The Wall Street Journal: Environmental Groups Develop New Ways to Air Grievances: "Now, Shell faces nongovernmental organizations who roam the corridors of international banks or take lenders on field trips to highlight their grievances.": Tuesday 11 October 2005

SAKHALIN ISLAND, Russia -- Nina Vlasenko, manager of fishing company Calypso Ltd. on Sakhalin Island in Russia's Far East, says she used to feel powerless complaining about the environmental impact of Royal Dutch Shell PLC's local venture, the mammoth Sakhalin II oil and gas project.

But in July, a local environmental group called Sakhalin Environment Watch put its weight behind her claims that materials from Sakhalin II dumped in the sea have damaged the area's marine ecosystem and shrunk Calypso's catches. This led the European Bank for Reconstruction and Development, a potential lender to the project, to review Ms. Vlasenko's grievances.

Sakhalin Environment Watch's focus on the EBRD shows how environmental groups have changed the ways they pressure oil companies. Ten years ago, Greenpeace activists boarded the Brent Spar oil platform that Shell had planned to sink in the Atlantic Ocean, leading the oil giant to abandon the idea under heavy media scrutiny. Now, Shell faces nongovernmental organizations who roam the corridors of international banks or take lenders on field trips to highlight their grievances.

Environmental campaigners have also aimed at backers of the BP PLC-led Baku-Tbilisi-Ceyhan pipeline project that would link the Caspian Sea to Turkey, and the Exxon Mobil Corp.-led Chad-Cameroon pipeline.

Sakhalin's case involves new procedures by NGOs, such as a mediation system it used with the EBRD. Environmental organizations claim their campaigns have already led Sakhalin Energy Investment Co., manager of the project, to reroute pipelines away from a path that the campaigners alleged affected Western gray whales. A Sakhalin Energy spokesman says the company chose to reroute its pipelines after reviewing their potential effect on the whales and after a report by independent scientists.

Dialogue with NGOs has become a larger part of lenders' decision-making processes, says John Martin, London-based managing director for energy and resources at Dutch bank ABN Amro Holding NV, who is advising international public lenders in the Sakhalin loan negotiations.

NGOs gained influence with the 2003 launch of the Equator Principles -- a set of environmental and social investment guidelines now adopted by a large number of commercial banks, says Francis Sullivan, an environmental adviser at HSBC Holdings PLC in London. The EBRD follows environmental guidelines similar to the Equator Principles, says Mr. Sullivan.

For Shell, the world's third-largest energy company in terms of market value, dealing with the NGOs is another headache in a crucial project whose costs have doubled to $20 billion (€16.5 billion) and whose completion has been delayed by six months.

Shell is in talks with public lenders to secure a $5 billion bilateral loan for Sakhalin II, and needs further financing to cover cost overruns. The EBRD would contribute only a minority of the loan, but its decision may influence other lenders, both commercial and public ones. If the EBRD refuses to back the project, it would "cause concern for commercial banks," Mr. Sullivan says.

Following an admission that it had overestimated the amount of oil and natural gas it had access to, Shell badly needs the one billion barrels of crude oil and 500 billion cubic meters of natural gas that Sakhalin II's fields contain.

Shell owns 55% of Sakhalin Energy, and Japanese companies Mitsui & Co. and Mitsubishi Corp. control 25% and 20%, respectively. Russia's OAO Gazprom has agreed to buy a stake of up to 25% of the venture from the three shareholders.

Sakhalin Energy's spokesman says: "We have been and continue to work with the potential lenders, including the EBRD, to address questions that they have relating to social and environmental issues. We remain confident that we will be able to address these questions with the aim that we can reach financial close in first quarter 2006."

He added: "Discussions with Calypso are continuing." Shell declined to comment.

Sakhalin Environment Watch lodged its complaint on behalf of fishing companies like Calypso that claim their businesses are endangered by the construction of oil and liquefied-natural-gas loading facilities for the Shell-led project in Aniva Bay, in southern Sakhalin's Korsakov district. It protested the project's effect on the ecosystem and local inhabitants.

Calypso's Ms. Vlasenko says the project has reduced its catch -- mostly of salmon -- to 365 metric tons in the first seven months of 2005 from 1,478 tons in 2003. She says the company has sought at least $2 million in compensation from Sakhalin Energy, to no avail. She claims 200 jobs, from fishing and an affiliated salmon packaging plant, could be lost as a result of the alleged environmental damage.

Founded by a Friends of the Earth representative in the mid-1990s, Sakhalin Environment Watch is a Russian NGO focusing on the protection of the natural ecosystem on the island. In coordination with international NGOs, it has launched a campaign against what it claims are environmental damages related to Sakhalin II and other oil and gas projects. It is largely financed by U.S. nonprofit foundations.

Though it has supported street protests against Sakhalin Energy on the island, the NGO has mostly targeted potential lenders, in coordination with other NGOs such as Pacific Environment, Friends of the Earth and the World Wildlife Fund. Its staff members have been taking representatives of potential lenders, including the EBRD, on field trips on the island and have met officials at the banks in the U.S., London and Moscow.

The EBRD in June postponed a decision to back the project due to environmental concerns. People familiar with the delay say it was worried by the predicament of the whales, the impact on local inhabitants and the risk of pollution in river crossings used by salmon for spawning.

It agreed to study Sakhalin Environment Watch's complaint in July, using a mechanism to mediate conflicts in projects it is considering for investment. The mediation system was adopted in part to deal with NGOs' concerns, a spokesman for the EBRD said, and this was the first time the bank used it.

The EBRD has no right to force any settlement between the two groups, but if Sakhalin Energy refused to negotiate, it could jeopardize any further talks for a loan, said another EBRD official.

Along with the EBRD, the U.K.'s Export Credit Guarantee Department, the U.S. Export-Import Bank and the Japan Bank for International Cooperation are in talks to join the loan and could decide this month whether the project damages the environment, people familiar with the banks say. The EBRD, ABN Amro and Ex-Im Bank declined to comment on the timetable for their evaluation.

EBRD President Jean Lemierre is set to meet NGOs today [Tuesday]in London to discuss the environmental impact of Sakhalin II, people familiar with the matter said. The EBRD couldn't be reached to comment.

Write to Benoit Faucon at benoit.faucon@dowjones.com