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Shell fails European Bank's funding requirements


Burning oil-gas by the Sakhalinneftegaz state company. Sakhalin Island on the Sea of Okhotsk, Russian Federation.
© WWF-Canon / Vladimir Filnov

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27 Nov 2005
London, UK – The European Bank for Reconstruction and Development (EBRD) should continue to declare Shell’s Sakhalin II project in the Russian Far East as unfit for purpose because the project’s environmental and social standards are continually failing to meet the Bank’s funding preconditions, reveals a new WWF report.

The report, Risky Business – the new Shell, is being launched the day before the EBRD’s board meets to reconsider whether to fund the project and highlights the gap between Shell’s performance on the ground and the EBRD’s policies for approving financial support for such a project.

“WWF is surprised and shocked by Shell’s unacceptable management of the project and the negative impact on Sakhalin’s people and environment,” said Robert Napier, WWF-UK's Chief Executive.

“WWF sees no progress on Shell’s part to suggest why the EBRD would now take the decision to lend support. The critically endangered western gray whales have been exposed to unnecessary risks and unknown impacts that if continued threaten them with extinction. This damning report highlights the many areas where Shell’s own Environmental Impact Assessment is lacking, and falls short of the EBRD funding requirement.”

In particular the report found Shell’s Environmental Impact Assessment (EIA) to be seriously lacking and cites specific examples where their activities are causing damage to Sakhalin’s environment and local communities: gray whales are being threatened; salmon spawning areas have already been destroyed; and fishing catches are being decimated – down around 70 per cent (over 1,000 tonnes) in some areas.

WWF believes that the continuing damage will lead to additional costs and delays to a project that is already overrunning.

“This project represents a key test for investment principles and policies of both public and private banks," added Napier. "If they, or other financial institutions with environmental standards, become involved it would make a mockery of their standards.”

Sakhalin II has been billed as a key test of the Equator Principles – environmental and social lending principles. Shell has not met their own policies but now expect others to fund the project and share its excessive risks. Signatories of the Equator Principles, such as ABN Amro and Royal Bank of Scotland, should have their eyes wide open before they get involved in this project.

Despite Shell stating that EIAs should be carried out prior to all new activities and developments, many critical areas of Sakhalin II project are still being assessed half-way through construction. This prevents mitigating action being included into the project. Investors will inherit the risks that Shell has built into Sakhalin II, and will be powerless to influence the outcome.

“Given the irreversible environmental and social impacts from the ongoing construction you would hope that Shell would act responsibly," said James Leaton, WWF-UK's oil and gas policy officer. "It seems as if Shell is retrospectively trying to complete their EIA simply to meet the EBRD’s funding requirements, rather than address the problems.”

“I doubt that Shell would have shown such disregard for the environment and social upheaval if this development was happening in the UK. But half way around the world on a remote island the story is different. This project does not bode well for similar locations in the Arctic where Shell has expressed an interest such as the Barents, Bearings and Beaufort seas, all of which are important regions for wildlife and fisheries,” he added.

To minimize its impact Shell needs to halt work on the project and undergo a rigorous reassessment. However, Shell needs to recognize that irreversible damage has already been caused as a result of not following their own guidelines.


• The report took environmental impact assessment information provided by Shell and assessed it against Shell’s global standards, which are equivalent to EBRD’s Environmental Policies.

• Fishing resources on Sakhalin, an island the size of England, are also being destroyed. In Aniva bay, where Shell is dredging as part of its liquified natural gas terminal, fishing catches are being decimated. In the 2005 season a local fishing company reported staggering reductions in their catch. Salmon spawning areas, important to indigenous communities, have already been destroyed by Shell’s activities. A third of the 533,000 population rely on fishing for their livelihoods.

• Despite the EBRD calling for a more strategic plan – a Strategic Environmental Assessment – in 1999 none has been conducted. Its absence on a project the equivalent of constructing a pipeline the length of the UK, with two major facilities at either end has led to increased damage. Instead of sharing the infrastructure Shell is running a pipeline north-south on Sakhalin and ExxonMobil is running one east-west. Sharing facilities could have helped to reduce costs, on a project with a $10 billion overspend.

• The Sakhalin II Phase 2 offshore oil and gas project is a proposed US$20 billion project on Russia’s Pacific Coast. The project is being led by Shell, as the major shareholder and operator of the Sakhalin Energy Investment Company, (the other shareholders are Mitsui and Mitsubishi). It proposes the construction of a new oil and gas platform, offshore pipelines, onshore pipelines carrying oil and gas the 800 km length of the island, and the construction of a liquid natural gas (LNG) production plant and LNG terminal at the south end of the island.

• Sakhalin is an important habitat for Steller sea lions, Steller’s sea eagles and another 10 endangered migratory bird.  It is also the home to the last 100 western gray whales. An international panel of experts is critical of Shell for failing to take into account the cumulative impacts on whales of various activities such as ship strikes, oil spills, noise and damage to their feeding grounds.

For further information:
Anthony Field, Senior Press Officer
Tel: +44 1483 412379

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