|                                                                                                                                                             |  | SAKHALIN LEADS THE WAY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | September 1997by Tanya ShusterSakhalin Island's offshore oil and gas projects are among the biggest commercial news these days
in the Russian Far East (RFE)--and  in much of Russia.  While a number of natural resource
development projects have signed production sharing agreements, the Sakhalin I and II projects,
worth roughly $25 billion in foreign investment, are the only two that are actually moving forward
based on such agreements.  Perhaps even more important, they are expected to create a boom that
will resuscitate many troubled RFE enterprises and greatly expand opportunities for U.S.
companies.  Although the projects are still in their early phases and the road ahead has numerous
obstacles, interested U.S. firms should act early and carefully to position themselves to take
advantage of opportunities when they arise.Sakhalin I and II will develop five oil and gas fields northeast of Sakhalin Island.  The fields are
said to contain 400 million tons of crude oil and gas condensate and 830 billion cubic meters of
natural gas.  Sakhalin I, estimated to be worth $15 billion in foreign investment, will develop three
fields believed to contain 310 million tons of oil and 335 billion cubic meters of natural gas.  The
two Sakhalin II fields contain 100 million tons of hydrocarbon liquids and 494 million cubic
meters of gas, and will draw $10 billion in investment from the four project participants,
Marathon (U.S.), Mitsui (Japan), Shell (Netherlands), and Diamond Gas Sakhalin
(Japan).Significance of Sakhalin I and II
Sakhalin I and II are the largest foreign investment projects currently active in Russia.  Their
dollar value, though, is only part of their significance in the RFE, whose economy has fared much
more poorly than other regions of Russia.  Despite the RFE's wealth of natural resources, the
region suffers from a severe, chronic energy shortage; some areas import up to 90 percent of their
food and consumer products.  The Sakhalin  projects--and additional offshore fields, some of
which are still being explored--are expected to bring cash, jobs, and a source of fuel to the
troubled local economy.Dinty Miller, Director of the American Business Center on Sakhalin Island voices the view of
many in the region: "These projects have the potential to be the catalyst that will spur economic
development throughout the Russian Far East," noting that "nearly $25 billion will potentially
flow to the region, but the multiplier effect is expected to be seven or eight to every dollar."At the same time, Sakhalin I and II are expected to impact many sectors in addition to oil and gas.
At the core of the projects will be exploration, extraction, refining, and transportation of oil and
gas.  The Sakhalin projects will also require substantial infrastructure--including onshore support,
construction, and environmental assessments. Additionally, the many expatriates expected to
work on Sakhalin Island will require food service, consumer goods, and a range of products and
services not currently available there.Getting the Work Done
Much of the work will be subcontracted through a competitive bidding process.  By March 1997,
Exxon Neftegas Limited, the operator for Sakhalin I, had awarded 90 contracts to Russian and
foreign companies, mostly for site surveys and test drilling.  Over the next few years, Sakhalin I
and II will award numerous contracts for inspection and security services; radio and telephone
communications; ground, air, and sea transportation; fuel supply; housing construction; and
more.RFE companies bidding on Sakhalin subcontracts will be aided by "Russian content" requirements
built into the two projects.  Overall, 70 percent of the equipment, services, and materials must
have a "Russian" source.  This does not mean, however, that they can go it alone.  RFE
companies suffer from the same problems as their counterparts elsewhere in Russia, especially the
lack of capital and the latest technologies.  Most will have difficulty meeting the stringent
technical specifications that the Sakhalin projects require.  As a result, many will need foreign
partners to help them qualify to bid.Potential U.S. subcontractors should remember that for the purposes of Sakhalin I and II,
companies with at least 50 percent Russian ownership qualify as  Russian.'  U.S. companies that
want to pursue Sakhalin contracts can do so on their own, or they can form a joint venture with a
Russian company in which they have up to a 50 percent stake.  Forming a joint venture in Russia
is not necessarily easy or quick, but this option will increase a non-Russian company's chance of
being awarded a contract.Getting Involved
Companies wishing to bid on Sakhalin contracts must go through pre-qualification and a selective
qualification process. Prequalification, which helps the operators to identify potential suppliers,
requires providing basic information about a company's ownership, activities, financial status,
business plans, pricing, and delivery. Pre-qualified companies are asked to submit additional
information, after which the operators invite qualified companies to submit bids.Project operators encourage prospective subcontractors to contact them both on Sakhalin Island
and in Houston.  U.S. companies may also want to contact the American Business
Center/Yuzhno-Sakhalinsk, which is assisting with pre-qualification and is also working with the
Sakhalin Administration in identifying potential U.S. and Russian joint-venture partners.  For
more information, including extensive contact lists, visit BISNIS Online at
www.mac.doc.gov/bisnis/cables/970714vl.htm, or www.mac.
doc.gov/bisnis/cables/970715yu.htm.Tanya Shuster is BISNIS' Senior Russia Trade Specialist.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)