The Sakhalin oil boom part 2: prejudice versus profit: Sakhalin's enormous potential could help save energy-strapped Japan. But can Japan deal with the Russians?

Japan, Inc., July, 2003 by David Wolman

ZIPPING INTO MY RUBBERY survival suit in case the Russian Mil-M80 helicopter I'm about to board crashes into the frigid waters of the northeastern Pacific, I can't help but think of the two oil rig workers who'd just been joking about imminent death. A plunge into a pile of late-winter sea ice would surely shatter the body. The yellow suits, they'd said, are just meant to keep all your parts together in a conveniently retrievable package.

A few moments later the rotors begin spinning and we lift off from Chayvo. Outside, sand blows over a cold and uninviting coastline while an earthmover dumps its payload into an awaiting truck. Further in the distance stands the bright blue tower of Exxon's Yastreb oil rig, one of the largest and most powerful oil rigs on the planet.

Eight months ago, none of this was here.

Desolate, ice-bound, tectonically tumultuous, blanketed in red tape and severely lacking in infrastructure, Sakhalin Island, Russia is nevertheless the epicenter of the world's latest dash for oil and gas reserves, with multi-billion dollar projects already underway and others in the works. By some estimates, the Sakhalin shelf is blessed with as much oil and gas as Alaska's North Slope, and could bring in $50 billion or more of investment over the next few decades.

At $12 billion, the Sakhalin I project, run by a consortium of companies led by ExxonMobil, is quite simply the biggest foreign investment in Russian history. (The subsidiary running the project is called Exxon Neftegas Ltd.) The Chayvo site is just the first phase of Exxon's ambitious plan for the island, which includes a natural gas pipeline running

south from Sakhalin to Japan.

Not far up the same blustery coast from Chayvo sits the Molikpaq offshore drilling rig for Sakhalin II, operated by a constellation of companies known as Sakhalin Energy, of which Royal Dutch/Shell is the largest stakeholder. As the Sakhalin oil rush ramps up, it's clear that everyone in the industry is either in or wants in: Exxon, Shell, Mitsubishi, Haliburton, Chevron, Mitsui, Astra, Rosneft, BP and more. Sakhalin III, V, VII--how high can you count?

For Japan, Sakhalin Island has never been so close, yet so far. Only 43 kilometers from Hokkaido's northern tip at Wakkanai, Sakhalin's sudden prosperity, though still risky and arguably mismanaged, nevertheless stands in sharp contrast to Japan's continued economic woes.

The abundant oil and gas on the Russian side of La Perouse Strait is like a cruel, geologic joke on the Japanese. Sakhalin has about 600,000 people; Japan roughly 120 million. Yet Japan has a dearth of fossil fuels within its borders and imports between 98 and 99 percent of its oil, mostly from the Middle East. Japan's domestic coal deposits have, for the most part, long since been exhausted, and nuclear power grows Tokyo Electric Power Co. recently closed 17 nuclear power plants for maintenance, and will be lucky to avoid brownouts this summer (see page 8 for the complete story).

The sting of Sakhalin's boom is that much more potent because of Sakhalin's history as a possession or partial possession of Japan. The Japanese still celebrate the achievements of explorer Mamiya Rinzou, who in 1809 was the first non-indigenous person to identify that Sakhalin was an island, not a peninsula. He also surveyed the geography of the island with remarkable accuracy.

After the Russo-Japanese War of 1904-1905, Japan owned the southern portion of the island below the 50th parallel. Stalin's troops captured it--or recaptured it, depending on who you ask--at the end of World War II, together with the Southern Kurils Islands, which to this day Japan claims are

During a brief period between 1920 and 1925, Japan owned all of Sakhalin and even had a consortium of companies extracting oil from the northern part of the island, one of which was Mitsubishi Mining. Nowadays, in towns like Otaru and other parts of Hokkaido, it's not hard to find old men who once lived on Sakhalin and who, after a sufficient amount of liquor, start griping about Russia's unlawful takeover of Karafuto, the old Japanese name for Sakhalin.

"Of all the important treaties that Japan and Russia have signed over the last 150 years, Sakhalin has always played a part," says Yoshihisa Kuroda, Japan's consul-general in Yuzhno-Sakhalinsk. It's not a place of trouble per se, continues Kuroda, but he adds, somewhat vaguely: "The history of our relations with Russia shows what Sakhalin is between us."

In other words, the island is a 948-kilometer sticking point. What will become increasingly tricky for Kuroda and other Japanese politicians is the fact that Sakhalin Oblast has jurisdiction over the disputed islands that the Japanese want returned. At the same time, the scramble to get a piece of the pie from Sakhalin's oil boom is under way, and Japanese firms need to be sure not to let conflict over the disputed islands, nor lingering reluctance about doing business with Russians, get in the way of cashing in on the Sakhalin bounty.