A few years ago, this spindly island that Russia wears like a holstered gun on its eastern hip was as close to nowhere as anyone could imagine. Eight time zones from Moscow, Sakhalin Island was best known for the day in 1983 when a South Korean airliner strayed too close to a top-secret Soviet military installation and got shot out of the sky.
Playwright Anton Chekhov had a one-word description when he visited in 1890: "hell." That was before capitalism hit Russia, and before oil hit $ 40 a barrel.
These days, Yuzhno-Sakhalinsk is a boomtown that makes Deadhorse, Alaska, look like yesterday's news. The southern bit of the island is awash in gravel trucks, roughnecks and more cash than anybody has seen for a long time. The hotel near a LNG plant site is booked up for the next three years. Next door to Shell's headquarters downtown, the Kona Bar is full of North Sea brogues and Texas drawls at happy hour, which starts at 5 and ends when there's somewhere else to go in Yuzhno-Sakhalinsk, which is never.
"We are spending money this year at the rate of $ 100 a second," said David J. Greer, project director for Shell's Sakhalin Energy Investment, which is building the world's largest LNG plant on the island and two oil platforms offshore. "This year alone, we will spend $ 3 bn. Everything about this thing has got lots of zeroes on the end of it. It's just huge."
This is what happens when a country as big as Russia decides to go global in the oil and gas business. Although the former Soviet Union has pumped crude for years, only recently has Russia emerged as the world's second-biggest oil exporter and -- if the Bush administration has its way -- a potentially important new supplier of both oil and gas to the United States. Russia's crude oil production rivals that of Saudi Arabia, and analysts say its reserves could provide the output answer for the United States, China, South Korea and Japan, which have grown increasingly wary of their dependence on producers in the Middle East.
"Our goal is to diversify our access to energy exports from around the world, and we would very much like to see the opportunity for the US to have access to larger amounts of Russian exports," US Energy Secretary Spencer Abraham said in a visit to Moscow in June.
Formidable obstacles stand in the way of Russia's becoming a big new supplier to the United States any time soon. Among them is Russia's inability to export more oil until it builds new pipelines, and Moscow's ambivalence about the US market when customers in Japan and China are closer, possibly more voracious in the long run and ready to strike better deals.
Russian oil production is expected to grow to as many as 10 mm bpd by 2010. But the state-owned company that has control of Russia's oil transportation network, Transneft, says it has hit a ceiling with shipments of slightly more than 4 mm bpd and can't sustain production growth without major new pipeline capacity.
Japan recently stepped forward with major financing guarantees for a $ 12 bn, 2,500-mile pipeline that would carry Siberian oil to the eastern Russian city of Nakhodka, from where it would be shipped to Japan. The United States would prefer that a new pipeline run westward to Murmansk at the Barents Sea. Washington has offered to conduct a feasibility study on such a line -- an offer the Russians coolly said was not what they meant when they said they were interested in "foreign participation."
Sergei Oganesyan, chief of Russia's Federal Energy Agency, said that the US-preferred route was third on the government's list of priorities, behind expansion of the existing oil transit line to the Baltic Sea and the proposed route to Japan and possibly China. A ray of hope for the United States appeared in July when Transneft President Semyon Vainshtok suggested that a shorter, cheaper Barents Sea pipeline could be built if it terminated at the port of Indiga, instead of Murmansk. The price would be about $ 6 bn, compared with as much as $ 15 bn for the Murmansk route, he said.
The pipeline issue has been an undercurrent in the US-Russian political dialogue, especially when it comes to the troubles of Russian energy giant Yukos Oil, whose former CEO, Mikhail Khodorkovsky, is on trial in Moscow on fraud and tax evasion charges. US officials repeatedly have raised concerns that Khodorkovsky's arrest in October -- and the conceivable bankrupting of Yukos itself with a more than $ 6 bn tax bill recently affirmed by a Russian court -- could undermine foreign investor confidence and raise questions about the rule of law and security of private investments in Russia.
The geopolitical subtext goes deep. Before his arrest, Khodorkovsky was said to be negotiating the sale of a big stake in Yukos to ChevronTexaco or ExxonMobil, which would transfer key decision making for the engine of the Russian economy to a boardroom in California or Texas.
Khodorkovsky also was promoting the idea of a pipeline on the US-preferred route through northern Russia, and lobbying for private construction and ownership of new pipelines -- a plan that would eliminate the government's most important lever of control over a resource that is, thanks to the market reforms of the 1990s, mostly in corporate hands.
"Pipeline ownership is the single most efficient and the cheapest way of controlling the entire Russian oil sector," said Steven Dashevsky, senior oil and gas analyst with Aton Capital Group. "While it probably has not single- handedly determined the whole Yukos affair, it clearly had a very, very significant impact. Khodorkovsky... was trying to run his own energy policy."
The oil delivery issues became so thorny that American diplomats earlier this year pronounced the US-Russian energy dialogue essentially "stalled." Another hydrocarbon -- natural gas -- has put new life into the exchange, and Russian and US officials are making optimistic predictions that a good part of Russia's estimated 47 tcm of gas reserves soon will begin arriving in the form of LNG to the United States.
The Russian state-owned oil giant Gazprom is looking at exporting to the United States from Siberia's Yamal Peninsula as well as a $ 15 bn project to develop offshore gas deposits in the Barents Sea -- an endeavour US officials are discussing financing, through the United States Export-Import Bank. That production could be marketed on the US East Coast.
Not surprisingly, Gazprom is trying for a piece of the action in Sakhalin -- a potential supplier to the US West Coast -- where Shell is scheduled to begin the island's first exports of LNG, or LNG, in 2007, with ExxonMobil not far behind.
Sakhalin producers have signed contracts for 3.4 mm tpy of LNG deliveries to Japan, about one-third of Shell's expected production, but also are conducting negotiations for deliveries to other Asian countries and the US West Coast, only 11 to 12 days' sail away.
An LNG import terminal proposed for the Baja California coast near Ensenada, Mexico, would receive Sakhalin deliveries; another terminal is under discussion at Long Beach.
"I firmly believe that somewhere between Seattle and San Diego, two to three LNG terminals will be built," Andy Calitz, Sakhalin Energy's commercial director, said.
LNG technology has transformed the delivery of natural gas around the world; supercooling allows it to be compressed and transported in tankers like oil, creating an international gas market that never existed before. Sakhalin Energy's sprawling plant on the coast of Aniva Bay will be the largest of its kind, producing 9.6 mm tpy.