No. 1, 2004

Prof. Alexander Igolkin, Dr. Sc. (History)


The record of this Japanese oil concession in Northern Sakhalin is most instructive because it features a multitude of extremely interesting details and circumstances understanding the essence of which is vital at the current stage of Russian-Japanese economic relations in the oil and gas sector.

First attempts

Even before the 1917 Revolt, the Russian government had tried to draw British capital into the development of the Sakhalin oil fields discovered by then. Preference was given precisely to British rather than Japanese capital (after the Russo-Japanese war the southern part of Sakhalin had been taken over by Japan). According to Dr. Vladimir Kostornichenko, the Russian government was wary, not without reason, of its Far Eastern neighbor's expansionist encroachments in that region. Starting with 1909, the British-owned Sakhalin Oil and Coal Company repeatedly arranged prospecting and drilling expeditions which cost it up to a million rubles. The expeditions established the presence of a 400-verst-long oil-bearing area in Northern Sakhalin (1 verst is equal to 0.6629 mile or 1.067 km).

In May 1914, a preliminary agreement on oil production in Sakhalin was reached with two British oil companies: W. Peerson's company and Vickers Petroleum. At the end of 1916, however, the former gave up the project, and in May 1917, the latter followed suit.

In 1918, Japan's Kuhara company signed an agreement with Russia's industrial group of O. Stakheyev & Co. and sent a prospecting party to Northern Sakhalin.

In July 1920, Japanese troops occupied Northern Sakhalin. In the same year, the Japanese got down to drilling oil wells in the Katangli area, and in 1921, in the Okha area. The Okha wells started producing in 1923, and the Katangli ones, only as late as in 1932-1933.

Apprehensive of Japan's getting stronger, the United States formally declared against the Japanese occupation of Northern Sakhalin and insisted that it should revert to Russia. Although the Far Eastern Republic officially assumed political control over Northern Sakhalin, Japanese troops remained there. In 1921, the Far Eastern Republic entered into negotiations with the U.S. Sinclair Oil company on the development of Northern Sakhalin's oil-bearing areas. The Soviet government commented on the concession project as follows: "A clash of American and Japanese interests in the Far East is good for us politically."

Words and deeds

Upon the Far Eastern Republic's accession to Russia, Moscow confirmed the agreement with the Americans on January 26, 1923. However, Sinclair Oil could not go ahead with the development of the local oil fields owing to the presence of Japanese troops in Northern Sakhalin. The Japanese pumped out Sakhalin oil without the Soviet government's permission and without paying it any money. On the larger Okha oil fields, the Japanese recovered 12,170 tons in 1924 alone. In 1924 Japan agreed, in principle, to withdraw its troops from Northern Sakhalin but only on condition that a concession for the production of Sakhalin oil be granted to it.

The USSR and Japan signed a convention on the establishment of diplomatic relations on January 20, 1923 in Beijing, China. Along with other matters, the document provided for granting Japanese companies concessions to produce oil and coal in Northern Sakhalin. An agreement was signed on December 14, 1925, granting an oil concession to a newly-established Japanese company which came to be known, since 1927, as Kita Karafuta Seki Kabusiki Kayasya (the Joint Stock Oil Company of Northern Sakhalin (JSOCNS)). The list of the company's shareholders featured major Japanese companies like Mitsui, Mitsubishi, Sumitomo, Okura Kochyo, Nihon Sekyo, and Kuhara.

Concessions to develop the explored oil fields were granted for the term of 45 years, and to prospect for new ones, 11 years. Japanese concessionaires had to pay an annual rent constituting 4% of production worth. Besides, share deductions to the budget amounted to 5% of the original 30,000 tons, the charge growing by a quarter percent per each extra 10,000 tons. Upon the attainment of the 230,000 tons production level and over the concessionaries had to pay the USSR government a fixed 15% rent. Share deductions from the worth of oil coming from flowing wells (from 15 to 45%, depending on the volume of production) and of natural gas produced (from 10 to 35%, depending on the gas fractions content) were agreed upon separately. Moreover, a land tax was charged in the amount of 3.84% of overall recovery. The financial obligations provided for by the agreement were in line with standard world practice at the time.

