No. 003
U.S.
Consulate General, Vladivostok December 7, 2000
Establishing a Branch Post in Yuzhno-Sakhalinsk:
Two
Thumbs Up
By James Schumaker, A/CG Vladivostok
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| Yuzhno-Sakhalinsk in winter |
Introduction and Comment
I visited
Yuzhno-Sakhalinsk, the capital of Sakhalin Oblast’, from December 3 until
December 5, 2000 to meet with local officials, familiarize myself with the
city, and to look into the possibility of establishing a branch office of
AmConGen Vladivostok. Overall, my
impressions of the city were favorable.
I was received cordially by local officials, and the general atmosphere
toward Americans seemed much friendlier than that in Vladivostok. Both Sakhalin officials and the Western
community on Sakhalin would welcome the establishment of a branch office,
particularly since the American Business Center (ABC) is slated to close on
March 31, 2001. Yuzno-Sakhalinsk’s
infrastructure has improved as oil money begins to flow in, and life here for a
Westerner, while a bit of a frontier experience, is certainly quite
bearable. Crime is also relatively low,
in comparison to Vladivostok, though organized crime is a fact of life on
Sakhalin. Yuzhno-Sakhlinsk is poised on
the edge of an oil boom. What is unknown
is just how big that boom will be. It is
possible that the six projects (Sakhalin 1-6) currently under exploitation or
exploration will prove disappointing. It
is also possible that Sakhalin’s oil production could one day grow to rival
that of Alaska. In any case, the oil
companies will be here, and Americans will be here in growing numbers for at
least the next 40 years. I believe,
therefore, that we should move ahead expeditiously with the establishment of a
branch office. In addition, we should
not preclude the possibility of transforming that office a few years down the
line into a somewhat larger American official presence, should the number of
Americans on the island grow beyond current projections.
The Oil Fields: Vast Reserves, Disagreement over
Pipeline Routes
The Moliqpaq
Currently, there are
six Oil and Gas projects (Sakhalin 1-6) on the Sakhalin Shelf in various
degrees of exploration and exploitation.
At present, the only producing well is Moliqpaq (Inuit for “Big Wave”),
a project in Sakhalin-2 run by SEIC (the Sakhalin Energy Investment Corporation
– Royal Dutch Shell). Exxon-Mobil and its partners, SMNG (Sakhalin MorNefteGaz)
and Rosneft, have not found exploitable oil fields in Sakhalin-1, but there is
a gas field in the lower part of Sakhalin-1 (Chayvo) that will likely come on
line in the 2005-6 time period. Exxon is also optimistic about exploiting the
Kirin gas field in Sakhalin-3 a little later in the decade. Sakhalin 4, 5 and 6
are still in the organizing stages, with British Petroleum partnering with
Rosneft in Sakhalin-5 and possibly Sakhalin-4, and Exxon-Mobil, Chevron and
Rosneft interested in Sakhalin-6. In addition, there are huge unexplored areas
in the Sea of Okhotsk that hold vast potential for both oil and gas finds. Exxon-Mobil expects, if all goes well, to
invest over $3.5 billion in the first half of the decade. Currently, Exxon is in a debate with Royal
Dutch Shell, SMNG, Rosneft and the Sakhalin authorities over pipeline routes, a
matter that will have to be resolved before final investment plans are
approved. Shell and the Russians favor a
land pipeline extending the length of Sakhalin.
It is unclear why Shell favors this route, but it is obvious why the
Russians do. It would provide more “work content” for Russian workers in
building the pipeline, and it would enable the local authorities to derive more
revenue from the construction and operation of the pipeline itself. The Sakhalin authorities also want to construct
a refinery at the southern end of the island, a project Exxon considers
uneconomic. Exxon would prefer either an
undersea pipeline to running from the oil and gas fields south to Hokkaido, or
a much shorter pipeline crossing to the Russian mainland at Dekastri and then
to Khabarovsk. They believe these would be economically more feasible, and
would minimize the chance of accidents or human tampering. Exxon expects a final decision on pipeline
routes to be made sometime toward the end of January 2001.
