Bank urged to reject Shell plan for Sakhalin

Campaigners are urging the European Bank of Reconstruction and Development to reject Shell's plans for the Sakhalin II oil project for failing to meet environmental standards.

The management of the EBRD, which met this week, is thought to have postponed any decision on the project until the end of the year, with the board and staff of the bank reportedly divided on the matter.

They were meeting to discuss whether to provide a loan to the US$20 billion project. The EBRD’s decision is seen as vital as it will provide a lead for other financial institutions to follow. Shell is thought to be seeking up to US$5 billion in public financing from the EBRD, and the export credit agencies of the US, UK, and Japan.

Shell is planning to build a pipeline the length of the UK, running north-south on Sakhalin, with two major facilities at either end. In addition, it proposes the construction of a new oil and gas platform, and the construction of a liquid natural gas production plant and LNG terminal at the south end of the island.

However, campaigners say the project fails to meet the EBRD’s basic policies for approving financial support and is billed as a test case for the Equator Principles – a set of guidelines for environmental and social lending projects. In particular, they point to Shell’s environmental impact assessment, which is said to be “seriously lacking” and cite specific examples of the project’s activities causing damage to Sakhalin’s environment and local communities such as gray whales being threatened, salmon spawning areas being destroyed and fishing catches being decimated.

The EBRD deemed the EIA “unfit for purpose” earlier this year, yet Shell have not produced another. By Shell’s own estimates there is a 24% chance of a major oil spill during the 40 year lifespan of the project.

In a critical letter to the EBRD’s president and directors ahead of the meeting, Sakhalin’s Deputy to the State Duma, Ivan Zhdakayev, urged the EBRD to recognise that “the Sakhalin II project does not meet the EBRD standards and does not comply with the Bank’s policies.”

WWF also produced a report ahead of the banks meeting which attacks Shell’s “unacceptable management of the project”. Despite Shell stating that EIAs should be carried out prior to all new activities and developments, the group says that many critical areas of the project are still being assessed half-way through construction, preventing mitigating action being included.

Investors would then inherit any risks built into the project and would be powerless to influence the outcome if they got involved. WWF say the project “makes a mockery” of the Equator Principles.

“I doubt that Shell would have shown such disregard for the environment and social upheaval if this development was happening in the UK,” said WWF’s oil and gas policy officer James Leaton. “But half way round the world on a remote island the story is different.”

“Given the irresponsible environmental and social impacts from the ongoing construction you would hope that Shell would act responsibly. It seems as if Shell is trying to complete their EIA simply to meet the EBRD’s funding requirements, rather than address the problems.”

WWF are worried that the 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.

The Sakhalin II project is just one of several major pipeline projects that have been criticised for failures to respect social and environmental laws.

Amnesty International has produced reports on both the Chad-Cameroon pipeline, and the Baku-Tbilisi-Ceyhan (BTC) pipeline, alleging that both would cause severe human and environmental damage.

The £2.6 billion Chad-Cameroon pipeline, Africa’s largest single foreign investment, led by ExxonMobil, was criticised for creating financial disincentives for the governments to protect human rights.

Amnesty examined the framework of legal agreements known as “Host Government Agreements” governing the construction and operation of the Doba oilfields on Chad and the pipeline which takes the oil to Cameroon’s Atlantic coast.

The group found that the agreements may require the two countries to pay large financial penalties if they ever interrupt the operation of the pipeline or oilfields, even when making an intervention to protect human rights and enforce laws that apply elsewhere in their countries.

This would make it very difficult for Chad and Cameroon to proceed legally against company malpractice, or for individuals to obtain redress if they are adversely affected by the pipeline. Amnesty says this is the case with many poor farmers in the Doba region of Chad who have been denied access to their land, with no compensation, and with villages that have been denied access to their sole sources of safe water supply.

According to Amnesty, the host government agreement would also give the pipeline companies immunity from tax, customs and exchange control regimes.

Sheldon Leader, Professor of Law at Essex University and legal advisor to Amnesty International said: “These agreements illustrate how companies are inserting themselves into the heart of governance. Disturbingly, there may be hundreds of such agreements in existence around the world, drawn up to a similar template, weakening the capacity of states to protect human rights and the environment.”

The same disincentives for human rights protection are in the host government agreement drawn up for the BTC pipeline, Amnesty says.

Campaigners fear that as oil and gas companies increasingly look to unstable and developing nations, with immature legal infrastructures, this style of contract will become increasingly widespread.

David Hopkins

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