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Shell Doubles Cost Projections of Sakhalin II, Project Critics Redouble Opposition

Institutional Shareowner: Shell Doubles Cost Projections of Sakhalin II, Project Critics Redouble Opposition

“Shell is doing a very poor job on both internal governance and managing their own affairs, and communicating to their stakeholders and shareholders…”:

Published July 21, 2005

Shell Doubles Cost Projections of Sakhalin II, Project Critics Redouble Opposition

by William Baue

The largest oil and gas project in the world meets resistance over concerns about its social and environmental impacts, as well as its economic sustainability.

Last year, Shell (ticker: RD) rocked the business world when it revised its proven oil reserves by 20 percent, later revealing that top executives had foreknowledge of mistakes in reserve statements. Last week, Shell again sent out shock waves when it revised cost projections twofold for its Sakhalin II project, upping estimations from $10 billion to “the order of $20 billion” while simultaneously announcing delays to the project timeline. Sakhalin II is an oil and gas extraction project taking place off of the east coast of Russia that is already producing oil. Liquefied natural gas (LNG) deliveries will begin in the summer of 2008, and drilling will continue through 2014.

Is there a connection between these two revisions? According to Shell spokesperson Susan Shannon, the answer is no.

“They are completely different issues, there’s no link whatsoever,” Ms. Shannon told “One is costs, the other–which is now very much behind us–is reserve categorization.”

Ilyse Hogue, global finance campaigner for Rainforest Action Network (RAN), an environmental nongovernmental organization (NGO) campaigning against the Sahkalin II project, does see a connection, albeit not a cause-and-effect relationship.

“Shell is doing a very poor job on both internal governance and managing their own affairs, and communicating to their stakeholders and shareholders,” Ms. Hogue told “Sahkalin II is the largest oil and gas project ever on the books with the most potential for social and environmental damage we’ve ever seen, and Shell is saying we should trust them, but increasing evidence demonstrates exactly the opposite conclusion–that they can’t be trusted.”

“If you’re a corporate or institutional investor, such as those Shell is looking to for project finance, investing in this project is too big a risk economically, environmentally, and socially,” Ms. Hogue added.

RAN noted that two European socially responsible investment (SRI) funds–Investec Henderson Crosthwaite and Morley Fund–have divested from Shell due to concerns over Sakhalin II.

RAN has joined together with other NGOs, including Friends of the Earth (FoE), World Wildlife Fund (WWF), and BankTrack, to campaign against the project. The groups are shining the spotlight on banks that have signed the Equator Principles (EPs), a set of voluntary social and environmental guidelines covering project finance over $50 million.

BankTrack, a network of fourteen NGOs operating as a watchdog over social and environmental impacts of financial institutions, issued a report in April 2005 outlining the ways Sakhalin II contravenes the EPs. For example, clause 3 and Exhibit II of the EPs require compliance with the International Finance Corporation (IFC) Safeguard Policy on Indigenous Peoples. BankTrack, as well as local indigenous peoples groups, claim that the Sakhalin II project does not comply with this policy.

“The lack of access to full and truthful information about the oil development and the disinformation in published project information, along with the lack of interest by the company to carry out a serious dialogue with native peoples’ organizations, has forced us to conduct civil protests,” said Pavel Sulyandziga, vice president of the Russian Association of Indigenous Peoples of the North (RAIPON).

Ms. Shannon disagrees, pointing to Shell’s engagement with local indigenous communities and company disclosures.

“We do listen to local concerns–for example, there’s quarterly community town hall sessions, a new bypass road around the site where the liquefied natural gas plant will be opened, and the company has supported over $2 million in community programs including an HIV/AIDS education program for youth and a traffic safety initiative,” Ms. Shannon said. “And we are transparent–we recently commissioned an independent scientific review by the IUCN, and obviously their report was public.”

“That was something very new–asking an independent scientific review to look at some issues–there were a number of scientists who said that this was really groundbreaking, and they praised us for undertaking it,” she added.

However, the report by the International Scientific Review Panel of the World Conservation Union (IUCN), which focused on the project’s impact on the endangered Western Gray Whales, recommended against pursuing the project.

“[T]he most precautionary approach would be to suspend present operations and delay further development of the oil and gas reserves in the vicinity of the gray whale feeding grounds off Sakhalin . . . ,” the report states, though it also provides guidance for going forward. “If for some reason this is not deemed possible, risk management needs to be conservative with regard to western gray whales . . .”

Shell maintains that suspending present operations is not possible.

“As a 55 percent shareholder in the Sakhalin Energy Investment Company that actually runs the project, Shell is obviously committed to Sakhalin II,” said Ms. Shannon.

The company also says it is conducting appropriate risk management on the Sakhalin II project, which exploits oil reserves in the Piltun Astoskhskoye field off the island.

“The Piltun-Astokhskoye platform, which is seven kilometers away from the edge of the Western Gray Whales feeding ground, has been producing since 1999 and there has been no discernible change in behavior in the whales–we have monitored that closely, and we’re confident that our mitigating measures can offset any potential impact,” Ms. Shannon said. “Furthermore, the route of the Piltun-Astokhskoye pipeline that will bring the oil and gas from the platform onto the island has been changed to run outside the whale feeding area.”

The question remains whether such measures will achieve their intended outcome.

“Although this [decision to re-route the pipeline] is a welcome first step in reducing the impacts on the whales, it is not considered sufficient,” states the BankTrack report.

While the social and environmental risks of the Sakhalin II are important considerations for EP banks and non-EP banks alike, financial risks may prove the make-or-break considerations over whether to fund the project, according to BankTrack founder Michelle Chan-Fishel.

“There’s no way you can tweak a $10 billion finance package and all of the sudden have your financiers be ready to pony up twice that much,” Ms. Chan-Fishel told
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