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The Wall Street Journal: Europe Wary of Sakhalin Loan

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By GUY CHAZAN
January 2, 2007; Page A4

MOSCOW — A potential about-face by the former Communist bloc’s biggest single investor over a massive Russian energy project comes amid rising Western concern about increasing state control of that nation’s energy sector.

The European Bank for Reconstruction and Development is likely to abandon a loan to Sakhalin II, the huge energy project in the far east of Russia, after Royal Dutch Shell PLC and its two partners were forced to sell a 50% stake in the venture to Russian natural-gas giant OAO Gazprom. The European development bank — set up in 1991 by Western governments to support the private sector in former Communist states making the transition to a free market economy — had planned to lend Sakhalin II about $300 million.

Many observers saw Gazprom’s entry into Sakhalin II as tantamount to nationalization. The mandate of the European bank, known as EBRD, would probably preclude it from lending to a project now dominated by a state-run company like Gazprom. “It doesn’t invest in projects that have just been nationalized,” said a banker familiar with EBRD’s work.
 
A decision not to approve the loan likely won’t jeopardize the $22 billion project. Furthermore, it likely won’t threaten overall funding for big Russian energy projects, as Western investors remain interested in Russia in general and its vast natural resources in particular.

But the bank’s potential change of heart shows the repercussions in the West over increasing state control in the Russian oil and gas industry and the Kremlin’s treatment of foreign investors.

The emergence of Gazprom as a shareholder was “a new development and it makes things more difficult,” said Anthony Williams, a spokesman for the EBRD. “It might mean the bank is less needed now,” he added. He said no decision on the loan had yet been taken.

Last month, Gazprom announced it was paying Shell and its two Japanese partners, Mitsui & Co. and Mitsubishi Corp., $7.45 billion to take a stake of just over 50% in Sakhalin II. The move came after nearly a year of sustained attacks on the project by Russian regulators regarding cost overruns and alleged environmental violations.

A few days after the deal was announced, it emerged that the three foreign shareholders would have to pay for a third of Sakhalin’s cost overrun by themselves. Shell, Mitsui and Mitsubishi will be required to absorb $3.6 billion of the additional costs, and will have to give the Russian government a share of Sakhalin’s production earlier than they had hoped.

The deal reflected Kremlin frustration over the fact that the ballooning cost of Sakhalin II meant the government would have to wait much longer for tax and royalty payments.

Shell announced last March that it was hoping for funding of up to $7 billion for Sakhalin II from international financial organizations, including the EBRD, the Japan Bank for International Cooperation, and the Export-Import Bank of the U.S. But the banks delayed disbursal of the funds after a barrage of complaints about Shell from environmental groups. They worried about Sakhalin II’s impact on the feeding grounds of the endangered gray whale and the wild salmon population of Sakhalin Island.

Those complaints grew more serious last fall when Russian regulators stepped into the fray, warning they might withdraw key permits from Sakhalin II and even threatening criminal investigations over alleged environmental damage. The EBRD had expected to take a decision on whether to approve its loan to the Sakhalin consortium last September but put it on hold as Shell’s regulatory problems piled up.

Analysts say an about-face by the bank would have little impact on the financing of Sakhalin, Russia’s biggest foreign investment. The loan was seen as an important stamp of approval by a bank that requires borrowers to meet strict environmental standards. But President Vladimir Putin, presiding over the deal last month that brought Gazprom into the Sakhalin consortium, said the project’s regulatory problems were now resolved. “That means commercial banks will be queuing up to lend to Sakhalin II,” said one Moscow banker.

Write to Guy Chazan at [email protected]

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