Sakhalin - Economy

Economy

Sakhalin is a classic "primary sector of the economy" relying on oil and gas exports, coal mining, forestry, and fishing. Limited quantities of rye, wheat, oats, barley and vegetables are grown, although the growing season averages less than 100 days.

Following the collapse of the Soviet Union and economic liberalization, Sakhalin has experienced an oil boom with extensive petroleum exploration and mining by most large oil multinational corporations. The oil and natural gas reserves contain an estimated 14 billion barrels (2.2 km³) of oil and 96 trillion cubic feet (2,700 km³) of gas and are being developed under production-sharing agreement contracts involving international oil companies like ExxonMobil and Shell.

In 1996, two large consortiums signed contracts to explore for oil and gas off the northeast coast of the island, Sakhalin-I and Sakhalin-II. The two consortia were estimated to spend a combined US$21 billion on the two projects which almost doubled to $37 billion as of September 2006, triggering Russian governmental opposition. The cost will include an estimated US$1 billion to upgrade the island's infrastructure: roads, bridges, waste management sites, airports, railways, communications systems, and ports. In addition, Sakhalin-III-through-VI are in various early stages of development.

The Sakhalin I project, managed by Exxon Neftegas Limited (ENL), completed a production-sharing agreement (PSA) between the Sakhalin I consortium, the Russian Federation, and the Sakhalin government. Russia is in the process of building a 136-mile (219 km) pipeline across the Tatar Strait from Sakhalin Island to De-Kastri terminal on the Russian mainland. From De-Kastri, the resource will be loaded onto tankers for transport to East Asian markets, namely Japan, South Korea, and China.

The second consortium, Sakhalin Energy Investment Company Ltd. (Sakhalin Energy), is managing the Sakhalin II project. It completed the first ever production-sharing agreement (PSA) with the Russian Federation. Sakhalin Energy will build two 800-km pipelines running from the northeast of the island to Prigorodnoye (Prigorodnoe) in Aniva Bay at the southern end. The consortium will also build, at Prigorodnoye, the first ever liquefied natural gas (LNG) plant to be built in Russia. The oil and gas are also bound for East Asian markets.

Sakhalin II has come under fire from environmental groups, namely Sakhalin Environment Watch, for dumping dredging material in Aniva Bay. The groups were also worried about the offshore pipelines interfering with the migration of whales off the island. The consortium has (as of January 2006) re-routed the pipeline to avoid the whale migration. After a doubling in the projected cost, the Russian government threatened to halt the project for environmental reasons. There have been suggestions that the Russian government is using the environmental issues as a pretext for obtaining a greater share of revenues from the project and/or forcing involvement by the state-controlled Gazprom. The cost overruns (at least partly due to Shell's response to environmental concerns), are reducing the share of profits flowing to the Russian treasury.

In 2000, the oil and gas industry accounted for 57.5% of Sakhalin's industrial output. By 2006, it is expected to account for 80% of the island's industrial output. Sakhalin's economy is growing rapidly thanks to its oil and gas industry. By 2005, the island had become the largest recipient of foreign investment in Russia, followed by Moscow. Unemployment in 2002 was only 2%.

As of 18 April 2007, Gazprom has taken a 50% plus one share interest in Sakhalin II by purchasing 50% of Shell, Mitsui, and Mitsubishi's shares.