Russian Natural Gas Opportunities

Brian Hicks

Written By Brian Hicks

Posted August 30, 2011

The northeast Asian equation, with its complex matrix of rising economic power in South Korea, an erratic and unpredictable North Korea, a Japan beset by uncertainty and lingering calamity – and the undisputed titan, China – remains incomplete without understanding the one card in the deck that is all too often overlooked: Russia.

With its growing global role as a major energy exporter, Sakhalin Island, in Russia’s Far East region, has become one of its most valuable but least recognised geographic assets – and a prime example of why Russia is an increasingly dominant player in Far East Asian politics and resource exploitation.    

Sixty-six years after the end of World War II, having never signed a formal peace agreement, Russia and Japan remain technically in a state of war. During the closing days of that conflict, Russia settled an old score when it reclaimed control of the 948 km Sakhalin Island just above Japan’s northernmost island, Hokkaido.

This fish-shaped island, Russia’s largest, occupies more land than Ireland or Sri Lanka and is richly endowed with timber, fish, coal, oil and gas. Just 43 kms from Japan, Sakhalin has been a point of contention between the two Asian powers since they first began competing for control in the early 19th century.

After the Russo-Japanese war (1904-05), Japan gained control of the southern half of Sakhalin (which it called Karafuto) below the 50°N parallel, as demarcated under the terms of the Treaty of Portsmouth. Japan occupied southern Sakhalin until 1945.

Sakhalin Oblast (district) includes the northern and southern Kuril Islands, an archipelago of 56 volcanic islands which arc northeasterly across the Sea of Okhotsk, from Hokkaido towards Russia’s Kamchatka Peninsula.

For more than six decades, relations between Moscow and Tokyo have been dogged by the dispute over four of the southern Kurils – Kunashiri, Shikotan and Etorofu and the Habomai islets – which Japan calls the Northern Territories.

Political tensions ramped up after President Dmitry Medvedev became the first Russian leader to visit the Kurils in 2010. Medvedev called for Russia to “consolidate its presence” in the islands and for an increased military presence with advanced weapons. This came in advance of a recent announcement by Russia’s defence minister that two brigades would be sent to “defend the nation’s interests” (read: energy resources) in the Arctic region.

Tokyo responded to the Kuril announcement with vocal protests which prompted a sharp rebuke from Moscow. Nothing indicates Japan – or its ally the United States, which supports Japan in the Kuril dispute – would consider an armed conflict over the islands, yet Japan remains adamant that the small, remote, but resource-rich (though grindingly poor) islands are rightfully Japanese territory.

A rising East Asian power

Skirting one of the world’s most rapidly developing regions, home to the world’s second and third largest economies (China and Japan), Sakhalin Oblast is poised to partner and compete with its Pacific Rim neighbours. Sakhalin Island, where the region’s wealth and development are concentrated, represents Russia’s potential – both in terms of its growing affluence and, more broadly, trade, energy production and forest and ocean resources.

In an age of soaring energy needs and the rise of economic giants led by China, India and Brazil, the world is hungry not only for Sakhalin’s fish and seafood, but for its oil and gas.

Sakhalin has an estimated 45 billion barrels of oil equivalent (BOE), making it one of Russia’s most important oil and gas producing regions and a prime target for foreign investment.

Much of Sakhalin’s oil and gas is exported to South Korea, Japan, Australia, New Zealand, Southeast Asia and the United States. These vast resources drive Sakhalin’s largest energy extraction projects: Sakhalin-1 and Sakhalin-2, both overseen by international consortiums.

Sakhalin-1 is operated by Exxon Neftegas Ltd – along with Russia’s Rosneft, Japan’s SODECO and Indian state-owned ONGC Videsh Ltd. 

Sakhalin-2 is operated by a consortium of Russia’s Sakhalin Energy Investment Company, Gazprom, Royal Dutch Shell, Mitsui and Mitsubishi. The project includes Russia’s first liquefied natural gas (LNG) plant which operates out of the south of the island exporting much of its product to South Korea and Japan.

In the first six months of 2011, Sakhalin produced nearly 8 million tonnes of crude oil, a five per cent increase over a year earlier, the bulk of which was produced by Sakhalin-1 and -2. During the same period, 13 billion cubic metres of natural gas were extracted as reported by Itar-TASS.

Sakhalin’s value as an oil and gas exporting region were highlighted in a 2009 Center for Strategic & International Studies Energy and National Security Program report which noted Russian oil exports offer “reliability, security and diversity of supply” geographically and politically distant from the uncertainties and instability of places such as Nigeria, Venezuela or Iraq.

With these still relatively untapped energy and marine resources, strategic location and an increasingly vibrant economy, Sakhalin’s importance to the Asia-Pacific region is reflected in the attention it and the Kuril Islands are receiving from Moscow, seven time zones away.

Political tensions and territorial disputes notwithstanding, Sakhalin’s relationship with its East Asian neighbours is maturing. In 2009, then-Japanese Prime Minister Taro Aso said the Sakhalin-2 LNG plant suggested Russia was “building a window to Asia”. Yet this often overlooked corner of northeast Asia has a history and modern role as complicated as the island’s weather, which can turn from rain and fog to snow, sun and wind in a single day.

Closer to Hawaii than Moscow

Clinging to the far edge of the Russian Republic, Sakhalin is physically closer to Hawaii than Moscow. But this distance from Russia’s traditional power centre does not indicate isolation, so much as an orientation toward its East Asian neighbours.

