Russia Flexes Green Muscle on Shell & Exxon

posted by Japhet Ran

From our Global Finance campaigner Dana about the Sakhalin project in Russia:

This story on the future of Sakhalin II is still going back and forth. Since so many of you are interested in this project, I wanted to try to give a summary of the information and perspectives on what is happening.

First, Shell’s permit was cancelled by the Russian government on environmental grounds, which I believe will shut down operations of Sakhalin-2 for now. European and Japanese govt officials are quite upset. The financial press is playing this as politically motivated and Russia trying to get a better deal. The NGOs are highlighting the fact that it reflects long-standing violations of Russian environmental law, a risk they have been highlighting with Shell and the finance community from the beginning.

Until I got a msg from Doug this morning, it was unclear what effect this had on the European Bank for Reconstruction and Development’s (EBRD) involvement. Doug and colleagues are now in Europe making the rounds with EBRD Executive Directors. His report is listed first below. Then is a summary from Igor Chestin, with WWF Russia. And finally, an excerpt from the article the Financial Times ran today.

Doug at Pacific Environment has shared:

Over the last couple of days James and I have met with EBRD EDs and/or staff for the US, UK, Italy, Germany, The Netherlands, Belgium and Japan. The most amazing thing that came out of the meetings was…nothing. EBRD seems to be in a state of shock and according to an unnamed source, their lips were “tighter than a bull’s arse in fly season.” What little statements they made ranged from “there is no Sakhalin II project at EBRD now,” to “We will not do anything until Russia makes a decision,” and “We have no idea when the project will go to the board, if ever.”

From Igor Chestin at WWF Russia:

“Summer inspection found severe deviations from the project document which led to violations of the Russian law. In particular they documented the damage done to forests along the pipeline and calculated the monetary damage (app. 600,000 USD). They also noticed, but not fully documented damage to rivers. After inspection came back, Rosprirodnadzor submitted the report to the General Prosecutor’s office for judgement. General Prosecutor issued an order to the Minister of Natural Resources to cancel the approval of positive state ecological expertise of 2003. Yesterday, on 19th the Minister Yuri Trutnev followed the Prosecutor’s order and cancelled the order of MNR from 2003. . . .

At a press conference, Mr. Mitvol [deputy director of Federal service of control over natural resource use and nature protection (Rosprirodnadzor)] said they are going to continue documenting the damage, especially to rivers and marine resources, but even just from violations of the forest regulations it is clear that prosecutors will start criminal, not just only fiscal investigation. Answering the questions on the license and Production Sharing Agreement, he said the story has nothing to do with these documents which are still as valid as before. His close quote was “The company was given a license to drill oil and gas, but not to destroy nature”. He was asked why the government started to act only now if a problem has such a long history. Mitvol responded that while environmental NGOs were warning on what was going to happen, his agency could only act once violations factually took place.

IFAW concentrated on the risks to the whale population, Rodnik gave a history of court cases against the project over the last 3 years initiated by NGOs, Greenpeace showed Dima’s presentation for EBRD meeting in May. I started with specifying the 4 demands to the project which we have been pursuing since 2003: move offshore platform, move offshore pipeline, lay onshore pipeline using suspension rather than trenching, do not dump dredged ground into Aniva Bay. Out of these, the company only agreed to move offshore pipeline and fully destroyed Aniva Bay in the meantime. Answering the question whether we as NGOs think we are used by the Russian government to get Gazprom into the project, I said that what the government does now is fully in line with the Russian law, while previous ignorance of the problem by the state was illegal. I also said that our position always was that Sakhalin II design does not comply with the law and it was a matter of time for the authorities to find that out and to take action. I mentioned that the coalition and me personally repeatedly warned both the former Shell CEO Phil Watts in 2003 and EBRD President Lemierre in 2004-2006 that since project is illegal, it has an intrinsic risk of being terminated at any stage following political or commercial interests or either the government or another company. I was asked whether we are afraid that if another company takes over, there will be even more damage. I answered that I do not know of any company working in Russia, domestic or international which applies so low environmental standards as Shell does in Sakhalin and is so ignorant to concerns of NGOs and local people, including indigenous groups.”

And finally, an Excerpt from a Financial Times editorial (“Cynical in Sakhalin” Sept. 19, 2006).

….Though environmentalists will welcome Russia’s plans to suspend the $20bn (£10.6bn) Sakhalin-2 energy project, run by Royal Dutch Shell, others will wonder why Shell has been singled out. Russia should address environmental concerns. But shutting down large foreign investors is not the way to do it.

Russia’s natural resources ministry has cancelled a permit Shell needs on the grounds that it is polluting Sakhalin’s rivers and seas. Sakhalin, a large island off Russia’s Asian coast, has an estimated 45bn barrels of oil and gas. Shell, which has already suffered a doubling of costs on Sakhalin-2, and the project’s end customers in Japan and South Korea are all counting on rapid extraction of those hydrocarbons.

Environmental worries about Sakhalin-2 are real: both western and Russian non-governmental organisations have been vocal opponents. But Russia’s natural resources ministry has also argued that Sakhalin-2, and similar agreements signed with ExxonMobil and Total in the mid-1990s, are too generous to the western oil companies. Sakhalin-2 has particular problems. Gazprom, Russia’s state gas company, agreed to buy into the project last year, shortly before Shell announced the rise in costs. Now Gazprom is seeking better terms. If the withdrawal of Shell’s permit is politically motivated, it will undermine the rule of contract and the wider rule of law in Russia. Foreign investors, despite their lust for Russia’s mineral wealth, will be deterred. European countries, meanwhile, will try even harder to find alternatives to a dependency on Russian gas….