Attitudes toward Americans
In general, I found
that the prevailing attitude of average Russians in Yuzhno-Sakhalinsk was
favorable, a stark contrast to the generally wary or even hostile reception
Americans often receive in Vladivostok. Ordinary citizens do not seem to be
mistrustful of Westerners, particularly if they speak Russian, and are
generally helpful. One anecdote, which
indicates the degree to which Westerners, and especially Americans, are held up
as role models, involves a series of news stories that appeared earlier this
year in the local media. The stories
noted that, with the advent of oil money, Sakhalin was becoming a much more
attractive place to live, and that even Americans were choosing to come here to
stay permanently. To prove this, a
picture of a beautiful American woman was featured with the subhead “She chose
Sakhalin.” Unfortunately, it turns out
that the picture in question had been scanned in from one of the tamer pages of
a recent Playboy Magazine.
The official
attitude toward Americans is also positive, if perhaps somewhat more
realistic. Sakhalin’s Governor, Igor’
Farkhutdinov, is very pro-investment, and this stance, which favors all
Westerners generally, has seeped down into the rest of the official apparat. While in Yuzhno-Sakhalinsk, I met with
Vladislav Rukavets, head of the Oblast’ Administration for Foreign Economic
Relations; Yelena Kondrat’yeva, Acting MFA Representation Head; and Gen.-Maj.
Vladimir Kharskiy, Chief of Administration of the Sakhalin MVD. All reacted positively to the idea of an American
branch office in Yuzhno-Sakhalinsk, and saw it as particularly necessary in
view of the growing American presence on the island and the imminent closure on
March 31 of the American Business Center (ABC).
Kondrat’yeva noted that the Japanese, who had the only official
representation on the island so far, had just upgraded their mission to the
status of a Consulate General, and that it would be fitting that the Americans,
who were currently the largest group of non-Russians on the island, should also
have a permanent representation.
One problem area
that has recently surfaced for Americans, and Westerners generally, is the
issue of multiple-entry visas. The ABC
has been told that all multiple entry visa applications for U.S. businessmen
will now have to be processed in Moscow.
This does not suit the local authorities, which derived substantial
revenue from issuing such visas here, and it will considerably delay visa
processing for Western businessmen. Some
are theorizing that this could be linked in some way to the verdict in the Pope
case, but no direct connection has been proved.
The American Presence
The continuous
American presence on the island is about 150 persons in the winter and about
double that in the summer (the drilling season). Kondrat’yeva told me that about 800 Americans
were registered on the island in the past year, although most were
visitors. Believe it or not, there are
four permanent American residents on the island (no one in the business community
quite knows who they are). The American
contingent is currently the largest foreign group on the island, with the
Japanese second. At one time, it was
thought that the American presence might grow drastically, as Marathon and
Exxon-Mobil brought in personnel to explore and exploit Sakhalin 1, 2 and
3. However, Marathon’s share of
Sakhalin-2 was bought out by Shell, and Marathon’s personnel began leaving on
December 1. Also, Exxon-Mobil has not
yet succeeded in bringing in a producing oil or gas well. Exxon-Mobil currently has about 50 Americans
on the island. If they come to agreement with the local authorities on a
pipeline route for Sakhalin-1, it is possible that Exxon’s contingent could
number several hundred very quickly. If another route is chosen that is not to
Exxon’s liking, the American company will go into “hibernation” until the gas
field in Chayvo (Sakhalin-1) and Kirin (Sakhalin-3) come on line around
2005-2006. Also, there will likely be a large number of Americans
coming to Sakhalin to help Shell exploit its holdings, and to build
pipelines. I do not think it likely,
however that the continuous American presence on the island will get much above
a thousand, even under the rosiest scenarios.
The American Business Center (ABC)
While in
Yuzhno-Sakhalinsk, I spent a fair amount of time observing the operations of
the American Business Center, located in offices on the 5th floor of
the Sakhincenter. On the whole, I was
well impressed with the level of activity and the quality of our
personnel. For the past several years,
the ABC has provided market facilitation support services to a number of U.S.
companies, as well as administrative support for USG technical assistance
programs and support for other USG activities.
