The Observer: Shell halts crucial Sakhalin pipeline project

Nick Mathiason

Sunday May 2, 2004

Shell, the embattled oil giant, faces a fresh blow this weekend as one of its most important gas projects, already billions over budget, falls into deepening crisis.

Fears are growing that its $12 billion (£6.7bn) development in Eastern Siberia could wipe out the last remaining Asian grey whales. Shell has conceded its pipeline will have to be dug deeper beneath the seabed than it had planned, threatening the endangered species' habitat.

It has emerged that the European Bank for Reconstruction and Development had already threatened not to lend money to the project be cause of environmental concerns.

The whales are perilously close to extinction and campaigners say if they are driven away from their feeding grounds around the pipe near Sakhalin island, they will die out altogether.

Shell, which is a majority shareholder in Sakhalin Energy, the company formed to build the pipeline, will now undertake further environmental impact studies on this section of its project instead of starting construction on site this summer as planned.

It is the world's third-largest project finance deal: a deeper seabed trench for the pipeline will dramatically increase costs that are already $2bn over budget.

Sakhalin is one of Shell's core investments. It will contribute more than 200,000 barrels per day of additional oil and gas output. The Anglo-Dutch firm believes Sakhalin will reinforce it as world leader in liquefied natural gas.

The escalating problems could force consortium partners to review their partnership. A Shell spokesman rejected suggestions that the company had 'caved in' to demands by potential funders or environmentalists and that it takes environmental concerns very seriously.

http://observer.guardian.co.uk/business/story/0,6903,1207722,00.html