Admiral Nakasato, who represented the interests of the Japanese Navy, then No.1 consumer of Sakhalin oil, was the first director of the Japanese concession company.

Later, throughout the 1930s, JSOCNS maintained close contacts with Japan's Naval Ministry. The company's executives and most of its personnel were picked up from among Japanese seamen.

The Japanese company Kita Karafuta Seki Kabusiki Kayasya operating in Northern Sakhalin produced 30,000 tons of oil in 1926; 70,000 tons in 1927; 133,000 tons in 1928; and 150,000 tons in 1929. Northern Sakhalin oil constituted about 13% of Japan's overall oil consumption. Nevertheless, that oil was of much importance for Japan's Navy, above all.

To quote L. Denny, an American oil policy analyst of the time, Sakhalin as the principal supply source of the Japanese Navy is plotted on world powers' maps as a major attack target or defense objective in any future naval war that may break out in the Pacific Ocean.

Under the concession agreement, the eight oil fields, explored by then, were arranged checkerwise, with half of the fields leased to the Japanese and the other half kept by the USSR. Ivan Strizhov, senior director for the oil industry under the Supreme Council of the National Economy (VSNKh), was of the opinion that it would have been better to simply lease out four fields and warned that the Japanese could siphon oil off from neighboring fields.

Rule of the contraries

Initially, oil in Northern Sakhalin was produced by the Japanese only but as early as in 1926 the Sakhalinneft Trust was established and in 1927 the USSR's own oil production got off to a good start.

In 1928, the Japanese concession company produced 106,631 tons of oil in Sakhalin, and Russia's Sakhalinneft, 296 tons (in 1927/28). In 1932, the Soviet company produced 188,889 tons, and the Japanese concessionaires, 185,435 tons.

The Soviet government invested quite heavily in Sakhalinneft which accounted for the following shares of the total investments in the USSR's oil industry: 1927/28-0.3%, 1928/29-2.1%, 1930-2.5%, 1931-3.2%, 1932-4.4%.

Sakhalinneft's share in investments was considerably in excess of its share in oil production. There were political as well as economic reasons for such attention to Northern Sakhalin.

In 1928, Japan granted the Soviet Union a loan for the development of Sakhalin oil fields against import purchases of drilling equipment, pipes, etc. The loan was repaid in the supplies of Sakhalinneft-produced oil for the Japanese Naval Ministry. Imported equipment helped step up oil production efficiency appreciably.

Sakhalinneft's oil production kept growing thereafter, as illustrated by the table below, but the share of Northern Sakhalin in the USSR's total oil production remained small.

In September 1932, oil flowing was induced in Sakhalin for the first time, but the amount of cheap free-flowing oil was small. It cost the Sakhalinneft Trust 31.65 rubles to produce a ton of oil which was five times the national average oil production cost (6.35 rubles a ton).

Japan's oil exports in 1934-1938 were as follows: 1934 - 240,400 tons, 1935 - 174,600 tons, 1936 - 166,400 tons, 1937 - 216,300 tons, 1938 - 161,200 tons.

After 1934, oil exports began to diminish and dwindled to one-third by 1938. That was due to mounting tensions between the USSR and Japan culminating in armed clashes outside Lake Khasan. In 1938, oil exports – and Japan's oil production – declined sharply.

The Kita Karafuta company had planned to produce 243,600 tons of oil in 1938 but its actual production turned out to be about 60% the target figure.

The Soviet government was undoubtedly aware of the fact that the concession was managed by the Japanese military.

In the summer of 1938, Vice-Admiral Masazo Sakonji, ex-President of JSOCNS, arrived in Northern Sakhalin for negotiations with the Soviet side. In the meantime, "a border conflict broke out which compelled the company to cut the negotiations short," the Japan Advertiser newspaper reported on September 16, 1938. The paper pointed out further that in 1938 the company would incur substantial losses owing to deficient oil supplies from Sakhalin.

