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Russia's Far East Bonanza

Sakhalin Island's oil greases Western cooperation

Russia's decision to allow Western interests to share in the exploitation of the immense oil and gas reserves off Sakhalin island has opened the floodgates of investment.

Sakhalin was first developed 150 years ago as a prison colony. I write from Neftegorsk, a grim oil town in the northern tip of the shark-shaped Pacific island. The town was severely damaged in 1995 by an earthquake, killing thousands.

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The arrival of Western oil companies has at last ended a sense of hopelessness in Sakhalin. As in many other parts of the world, oilmen and bankers are followed by ports, roads, hospitals, schools, and other facilities generating employment as well as trade and training opportunities.

Both the Russians and their Western partners have had to take risks and learn to compromise to make the project possible. They have had good reason for caution.

The Russians are intensely suspicious of foreigners involved in key production-sharing ventures, which the Russians fear could compromise their energy balance and, indeed, national security. They tend to regard foreign direct investment as at best a necessary evil, exposing their country to meddling and exploitation by potentially hostile interests beyond their control.

Western oil companies also distrust the Russians, fearing corruption, bureaucracy, and a tendency of government departments to go back on their promises. Westerners want consistency and clarity in energy regulations, tax laws, and production-sharing agreements, as well as guarantees enabling them to seek justice, if necessary, from international courts.

In the Sakhalin venture, the Western technology most needed by the Russians involves the production of oil and gas in environmental conditions even more hostile than those in Alaska. But Western interests are eager to be involved, because the location of those resources is ideal for the development of vast and potentially lucrative energy markets in Asia.

The US joins in

The US Overseas Private Investment Corporation has signed a protocol with Russia's Sakhalin Energiya Investment Company to raise $116 million toward various energy projects on Sakhalin. France's Lazard Frres & Co. completed another financing accord earlier this year for $14 billion to cover the investment commitment of two Russian energy enterprises, Rosneft and its subsidiary Sakhalinmorneftegaz, over the next 42 years. The two Russian companies have just concluded three short-term credit agreements of undisclosed proportions with ABN Amro Bank. Many more arrangements are to follow as Sakhalin becomes a substantial new offshore energy source for the Russian Far East and Pacific Rim.

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Both the Russians and their Western partners have expressed surprise at each other's ability to cooperate to their mutual satisfaction. They will have plenty of opportunity to learn to work together as Russia approaches several gigantic new oil and gas ventures planned for the next century. An authoritative recent assessment issued by the World Bank calls for foreign direct investment worth $60 billion to finance several such projects within a decade.

Why the door opens at last

Western companies have been negotiating for stakes in the Sakhalin fields since the middle of the 1970s, but they have won production-sharing agreements only recently.

The reason: Russia desperately needs to end the permanent energy shortages retarding the industrial development of its Far East region, but it lacks the money, the experience, and the technology essential for the full exploitation of its strategically placed hydrocarbon reserves off Sakhalin.

Thousands of oil wells have been sunk in the northern part of the 589-mile-long island since the 1920s. Sakhalin's 40 functioning production fields yield three quarters of the Russian Far East's entire oil output.

Several sets of deposits are to be brought into production soon along the continental shelf. Bargaining over new projects will go on well into the next century.

The Sakhalin-1 consortium has ordered its first oil and gas production platform costing about $1 billion. It plans up to seven such platforms in the next century in the sub-Arctic Arkutun-Dagi, Chayvo, and Odoptu fields in sea depths of about 165 feet. And it envisages a $30 billion investment program to develop the fields, which contain an estimated 340 million tons of crude oil and 440 billion cubic yards of natural gas.

The consortium drilled its first appraisal well in September and plans to drill three more this year during the ice-free months between June and October. It has announced an operating budget of $140 million for this year and declared its intention to give Russian companies preference when choosing contractors. Consortium members are Rosneft (17 percent), Sakhalinmorneftegaz (23 percent), Exxon Neftegas of the US (30 percent) and Japan's Sakhalin Oil and Gas Development Company (30 percent).

Sergei Bogdanchikov, director of Rosneft-Sakhalinmorneftegaz, comments that the main task of his companies in the consortium is "to draw the maximum benefits from these projects for Russia to gather experience for subsequent independent work in hydrocarbon projects."

The success of the Sakhalin venture so far may well encourage cooperation in the future.

* Thomas Orszg-Land, author and foreign correspondent, writes on global affairs.

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