While I was there, the Director of the ABC, Michael Allen, dealt with
four or five business clients a day, including representatives of the law firm
Russin and Vecchi (in Yuzhno-Sakhalinsk to establish a branch office), and the
Foundation for Russian-American Economic Cooperation (which had a delegation of
Washington state policemen in town to meet with local counterparts). The ABC was also providing offices for
Research Triangle, inc. (working with the Oblast Administration on budget
transparency), Coruna Corp. (investment promotion), Ecolinks, ABB and the Regional
Initiative Office (currently vacant).
The ABC has been very active over the past few years, and has built up a
substantial number of contacts and much good will. It would be a shame to see
much of that work cease when the ABC itself stops operations on March 31. If we establish a branch office of AmConGen
Vladivostok in Yuzhno-Sakhalinsk, I would strongly advise that we move to pick
up the five local ABC staff as soon as possible so that they can continue their
work. Otherwise, they will be snapped up
by the oil companies.
Infrastructure
Yuzhno-Sakhalinsk’s
infrastructure has improved remarkably over the past four years, according to
Western businessmen on the island. In
fact, in many ways, the support structure for Westerners is better in Yuzhno-Sakhalinsk,
a city of 220,000, than it is in Vladivostok, an allegedly more cosmopolitan
city of 750,000. Yuzhno-Sakhalinsk has
one first-class hotel (Santa Resort), and three good hotels (Sakhalin-Sapporo,
Natalya, Gagarin). It also has a
western-style supermarket and shopping mall (Slavyanskiy Bazaar) with a better
selection of products than Vladivostok.
Yuzhno-Sakhalinsk has several decent restaurants (all the hotel
restaurants, plus the Pacific Café in the Sakhincenter, 777, Russkaya Kukhnya,
Prazdnik and Toyo Hara). Modern Office
buildings are also beginning to dot the skyline, including the newly
constructed SMNG building (Sakhalin MorNefteGaz – reserved for the offices of
the Russian oil company), the SEIC building (reserved for Royal Dutch Shell)
and the Michinoku Building (site of the Japanese Consulate). Also, there is acceptable housing available
in the town, and outside of it there is the spectacular 48-unit “Zima” housing
development – currently reserved for Shell and some Exxon employees. The cultural offerings in Yuzhno-Sakhalinsk
are provincial in every sense, but the island does have satellite TV, so CNN
junkies will not be disappointed.
Transportation links are rudimentary, as the ramshackle and thoroughly
mystifying airport would suggest.
However, there are daily VladAir and SAT flights to Vladivostok and
Khabarovsk. Until recently, there were
also weekly flights to Alaska on RAA (Reeve Aleutian Air). However, we understand that RAA has cancelled
its remaining flights for the winter, and may be filing soon for Chapter 11
bankruptcy.
Crime
MVD Gen. Maj.
Kharskiy told me that street crime was indeed a problem in Yuzhno-Sakhalinsk.
However, it did not appear to be targeted at Westerners, and it was of a much
smaller scale than in mainland cities like Vladivostok. He did note, however, that economic crimes
and organized crime activity were a growing problem in Yuzhno-Sakhalinsk. This
assessment is borne out by consistent media reporting on the subject.
For example, on
November 21, the Director of the Yuzhno-Sakhalinsk airport, Vladimir Bagrov,
was arrested in Moscow, after a shortage of $600,000 was found in the airport’s
hard currency account. Rumors abound in
Yuzhno-Sakhalinsk that much more money is missing – up to $30 million that was
supposed to have been spent on modernizing the airport. Speaking from personal experience, the fair
market value of the airport in its current condition is closer to 30 cents than
30 million.
Also on November 21,
a Komosomol’sk Mafia figure, Aleksandr Kolodyazhniy, was gunned down in front
of his home in Yuzhno-Sakhalinsk in an apparent contract killing. Kolodyazhniy had been involved in a dispute
with the Oblast’ Administration over the ownership of the “Mountain Air” ski
resort overlooking Yuzhno-Sakhalinsk. Kolodyazhniy swore he would never bend to
the will of the authorities, and at some point during the dispute, the
“Mountain Air” resort was destroyed in a mysterious fire. After Kolodyazhniy’s murder, Oblast’
officials furiously backpedaled, saying their dispute with Kolodyazhniy had
nothing to do with the murder. The prevailing theory now is that Kolodyazhniy
got caught in the crossfire in the ongoing conflict between the “Moskvichi” and
the “Komsomol’tsi,” and that Kolodyazhniy’s dispute with the Oblast’ was indeed
not a factor in his murder.