Storm clouds gathering…

In 1939, Soviet-Japanese relations remained extremely strained. The summer of that year saw large-scale combat action in the area of the Halhin-Gol river. Naturally, that could not but tell on the functioning of the concession company.

On April 27, 1939, Mr. Nishi, Japan's Charge d'Affaires in Moscow, complained to the People's Commissariat for Foreign Trade (PCFT) about the Japanese oil and coal concession companies in Sakhalin allegedly being interfered with. For its part, the Soviet side stated numerous and repeated violations of the concession agreement and cited facts of fire code violations and neglect for personnel safety arrangements and precautions. The Japanese Charge d'Affaires complained about problems involved in renewing collective bargain agreements with the Soviet citizens – labor union members – who worked in Sakhalin. The Soviet side countered that "no government agencies can mediate in that matter because a labor union is a public organization" and that "because relationships with the concessionaries were governed by private law they were outside the government agencies' terms of reference."

Having cited more violations of the concession agreement by the Japanese, Mr. Semyonov, head of the Concessions Department of the People's Commissariat for Foreign Trade, who had been instructed to make a cross-appeal, wrote: "It is surprising that under the circumstances the Japanese government, instead of censuring concession companies which, by their neglect for mandatory concession agreements, do the Soviet side considerable damage, deem it possible to intercede for the companies and try to shift onto Soviet organizations the blame for the concession companies doing less business and incurring losses as a result. It stands to reason that the concession companies' breach of their commitments threatens the very existence of the concession agreements."

By the year 1939, Japanese concessionaires had operated 211 operating wells in the Okha area yielding a total of 300-320 tons a day, and 32 wells in the Katangli area with an average daily yield of 120-150 tons. That was far short of Japan's requirements. Japanese concessionaires planned to drill 10 exploratory and 49 operating wells in the first quarter of the 1939/40 business year – but never got down to drilling a single exploratory or operating well. Neither did they go ahead with their plans to build oil tanks, narrow-gage railroads, high-voltage transmission lines, oil pipelines, structures, etc.

The Soviet side had its misgivings about the concessionaires' activities, and with good reason, too. In 1938, the Japanese concession company filed a request for goods for its personnel but the PCFT agreed to supply only 40% of the items requested on the grounds that the Japanese side stubbornly refused to submit to the PCFT an inventory of the residue stock found at the concession company's warehouses. In January-February 1939, a PCFT commission inspected 129 Japanese warehouses in Sakhalin revealing substantial food and consumer goods surpluses there. Moreover, items falling into the "prohibited imports" category, such as Berdan rifles, gunpowder, a pair of binoculars, a field telephone set, a wireless set, a telescope and five moonshine stills were discovered.

The 1925 agreement stipulated that foreign nationals could account for 50% of the Japanese concession company's administrative and engineering personnel and for 25% of its unskilled workforce. As of January 1, 1927, 49% of all those employed were Soviet citizens; 47.5%, Japanese; 2.8%, Korean; and 0.6%, Chinese.

As of September 1, 1938, there were 1,092 citizens of the USSR and 967 citizens of Japan on the Sakhalin concession company's payroll.

The Soviet citizens employed by the concession company ran the risk of being accused of spying for Japan.

"It is common knowledge," Dementyev, chief of the NKVD (secret political service) of Checheno-Ingushetia, reported to a regional CPSU conference in May 1937, "that in our oil industry large numbers of workers are recruited every year for Sakhalinneft and for the Japanese concession company in Sakhalin. The Japanese are taking advantage of that as evidenced by the cases of Ionov, Petrachenok and Mishin who have been proved guilty of working for the Japanese intelligence service. Japanese resident spies – Martynenko, Antonov and others – were recruited while in the Sakhalin concession company's employ and then bought over here."

Over 200 Soviet workers of the concession company were arrested in the period of November 1937-April 1938. That got Japanese concessionaires seriously worried because in the spring of 1938 a mass exodus of Soviet workers to the mainland began. The Japanese pointed out that the workers had deliberately stepped down their efficiency – an act described as "defiant" by the Moscow representative of the Japanese concession company in his letter to the PCFT.

