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O’Malley concerned by Shell’s Sakhalin-2 project

Sunday Business Post (Ireland): O’Malley concerned by Shell’s Sakhalin-2 project

“Pitted against Shell is an array of international non-government organisations (NGOs), battling on environmental and social issues on the bleak island nine time zones away from Moscow.”: “Does he think the board is likely to reject the Sakhalin-2 project? “I would hope so, if the facts dictate it,” he said.”

Sunday 9 October 2005

By Ann Cahill

For the past eight years, the European Bank for Reconstruction and Development (EBRD) has been mulling over a loan application from a Shell-led conglomerate to develop huge oil and gas reserves in the far east of Russia.

A final decision on a loan package of about $5 billion is expected by Christmas for the contentious Sakhalin Island project. The development is the world’s most expensive – and the single biggest ever considered by the EBRD – so it is not surprising that the bank, of which Ireland is a member, is putting such time and effort into it.

The bank’s directors are divided on the issue. Ireland’s representative, former government minister and former Progressive Democrats leader Des O’Malley, is critical of the project.

There is pressure from Shell as it badly needs to generate new flows of oil and gas, after it was forced to admit last year that it was holding less in reserves than it claimed.

The 96 trillion cubic feet of gas on Sakhalin would be enough to supply all Europe’s gas needs for five years, though the main recipients will be Japan, China and the US.

Pitted against Shell is an array of international non-government organisations (NGOs), battling on environmental and social issues on the bleak island nine time zones away from Moscow.

The PDs founder, who has been working with the bank for the past two years, has become something of an expert on the whole matter.

He is reluctant to say publicly where he stands, but several of the NGOs have said he has been very helpful raising their concerns in the bank.

“A lot of problems seem to have arisen about this, both environmental and because of the cost. There are mixed feelings here about it,” he said.

The bank was established in 1991 to promote prosperity through political freedom and market economics in the former communist countries of Europe.

Its lending criteria are wider than normal commercial banks, with environmental considerations written into its charter. It emphasises sustainable development and social concerns, particularly for indigenous people affected by developments it helps fund.

Five years after receiving Shell’s environmental impact assessment, the EBRD threw it back to the company in 2003 saying it was not fit for its purpose. Since then, its experts have been working with Shell to get around the problems. The EBRD has experts permanently at the site and board members have visited the island (which is just north of Japan) at least three times.

Lending decisions of at least two other banks, the US Ex-Im Bank and the Japanese Bank for International Cooperation, will most likely depend on what the EBRD decides.

O’Malley’s interest began shortly after he was appointed to the bank by the then Minister for Finance, Charlie McCreevy. “The volume of complaints coming to the bank drew my attention to it,” he said.

The last western grey whales in the world, numbering about 100, are under threat from drilling in their feeding area, salmon spawning rivers are being disturbed and the traditional fishing and reindeer livelihoods of many of the island’s 670,000 people is under threat.

The seismic nature of the region and the difficulties of cleaning up potential oil spills in an area under ice for most of the year are also considerations. But the EBRD does have an opportunity to promote some of its objectives for Russia, including raising standards and introducing private enterprise to the state-controlled oil industry.

The bank, which invested a record €4.1 billion in the region last year, helped in the transition of the eight former communist countries that joined the EU last year.

But Russia and the countries unlikely to join the EU in the future are proving harder nuts to crack. “There is a terrible legacy from the communist times,” said O’Malley.

“People hoped it might disappear in five to ten years, but it will not – it’s too deeply ingrained in their whole outlook.’’ Market economics were not enough to bring about change, he said. The advantage the EU had over the bank was that it could insist on countries adopting and implementing the rule of law.

“The EBRD does not have the clout to do that in these other countries because it’s a bank, rather than a political institution, but it can encourage them along that path.”

But he is pessimistic about real change in Russia, despite its being the bank’s single biggest recipient of funds.

Currently, the bank’s environmental experts are coaxing, encouraging, enticing and bullying the Shell-led conglomerate into incorporating better environmental, social and work practices into the Sakhalin-2 project. The bank wants to provide the funding and eventually the decision will be a political one, made for many of the directors by their governments. Voting is weighted by the amount of money each country has invested in the bank, with the US having more than 10 per cent and Ireland 0.3 per cent.

“Our shareholding is unfortunately very small. If we were joining today it would be much bigger, as it was based on our GDP in 1990,” said O’Malley.

However, a country’s influence is not totally related to its shareholding at the fortnightly board meetings.

“People listen to arguments, and Ireland is seen as a more independent country,” said O’Malley.

Does he think the board is likely to reject the Sakhalin-2 project? “I would hope so, if the facts dictate it,” he said.

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