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Russia: Sakhalin Waits In Vain For Wealth From Oil

Yuzhno Sakhalinsk/Moscow, 5 October 1998 (RFE/RL) -- Russian Prime Minister Yevgeny Primakov has repeatedly underlined the importance of having regional leaders on his side, to avoid the possibility that local impulses towards independence could end up splitting the country.

Sakhalin Governor Igor Farkhutdinov, who presides over a region where offshore energy resources are estimated to rival those of the North Sea, was one of the first governors to hold talks with the new prime minister. The focus of the meeting was almost certainly how to speed the development of oil and gas projects on Sakhalin, coupled with the threat of social unrest on the Far Eastern island. For despite Sakhalin's great natural wealth, the region's poverty level is one of the highest in Russia, with more than a third of the population of 600,000 people officially classified as living in poverty.

Farkhutdinov's main preoccupation at the talks would likely have been to forge the same cooperative links with Primakov that he shared with the previous Moscow government on a key issue, namely efforts to push through parliament legislation guaranteeing the safety of foreign investment in Russia.

The communist-dominated State Duma in Moscow has since the early 1990s put obstacles in the way of laws guaranteeing safety of foreign investment for consortiums, as well as for a share of the oil and gas extracted -- the so-called PSA, or production sharing agreements.

Local officials have tried to push the Duma into action and, acknowledging the lack of significant results, are frustrated. Galina Pavlova, director of Sakhalin region's department of offshore oil development, told RFE/RL in a recent interview that "instead of working together, the Duma obstructs a result we are, with our own hands, destroying our own possibilities."

Farkhutdinov says passage of the necessary laws is a critical issue for Sakhalin, if the big foreign oil companies already working there are to remain committed to developing the region's resources: "At a moment when foreign capital is fleeing Russia, on Sakhalin this is not happening," he says. "Sakhalin cannot go on without money, but if we want to overcome this difficult situation and do not become a burden for the state, we need legislation even more than financing."

Enormous sums of money are in play. Foreign consortia have said that on the first three major projects, called Sakhalin 1, 2, and 3, investment could reach a total of $36 billion.

Sakhalin-2, the only project on target so far, is scheduled to begin production in the Spring of 1999. Prospects however could be damaged if the Duma decides not to approve a bill amending existing legislation to comply with tax breaks and provisions included in PSA.

Meanwhile, Sakhalin-2 managers put on a brave face. The consortium is led by the U.S. company Marathon and includes Royal Dutch/Shell, and Japan's Mitsui and Mitsubishi. David Loran, regional director of the project, told RFE/RL that Sakhalin-2 is moving ahead because, "it has been willing to take more risk" and because it completed successful feasibility studies earlier then other consortium.

In 1994, Sakhalin-2 was the first foreign consortium to be granted tentatively a production sharing agreement with Russia. "We consider the agreement honored, regardless of future implications," said Loran, who, however, conceded that managers have "long-term concerns" for the project, "but there is sufficient trust that Sakhalin authorities know what they are doing and what has to be done".

Sakhalin's road towards the dreamt-of oil and gas wealth has not been an easy one. Vladimir Sorochan, the editor of the paper Sovietsky Sakhalinsk, said prospects of oil production, coupled with plans for development of rich gas fields, provoked "euphoria" earlier in the 90s, when it was thought that there would be cheap energy, jobs and positive developments for the island. But the situation "has changed radically over the years," he said.

Sorochan said people have now understood they will have to wait long for tangible results, "while hopes of jobs are fading and the governor, instead of improving people's lives in decrepit cities and villages, seems more interested in grandiose plans like the building of an international airport."

Farkhutdinov denies the charges. "If the oil projects get finally under way, 20,000 permanent jobs will be created over the years... and an international airport would be a sound investment, if only because every meeting with foreign investors starts with the question: how is your airport?" The regional administration has also announced that the first prospective $20 million bonus coming from the Sakhalin-2 project is to be used in urgent construction projects, like a school and a hospital.

After the breakup of the Soviet Union, Russian authorities acknowledged that extraction and production operations in Sakhalin's oil sector required expensive and sophisticated technologies which the country did not have. So they started offering the reserves to consortia dominated by, and often composed entirely of, foreign companies. Foreign oilmen were lured by the perspective of gaining access to offshore oil reserves estimated at 29 million barrels.

There is interest also in Sakhalin's vast gas resources. Farkhutdinov told RFE/RL that development of gas resources would provide cheap energy for the island, solving the problem of energy cuts due to the non-payments crisis in the coal sector that led to this Summer's coal miners' strikes paralyzing Sakhalin for weeks.

Even more importantly, said the governor, noting Sakhalin's proximity to Asian markets, energy companies involved in the oil projects, would help build natural gas pipelines running to Japan, South Korea, and China.

(This is the third and last story in the series).