Russia Needs Oil Riches, But Communists Block Foreign Deals

Delays by hard-liners could lose Russia $25 billion in foreign investment.

It was meant to be Russia's Alaska, a rich new source of oil that would attract billions of dollars of foreign investments for a country desperate for revenue.

The offshore fields were supposed to develop Sakhalin, a remote fishing island 5,000 miles from Moscow but just 27 miles from Japan. Instead, the plans are going nowhere, or at most somewhere very slowly.

With its economic meltdown, Russia needs money as never before. But the Communist opposition is holding up laws that would protect Western oilmen's investment. Jittery multinationals are keeping billions of dollars in their pockets - to the irritation of local officials desperate for cash.

"I'm not satisfied with this project," says Gov. Igor Farkhutdinov. "It is moving too slowly." He estimates that Russia stands to lose more than $25 billion in potential investment, that would help fill the near-empty coffers of the state government.

It would also give jobs to Sakhalin men who poach caviar and crabs because there is no major legitimate industry. Oil would help develop the island, much of which is open shore inhabited only by sea lions.

This is not the first time that Communist legislators in the Duma, the powerful lower house of parliament, have held up potential investments by foot-dragging on legislation. In this case, the Communists object to what they see as giving away resources, such as oil, to foreigners. The Duma is delaying on granting production-sharing agreements to two of the three consortia that have bid for areas.

The agreements, known as PSAs, provide a sound tax situation and help protect investors against political risks. One of the guarantees would be that they could turn to international courts. The two consortia that already have PSAs are waiting for enabling legislation that allows the terms, such as tax breaks, to go into effect.

Potential billions

Industry experts estimate Sakhalin could supply 10 percent of Russian gas output and 5 percent of its crude oil. The region has an estimated 2.5 billion barrels of crude and 15 trillion cubic feet of gas.

Japan especially is hungry for new sources of oil, and Sakhalin's light-crude reserves could serve as an alternative to the North Sea or Middle East. Sakhalin, meanwhile, is a ready market for goods from the Far East, which islanders feel close to in more than a geographic sense. The jeeps parked in the capital are from Japan. The markets are filled with Korean pickles. The wall clocks in the main business center show the time in Asian cities.

Russia does not have the money to go it alone on Sakhalin, where drilling for oil is particularly expensive. Since surrounding waters in the Sea of Okhotsk freeze for more than six months of the year, special equipment is needed. Gas cannot be stored and shipped on tankers, so vast stretches of pipelines must be built. And then there is the danger of earthquakes, such as the one in 1995 that destroyed the town of Neftegorsk, killing 2,000 people.

90,000 barrels a day

Only one of the three consortia that bid in the area is pressing ahead - Sakhalin Energy Investment Co., which comprises Marathon, Royal Dutch-Shell, Mitsui, and Mitsubishi. The firm expects its Sakhalin 2 oil field to start producing next year, starting at 90,000 barrels per day.

So far the company has sunk $800 million into Sakhalin 2 but is dragging its feet on the next phase, which could entail investments up to $9 billion.

"We will not invest it until we see an enabling law giving us tax exemption [on profits until they recover their investment]," says the company's regional manager, David Loran.

Mr. Loran says his firm could do a lot more if the other consortia joined forces to build pipelines and other infrastructure. But Sakhalin 3 - which includes Mobil, Texaco, and Russian partners - is awaiting a PSA. Sakhalin 1 - Exxon, the Japanese firm SODECO, and Russian partners - has a PSA but wants enabling legislation.

"One project at a time slows down the impact. There is a lot of synergy needed for onshore facilities and contractors. So you want to see more developments going ahead," Loran says.

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