RUSSIA KICKS OUT SHELL OIL FROM MAMMOTH SAKHALIN II PROJECT

by Emad Mekay

(IPS) WASHINGTON -- Encouraged by a Russian government decision last week to enforce tougher environmental regulations for the controversial Sakhalin II oil project, international environmentalists say the European Bank for Reconstruction and Development (EBRD) should withhold funding for the project or risk violating Russian law.

Russia revoked the environmental permit for the oil-and-gas project, led by Royal Dutch Shell PLC, a move that has prompted accusations by Europe and Japan that the decision was politically motivated and that Moscow is trying to give its national oil company Gazprom greater power in the oil sector.

Sakhalin II is a $20 billion project to extract oil and gas from beneath the coast of Sakhalin Island in Russia's far east. Production was due to start in 2008 with 60 percent going to the Japanese market.

The Anglo Dutch oil giant Shell is leading the investment on the island, which is estimated to have reserves of 45 billion barrels of equivalent oil and gas -- the same amount of remaining reserves in the North Sea.

The company is seeking up to $5 billion in financing for the project.

The European Bank for Reconstruction and Development is considering whether to lend money to the project being developed by the consortium, Sakhalin Energy Investment Co., held 55 percent by Shell and 25 percent and 20 percent respectively by the Japanese corporations Mitsui and Mitsubishi.

But the Russian Ministry for Natural Resources announced that it has shut down sections of the pipeline construction because it found "multiple violations of environmental protection legislation" and said that criminal charges may be filed against the consortium.

Russian and international green groups seized on the news to renew calls for international lenders to reconsider their plans to bankroll the project now that environmental problems have belatedly been confirmed by the local authorities.

In a letter to the president of the EBRD on Monday, groups including Sakhalin Environment Watch, Pacific Environment and CEE Bankwatch Network argued that now Shell cannot convincingly demonstrate that Sakhalin II complies with the bank's environmental policies.

Greig Atkins of CCE Bankwatch told IPS in a telephone interview from the Czech Republic that the groups are not trying to block the project per se, but rather were campaigning against the use of public money for a project that has been proven to violate the public lenders' policies, and "because the Russians are now at last acknowledging that it violates their national environmental legislation."

In their letter, the green groups urge the EBRD to acknowledge the authority of the Russian Ministry of Natural Resources and Environmental Inspection Agency, and ask the bank why it did not halt consideration of the project after the enforcement action in Russia.

"If EBRD has such great leverage and environmental value added, why did it not succeed in stopping these violations earlier, when it was first informed of them by Sakhaliners at the EBRD public consultation on the project in March 2006?" asked Doug Norlen, policy director of Pacific Environment.

Environmentalists say that the project will harm marine life and several endangered species, including the world's 100 remaining western gray whales, as well as the local fishing community and indigenous people in the fragile area.

They are worried about a planned pipeline that would span 21 active seismic faults and hundreds of wild salmon spawning habitats. The project will dump 2 million tons of dredging spoil into Aniva Bay, threatening a key fishery and the livelihoods of many Sakhalin islanders.

The green groups say the outcry over Russia's decision is also misplaced because weak erosion control measures, which were either inadequate or completely missing, could have serious economic and environmental consequences.

Atkins said that without corrective measures, the pipeline is prone to ruptures and leaks, and therefore supply interruptions to Japan and Korea, as happened recently in the United States with BP's Prudhoe pipeline.

"The international diplomatic outcry about Russia's steps is more than a bit rich when you consider that, for several years now, local and international environmental groups have been uncovering legal violations along the project's onshore pipeline route," he said.

Green groups have repeatedly pointed the problems out to government representatives who sit on the boards of the EBRD and other public finance institutions, but which are still considering lending billions of dollars of taxpayers' money to the project, he added.

Like the World Bank and the International Monetary Fund, the EBRD is a multilateral financial institution whose investments have often had a major impact on local communities and the environment. Most of these lenders have come under fire for funding projects in environmentally damaging extractive industries like oil, gas and mining.

The Sakhalin II episode comes amidst global concern over climate change and the role played by oil and gas consumption in raising the earth's temperature and damaging fragile ecosystems.

But despite concerns from environmentalists, public lenders and private banks are still clamoring to fund oil and gas projects, prodded by energy-hungry countries like the United States, Japan and members of the European Union, which are major shareholders in public banks and home to most of the world's biggest energy companies.