But for all that, quite a few Soviet citizens stayed on. As of June 1939, the Japanese concession company in Sakhalin employed 1,288 Soviet citizens and 517 foreigners.

Although Sakhalin oil was important to Japan, its share in the Japanese import was nothing much. Petroleum products output was next to nothing: in April through June 1939, and over the first quarter of the 1939-1940 business year, the Okha refinery processed a mere 200 tons of crude oil into 117.2 tons of fuel oil, 55.2 tons of diesel fuel and 24.3 tons of motor lubes.

Japan imported most of its oil and petroleum products, aviation fuel in particular, from the United States.

Japan's own oil production constituted a mere 272,000 tons in 1929; 275,000 tons in 1935; and 356,000 tons in 1938. In 1936, Japan's own oil production met only 8.9% of its domestic market requirements. The nation imported 3.4 million tons of oil then, with the United States accounting for 2.5 million tons, and the Dutch East Indies company, for 0.45 million tons.

In 1937, the United States exported 43.6 and 3.5 million dollars' worth of oil and petroleum products to Japan proper and to its Kwantung province, respectively. The total worth of Japan's oil and petroleum products import added up to $71.6 million in 1937 and $81 million in 1938. By comparison, 161,200 tons of crude oil worth 6.45 million rubles were shipped to Japan from Sakhalin in 1938.

In the late 1930s, Tokyo-Washington relations deteriorated, which told on trade in petroleum products – aviation fuel, above all.

In July 1939, the U.S. government denounced the trade agreement with Japan that had been in force for 28 years – since July 1911. Article 5 of the agreement prohibited banning the export and import of any goods; within six months of denouncing the agreement, the U.S. government was entitled to ban the export of certain items. Shortly afterwards, an embargo was imposed on the export of aviation fuel to Japan. Its supplies to Japan from the United States went down to a third in 1940 compared with the 1939 figure, and the supplies of crude oil were also reduced substantially.

By the year 1940, Japan imported about 90% of its oil and petroleum products (about 42 million barrels a year). The United States accounted for 66%, and Dutch East Indies, for 26% of Japan's oil import.

The principal sources of petroleum products supplies to Japan were controlled by American, British and Dutch capital. Japan could not reckon either on the Western democracies, or on the Soviet Union.

A desire to have large oil sources of its own was among the factors in putting Japan on the warpath; in selecting the target of its aggression Japan could not but take into account the fact that Dutch East Indies produced much more oil than Sakhalin did at that time.

During the war the Japanese promptly experienced an acute shortage of oil fuel, aviation fuel, in particular, although initially they could, in fact, draw on Dutch East Indies' oil resources.

Japan got East Indies under its control in March 1942. Although destroyed by the allies, East Indies' oil fields were promptly restored; what's more, the Japanese discovered a fabulously rich new oil field in Sumatra. Japan's wartime oil import reached its peak in the first quarter of 1943 only to decline sharply thereafter, first due to the sinking of most of its tankers and then as Tokyo lost its grip on the areas it had previously seized. In 1944, the Japanese began to synthesize fuel from soybeans, peanuts, castor oil seeds, and even from sugar and rice alcohol requisitioned from civilians. In 1945, a campaign was launched to gather pine tree roots as a material to synthesize liquid fuel from. By June 1945, pinewood was processed into artificial oil at a rate of 70,000 barrels a month, but overall gasoline production by this exotic method constituted a mere 3,000 barrels.

The Japanese retained the Sakhalin concession even after World War II had broken out. It was only as late as on March 30, 1944 that a protocol on the return of the Northern Sakhalin oil and coal concession to the Soviet Union was signed. In compensation for the property takeover the USSR undertook to pay Japan five million rubles and, after the war, to supply to that country 50,000 tons of oil a year on common commercial terms over the period of five years. During the war, Sakhalin oil had practically no effect on Japan's military-strategic capability.

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Oil of Russia, No. 1, 2004
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