Sakhalin today remains something of anomaly: barely noticed by its western Russian compatriots, Sakhalin is often regarded as a provincial outpost, yet many of its people are among Russia’s most widely traveled. Clinging to the edge of East Asia, the majority of its residents are ethnic Europeans. Though technically at war with Japan, Sakhalin enjoys close, often chummy personal and business relations with its southern neighbour.

Sakhalin’s complex social fabric is a mix of ethnic Russians and others from former Soviet Republics – but roughly ten per cent of the population are ethnic Koreans who were effectively deported to Sakhalin by imperial Japan to work as conscripted labourers, mostly in mines and factories during World War II.

When the Japanese were forced to return to Japan after the war, many Koreans stayed behind, some by choice, others not, but most were left in diplomatic limbo for decades. By the demise of the Soviet Union most ethnic Koreans had Russian citizenship.

A sign of Sakhalin’s new found prosperity is the number of foreigners from former Soviet republics who come to Sakhalin for work. Kyrgyz, Uzbeks and other Central Asians travel to Sakhalin in search of jobs which pay better than in their home countries. 

One of Sakhalin’s best known visitors was Russian playwright Anton Chekhov who made the long, arduous journey across Russia in 1890 to visit Sakhalin – then a penal colony, chosen for its extreme isolation and brutal conditions. Chekhov spent three months on Sakhalin conducting a detailed census of the prisoners which he documented in the book Sakhalin Island wherein he wrote that he had seen “the extreme limits of man’s degradation, lower than which he cannot go”. Today Chekhov’s visit and subsequent book are held in such high regard on Sakhalin that statues, a downtown street, a theatre and a museum all commemorate the writer and his book.

Of the island’s infrastructure Chekhov observed: “All new construction on Sakhalin gives the impression of having been destroyed by an enemy or else of being long since abandoned. Only the fresh, bright colours of the hut frames and the shavings give evidence that something quite opposite to destruction is taking place.”

More than a century later, on the surface, it would appear little has changed. Sakhalin’s regional capital Yuzhno-Sakhalinsk (called Yuzhno, literally “Southern”, for short) is a dusty, provincial town of 175,000 people (roughly one-third the island’s population) – a city of low-rise Soviet-era housing blocks, rusted out shipping containers, pot-hole plagued roads and a central Lenin Square with a hulking statue of Russia’s greatest revolutionary stepping with determination to the east.

Colourful Soviet-era tile mosaics still adorn the sides of public buildings and walls and doors are scrawled with hand-written warnings of “falling snow and ice” or “vicious dog” in this town which fluctuates between various states of snow, mud or dust.

Many of Yuzhno’s roads are in a permanent state of disrepair and its older buildings appear only a colourful snap-on facade tile away from crumbling in the next large earthquake (a 1995 tremblor devastated the north Sakhalin town of Neftegorsk). But Yuzhno’s erstwhile “wild East” frontier backdrop is being reshaped by the spoils of oil wealth. Luxury sedans and brightly polished imported SUVs share the road with dust-coated second-hand cars from Japan and boxy Russian-built Volgas and Moskvich.

Today, youth fashion in Yuzhno calls for black leather jackets, ultra-tight jeans, high heels and designer brands. The ubiquity of iPhones along with sushi restaurants, trendy Italian cafes and Czech beer pubs all suggest money flows as fast as the river that cuts through sprawling Gagarin Park in central Yuzhno. The short drive to Sakhalin’s decidedly unpolished airport passes the popular new five-story Citi Mall where the “haves” can shop for imported goods.

The emergence of Sakhalin as a rising East Asian power shatters old stereotypes of Soviet-era shortages and endemic long queues. The markets and grocery stores of Yuzhno are fully stocked with fresh produce and imported foods from Asia and beyond. Living expenses on Sakhalin are generally higher than most other parts of Russia, reflecting the island’s remote location and an economy riding a swelling wave of oil and gas.

Who controls that oil and gas and where it is sold, along with other regional economic issues and thorny territorial ones, will undoubtedly come up when Russia and Japan, both member states of the Asia-Pacific Economic Cooperation (APEC), come face to face this November at the annual APEC meetings in Honolulu, Hawaii.

In 2012 APEC will again convene in host nation Russia’s Far Eastern city of Vladivostok, a short flight from Sakhalin Island. With Japan still only months out from the triple earthquake-tsunami-nuclear disaster of March 11 and a cloud hanging over the future of Japan’s own nuclear industry, the energy resources from nearby Sakhalin take on greater significance, suggesting Russia will continue to hold a strong hand in the region for the foreseeable future.

Jon Letman is an independent journalist in Hawaii where he covers wildlife conservation, politics and people of the Pacific region. Follow him on Twitter: @jonletman

**The original version of this story can be found here.**

Angel Publishing Investor Club Discord - Chat Now

Brian Hicks Premium


Hydrogen Fuel Cells: The Downfall of Tesla?

Lithium has been the front-runner in the battery technology market for years, but that is all coming to an end. Elon Musk is against them, but Jeff Bezos is investing heavily in them. Hydrogen Fuel Cells will turn the battery market upside down and we've discovered a tiny company that is going to make it happen...

Sign up to receive your free report. After signing up, you'll begin receiving the Energy and Capital e-letter daily.