior finance manager at ING Bank in Tokyo and a coference attendee. He says Far East Russian companies’ inexperience in the world market makes them an unknown. “It’s a chicken and egg thing. Russian companies need financing to get approval for their projects, but we can’t finance them until we know they’ve won the [contract],” since they often have short track records, says Rom. And maybe it’s from the disillusionment of communism’s fall, but many Sakhalin businessmen and residents are cautious about the shelf venture. Said Victor Kanarsky, founder of a Russian fishing company association on Sakhalin, “I don’t think it will necessarily bring direct profit to Sakhalin. Yes, we will get some jobs. But if you think about it, $100 million is pocket change. One ship costs $16 million; what can we really accomplish with that money?” But Valery Koltsov, manager of the Sakhincenter, Yuzhno-Sakhalinsk’s enormous business building, is unequivocal about the benefits. “We’re the barometer of business,” says Koltsov. “And we’re doing so well that we don’t have to advertise” for occupants. Mostly, though, Sakhalin residents are waiting to see if promises made actually come true. The Sakhalin administration, for example, promises that revenues from the project will be used to improve the island’s inadequate infrastructure, but many fear the funds will end up in a few politicians’ pockets. “International firms should worry about whether the money is going where it’s supposed to,” says Vladimir Sorochan, editor of Sovetsky Sakhalin, the island’s main newspaper. “It’s important for everyone to feel a benefit from the shelf project — not just a few authorities.” Right now, there is reason for cautiousness. Boris Yeltsin signed the production sharing agreements last year, but the Duma still hasn’t beefed up the weak legislation that the consortiums need in order to go ahead with the projects. “If the work on the projects doesn’t continue,” says Konyukh, “we’ll lose our investment potential.” For Sakhalin, the agreement with Moscow to share the project revenue was a coup; Sakhalin will take 60 percent while Moscow will get 40. But representatives of both consortiums say they are waiting for the crucial supporting legislation to come through. One group that is proving to be vocal about the development is the endangered indigenous people who live in the island’s northern territory. They say that the oil companies have not fully researched the possible environmental damage from the drilling and pipelines, and they want compensation for the activity that will occur on their land. Nadyezhda Laygy, representative of ethnic minorities at the governor’s office, said the oblast administration in 1995 signed an agreement to provide 10-15 percent of the production sharing agreement bonuses received from the consortiums. They are also demanding more investigation of the development’s effects on their habitat. Michael Allen, Sakhalin Energy’s community relations representative, says his company still hasn’t discovered the possible effects of laying a planned pipeline from the north of the island all the way to Yuzhno-Sakhalinsk. And he says a study is needed on the gray whale, which summers in the Sea of Okhotsk. But phase one of the project involved a full environmental assessment. Representatives of both consortiums speak openly about the environmental dangers of shelf drilling. One of the most challenging areas of the world, the region is often rocked by seismic activity, and winter brings huge, moving ice floes. They hope to avoid disaster by designing special platforms and using experience gained in other seismic areas, like California. Still, given the Exxon Valdez disaster — when a ship dumped 11 million tons of oil into Alaskan waters — there is little environmental activism at all on Sakhalin yet. A few individuals, such as Kanarsky, the fishing company representative, worry that the drilling will wipe out the fish population. But organized environmental groups, other than the island’s native Nivkhi, Ivkhi and Ilgi, have not made much noise. But perhaps people’s silence is simply due to the size of the planned development. In 1996, Exxon Neftegas spent $60 million on seismic research and test drilling. This year, the budget is $180 million — and Larry Kennedy, Sakhalin operations manager, says oil won’t start pumping at least until the turn of the century. Once the crude starts flowing, he predicts these first fields alone will yield for 50 years. Even affluent Sakhalin residents are wary right now, however. Olga Che, an accountant, and Irina Ogoleva, manager of a trading company, say legislation is too weak and too changeable to predict how the shelf project will go. “The idea is interesting,” says Che. “But the [Federal] Duma isn’t helping — always changing the tax laws. So we’re all skeptics. Time will tell.” [Back to the top]  [Back to Front page]  [Write to us]

 

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