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Anton Chekhov once visited Sakhalin Island to report on the condition of its prisoners and left a tagline unlikely to be adopted by the tourist bureau — if there were one: "Now I have seen Sakhalin, which is hell." And this from an author famous for understatement. Exiled at the far eastern end of the Russian Federation, just north of Japan, Sakhalin Island was where imperial Russia once sent some of its most unfortunate convicts, on a journey that was usually one-way. In Soviet times it became a closed military base; site of the notorious shooting down of Korean Air Lines flight 007 after it strayed over Sakhalin in 1983.

The rugged island has the climate of the Pacific Northwest, but without the flannel charm: freezing cold in the winter and damp in the summer, it is more suitable for salmon than people. Yet, today, flights to Sakhalin book up weeks in advance. Prices in the capital city of Yuzhno-Sakhalinsk are outlandishly high — $18 for a whiskey — and visitors (who usually come voluntarily now, unlike in Chekhov's time) have their pick of nightspots every bit as over-the-top as those found in Moscow.

So, how did Chekhov's hell become red-hot? The answer is oil, lots of it, along with enough natural gas to power Tokyo — which, actually, is where most of it will be going. Sakhalin Energy (SE), an international consortium led by Shell and the Russia's state-owned Gazprom, is spending $20 billion to mine the waters around Sakhalin; one executive says the island could eventually become as important to the industry as the Gulf of Mexico. SE is finishing a pair of underground 500-mile pipelines down the spine of the island that will deliver oil and natural gas to the one of the biggest liquid natural gas (LNG) terminals in the world, from which it will be exported to the energy-hungry economies of East Asia. Unlike the rest of Russia, unemployment on Sakhalin is virtually unknown, and money is pumping through an island economy once impoverished even by the grim standards of post-Soviet Russia. "If you visited this island 10 years ago and compare it now, you would see a big, big improvement," says SE CEO Ian Craig.

But not all of the island's residents would agree. The energy projects have been raised environmental concerns over potential damage to the habitats of the endangered Western grey whale and the streams where salmon come to spawn. Dmitry Lisitsyn, an intense geologist who has emerged as the voice of Sakhalin's environmental community, also fears that the pipelines could rupture in the event of an earthquake — Sakhalin is seismically unstable —causing a catastrophic underground oil spill. "This project is too large for such a small island," he warns. (SE says that it has responded to environmental objections, including earthquake risks.)

Then, there's the sense among many ordinary Sakhaliners that they're being cut out of the wealth being generated by the oil and natural gas on their island. The oil boom has driven up prices for everything from housing and food to transport — a five-minute taxi ride from the airport can break $20. Expat oil executives can pay without a problem, but locals struggle. "It's something crazy how high prices have gotten here," says Lisitsyn, speaking over the shouts of happy couples outside the cramped $745-a-month single room office his organization occupies upstairs from the municipal wedding hall. "But at the same time we still have people just barely surviving on fishing."

Moscow keeps more than nine tenths of the 6% royalty that SE pays on oil and natural gas pumped from Sakhalin, leaving just crumbs for the islanders. Pensioners live off vegetables they grow themselves, and it's not uncommon to see bundled old women by the side of the street selling carrots, while new SUVs pass them by. And, despite all that natural gas, Sakhaliners still use coal to heat their homes — although the government may transform the island's infrastructure to use gas in the future. "People think Moscow uses the island to squeeze out all of our natural resources," says one Sakhaliner, who works as a driver. "And then they'll throw us away."

But the deeper fear among many Sakhaliners is over the way energy money is changing the social fabric of their island. Construction companies have imported tens of thousands of workers from such countries as the Philippines, Turkey and Kyrgyzstan. The migrants live in temporary camps out the public eye, although it's not uncommon to see pairs of shivering Filipinos in heavy jackets walking on the streets of Yuzhno-Sakhalinsk. Nor is it uncommon to hear Sakhaliners muttering darkly about how unwanted migrants have brought crime and disease, and have driven down the wages of native workers. Locals complain that the workers from abroad will be a drain on the island's welfare system. "We worry that they will stay here and exploit our infrastructure," says Svetlana Soldakina, a local activist. "It's not that our island is unfriendly, but our city will burst."

Such complaints are unlikely to mean much in a Russia growing prosperous off its abundant oil and natural gas reserves. But while Moscow puts post-Soviet poverty behind it, the residents of Sakhalin are experiencing the energy boom in a manner familiar to many citizens of oil-rich nations. "I'm a native," says Vasili Plotnikov, a pensioner who owns a tiny country shack just a few miles from the massive LNG terminal. "I don't see any plus. I only see negatives." Maybe Chekhov's hell wasn't so bad, after all.

• Bryan Walsh