Office Buildings
Realistically, there
are only two buildings that would be suitable for a small branch office (the
other big, modern office buildings are taken by the oil companies). They are the Sakhincenter and the Michinoku
Building. I visited both buildings
during my stay in Yuzhno-Sakhalinsk, and both impressed me in different
ways.
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| The Michinoku Building |
The Michinoku
Building is very modern, very Japanese, and probably much better suited to
withstand an earthquake than any other building in Sakhalin, having been built
after the disastrous 1995 earthquake in Neftegorsk. The safety features of the building are
outstanding: it has modern fire fighting equipment,
emergency stairwells with good access, and a working sprinkler system. The available office space on the 4th floor is modern, if a
bit small (115 square meters), and security around the building is good,
although there is insufficient setback.
The Japanese Consulate General is on the 5th floor. The Michinoku building is also right across
the street from the Sakhalin-Sapporo Hotel.
Its drawbacks are its location – a bit far from the Sakhincenter, which
holds many government and business offices – and the fact that it is a bit too
cold and austere for my taste, although others are similarly critical of the
Sakhincenter for its rundown look.
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| The Sakhincenter |
The Sakhincenter is
an older, bigger, Soviet-era construction building (it was built in 1990). It
has been certified to take quakes up to 8 on the Russian scale (around 6 on the
Richter scale), but I have my doubts. On
the plus side, nearly everyone that our branch office would need to do business
with has their offices either in or near the Sakhincenter, including most government
offices, Exxon-Mobil and independent American businessmen. The support facilities at the Sakhincenter,
including a shopping area and a nice restaurant on the ground floor (the
Pacific Café), are also superior to Michinoku. The available office space is
also bigger (the former Japanese Consulate Space on the 4th floor,
about 230 sq.meters). If it were not for
the earthquake issue, there would be no question which office I would choose:
Sakhincenter.
The Earthquake Issue
On May 27, 1995, the
town of Neftegorsk in Northern Sakhalin was flattened by an earthquake
measuring 7.1 on the Richter scale. It was the largest quake ever recorded
within the current boundaries of the Russian Federation. Over 2,000 people were
killed. Because of Sakhalin’s history as
an earthquake zone, there has been considerable worry that any office sited in
a Soviet-era office building would be vulnerable in the event of a severe
earthquake in Yuzhno-Sakhalinsk itself.
It is certainly true that if a 7.0 earthquake ever struck
Yuzhno-Sakhalinsk, very little would be left standing. Only the SEIC Building,
the SMNG Building and the Michinoku Building are of sufficiently modern
construction to have a chance of surviving such a severe shock. In fact, there are probably very few buildings
in Yuzhno-Sakhlinsk that could stand up to a 6.0 earthquake. The question then arises, how likely is it
that such a quake will ever occur? The
answer is: not once in a hundred years.
While in Yuzhno-Sakhalinsk, I asked the ABC Director to check with the
Sakhalingrazhdanproekt Institute. This
Institute is responsible for seismic building codes on the island, and keeps
long-term earthquake data. Based on data
of the Marine Geological and Geophysical Institute, the strongest recorded
earthquakes in the past 100 years within 100 kilometers of Yuzhno-Sakhalinsk
occurred in 1949, 1951 and 1960. At the epicenter, these quakes were measured
at 6-7 on the Russian MSK-SNiP scale (which corresponds to roughly 5.2 on the
Richter scale). The earthquake intensity in the city of Yuzhno-Sakhalinsk
itself was less than 5.
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| Museum in Yuzhno-Sakhalinsk |
Conclusion
We should move
speedily to obtain permission from the Russian authorities to establish a
branch post in Yuzhno-Sakhalinsk. The
infrastructure is adequate to support such a post, there are two adequate
office areas that could be rented, and popular attitudes toward Americans are
reasonably positive. We should move
before the March 31 closure of the ABC, in order to retain locally hired
personnel, if desired. We should also
keep open the option of expanding post staff and operations, should the
American presence in Yuzhno-Sakhalinsk grow faster than expected.
Attachment:
1.
Map of the
Sakhalin Oil and Gas Fields
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