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Alaska Journal of Commerce : Oil, gas transforming Russian Far East

Exxon Sakhalin

(Russian construction crews lay brick tiles in late September for a sidewalk in front of the new Exxon office building in downtown Yuzhno-Sakhalinsk in Russia’s Far East. PHOTO/Rob Stapleton/AJOC)   

By Tim Bradner 
YUZHNO, Russia – This gritty city on the south end of Sakhalin Island, Russia’s oil-rich province in its far east, shows the face of a modernizing Russia.

In the early morning, streets are busy with traffic and smartly dressed young women and men who stride purposefully to work in modern office buildings.

The city bustles with new construction, including – in what would amaze visitors to Russian cities just a few years ago – new subdivisions of single-family homes being built for Russians, not foreigners, on the city’s outskirts.

There are still plenty of the old Soviet-era block apartment buildings, however, as well as older neighborhoods of log cabins and small wood houses, some which seem to date from czarist times. Many of the old homes have greenhouses and gardens, a sign that many Russian families, in a place with a cold climate and without Costcos and Safeways, must still grow a lot of their own food, as did many Americans not too long ago.

What is propelling Sakhalin’s emerging prosperity is oil and gas. Big projects are being managed by joint ventures led by companies with names familiar in Alaska: Exxon Mobil Corp., Royal Dutch Shell and BP. Thousands of people are at work, earning fantastic wages by Russian standards.

The projects themselves face challenges. A $20 billion pipeline and liquefied natural gas (LNG) project being run by Shell is 80 percent complete but is experiencing cost increases as well as environmental problems with pipeline construction. The project is on schedule to go into operation in 2008, officials with Sakhalin Energy Investment Corp., the consortium led by Shell, said in briefings held Sept. 27 in Yuzhno.

The cost escalation, from $12.5 billion to $20 billion, should be a sobering signal for Alaskans who are hoping to see a long-distance gas pipeline built or alternatively, a large LNG project. Shell’s LNG project is approximately the size that has been proposed for Valdez by the Alaska Gasline Port Authority, a municipal group.

Shell’s consortium isn’t the only group to experience cost overruns. Exxon Mobil recently announced that its project will wind up costing $17 billion, up from an earlier estimation of $12.5 billion.
The Russian federal government and the Sakhalin regional governments are unhappy about the project cost increases, because under terms of the production sharing agreements negotiated with the companies, the governments must now wait longer before they get a large flow of revenues from the projects.

The Shell and Exxon groups have provided development funds for Sakhalin infrastructure that their projects will also use, but Sakhalin governor Ivan Malakhov says his region badly needs more money for schools, hospitals, roads and other public improvements, concerns with which Alaskans would sympathize.

Malakhov was in Alaska recently with a group of Russian Far East regional governors, during which he met Gov. Frank Murkowski and other state officials and toured parts of the state.

Alaskans are no strangers to Sakhalin. Alaska contractors and support companies have been on the scene since the 1990s, when Western oil and gas companies started working there.

Alaska firms have experience with ice and supporting remote operations in difficult climate conditions, capabilities that Exxon Mobil and Shell needed. Many managers with Exxon Mobil in Sakhalin, for example, have worked in Alaska and are familiar with the Alaskan companies.

In northern Sakhalin, where the oil fields are located, operating conditions are similar to the North Slope. The region is on the same latitude as France, but its climate is affected by severe winter cold coming down from eastern Siberia across the Sea of Okhotsk.

BP’s project off northern coast of Sakhalin – conducted as a joint-venture with Rosneft, a Russian oil company – is still in the exploration phase, but BP also has Alaskans in senior positions, including Ray Jakubczak, the company’s general director for BP Sakhalin.

Veco Corp., the Alaska oil field services company, has been active in construction support work for the Exxon Mobil-led Sakhalin 1 project and recently landed maintenance contracts with a Russian partner for both Sakhalin 1 and 2.

John Conway, a former Veco manager in Anchorage, is in charge of the company’s operations in Russia overall. Other Alaskans now part of Veco’s management team in Sakhalin include Dave Hopkinson, Kurt Stangl, Derek McGowan and Gerry Leipert.

Arctic Slope Energy Services, another Alaska oil service firm, has been previously active in project support work and now operates a fabrication plant in Yuzhno. Gary MacDonald, a former Arctic Slope Energy manager in Alaska, is now in charge of the Yuzhno plant.

Alaska Interstate Construction, another veteran Alaska oil field construction company, has been active in Sakhalin in the past and is now working to land new contracts there. Dave Gonzalez and Norm Stevens from AIC’s Anchorage office were recently in Yuzhno working on potential projects.

Tim Bradner can be reached at [email protected]. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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