"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
All rights reserved

Conflict or Compromise?
Traditional natural resource use and oil exploitation
in northeastern Sakhalin/Noglikskii district

Emma Wilson

Local Economy
In this period of economic crisis, Noglikskii district has one of the healthiest local budgets on Sakhalin, and like Okhinskii district, acts as a "donor" to other districts, according to the old Soviet system. The relative wealth of both these districts is due to regular payment of taxes by the Sakhalin oil company Rosneft-Sakhalinmorneftegas. Likewise the district ecological fund (made up of fines from industrial polluters) is a "donor" fund, due to the amount of money collected from the main industrial polluter, the oil industry. The oil and gas industry is unquestionably the priority industry in both districts, especially since the collapse of the timber industry. And in the same way as the Soviet system in the past, the oil industry has created a dependency on itself, while helping to destroy the traditional lands and livelihoods of the indigenous populations.
Oil exploration began in northern Sakhalin at the end of the 19th century with the arrival of business magnate Grigorii Zotov from St. Petersburg, who at the same time set up a series of fishing artels based on the north-west coast (Grant, 1995). Industrial exploitation by the Russians started in 1925 when northern Sakhalin was returned to the USSR by the Japanese. Since then in Nogliki district alone, 15 reserves of oil and gas have been opened, about 2,000 bore-holes drilled, and more than 25 million tonnes of oil extracted (Znamia Truda, 3 April 1999). Virtually all the drilling sites are situated on or close to the north-eastern bays and coastal marshlands traditionally used for hunting, fishing and reindeer herding.
Today the on-land oil production is in decline, and there are no sectors of the economy that could replace the oil industry, even partly, given today's economic conditions. The multinationals have come into a region, and particularly two local districts where the economy is heavily dependent on taxes from the oil industry. Initially there were great hopes that the off-shore developments would make up for the decline in on-shore reserves through payments and job creation.
However, as the oil and gas reserves are located in federal waters, Noglikskii district has no claim to any payments for use of resources, though the reserves are located close enough to devastate the local fishing economy in the event of an oil spill. Furthermore, the Sakhalin offshore projects use the system of "production sharing," which was developed on the basis of experience in Third World countries, and does not ensure adequate benefits to local communities. The Production Sharing Agreement (PSA) for the Sakhalin II project was signed on 22 June 1994 between SEIC and the Russian side (the Russian government and the Sakhalin regional administration). According to this agreement, all the production goes first of all to SEIC until the company has covered its investment costs. Only after the project has then started to make 17.5% profit will the Russian side start to receive its own share of the profits, which will be about 60% (split between the Federation and Sakhalin region).
According the PSAs, the Sakhalin projects have been freed from their federal tax obligations, apart from the royalty (6%) and profit tax (32%). The projects have likewise been freed from their regional taxes. The decision to free the companies from local taxes has not yet been taken by the Nogliki district assembly. Yuzhno-Sakhalinsk municipal government has refused to free the companies from local taxes. While the money saved from local and regional taxes will increase the total profit of the projects and thus increase the amount of profit tax collected, (a) this money will go to the regional and federal budgets, not directly to local district budgets, and (b) the estimated loss to the region as a whole will be $4,160 million US for Sakhalin I and $954 million US for Sakhalin II.*6
In theory, the lack of direct benefits from the projects is compensated by the payment of "bonuses" at strategic points in project development (total $45 million US), and through distribution of finances from the Sakhalin Development Fund (total $100 million US). The distribution of payments is decided by the regional administration and the region assembly (duma). The only bonus payments that Noglikskii district has so far received have been towards the controversial gas-fired power station built close to Nogliki to feed the south. This power station caused protest from local activists, due its location close to local dachas and the political significance of the project. The power station is fed by an old gas pipeline that recently exploded under the extra pressure needed to transport the necessary volume of gas.
As the Sakhalin II project celebrated the first oil from Molikpaq in July 1999, the Sakhalin region received the third payment to the Sakhalin Development Fund ($20 million US). From the first of October 1999 SEIC will pay the first instalment of compensation totalling approximately $160 million for previous geological exploration work (50% to the federal, 50% to the regional budget). The 6% royalty payments will also begin with the start of production. At the same time SEIC is now claiming back VAT that they have paid up to now in contradiction to their PS agreement. This currently totals $23 million US and will be paid back out of the federal and regional royalty payments (Sovetskii Sakhalin, 25 June, 1999).
Benefits to the local communities of Noglikskii district could have been provided by the incoming worker population (shopping in local shops, using local service industries, etc). However, Exxon and SEIC have, for security reasons, built their own camp outside of Nogliki to which access is strictly limited. The camp has its own shop and is also self-sufficient in every other way. Workers who come from abroad and elsewhere on Sakhalin arrive on the train and are taken straight to the camp. Westerners sometimes visit the centre of Nogliki, but tend to frequent one or two local bars and the local hotel only. This considerably limits the amount of benefit to the local community. What is more, as the oil companies are registered in Yuzhno-Sakhalinsk, where they pay their taxes, Noglikskii district receives no tax payments from the camp.
Local experts consider that the Sakhalin projects have developed against the interests of the local districts, although the original tender agreements promised more local benefits (such as gasification of the island, local processing, local jobs, etc.). In November 1997 the mayor of Noglikskii district G. Susenko and the head of the district assembly V. Sereda wrote a letter to governor Farkhutdinov and the head of the regional assembly, B. Tretiak, expressing concern that profits from the Sakhalin I and II projects will be directed towards Moscow and the regional centre, rather than to the local districts Okhinskii and Noglikskii that will bear the brunt of the ecological risk relating to the projects (Znamia Truda, 22 November 1997).
However, almost two years later the same mayor and head of the district assembly have still not been able to negotiate a better deal for the local populations of Nogliki district, while the tendency is for business opportunities provided by the oil developments to be aggressively pursued by American companies. Recently a group of Alaskan business people visited Nogliki to explore the possibilities of setting up support service industries for the oil industry. The district mayor's response was to the effect that there are sufficient human resources locally to provide this kind of service, if given the chance.