The Sakhalin Times: EBRD’s Sakhalin Snub

January 21, 2007

It was always questionable whether the EBRD was going to fund the Sakhalin II project. The environmental groups launched a systematic and persistent campaign against the project but as long as the Russian Government gave the project its blessings, the chances of the loan looked brighter. Oleg Mitvol and Rosprirodnadzor virtually killed any chances of the loan being granted. The much-maligned takeover of the project by Gazprom was the straw that broke the camel’s back as far as the loan was concerned.

The environmentalists are celebrating what they consider a major victory but the hard truth is that the decision of the EBRD was no endorsement of the greens’ stance. Many analysts feared that a refusal of the US$ 300 million loan would make other lenders reconsider their stance.

UK-based lending institutions may be reluctant to finance the project, keeping in mind that Shell was made to sell its majority stake through coercive means. However, Japan-based lending institutions will not be as reluctant to fund the project’s second phase as most of the Sakhalin II LNG is headed to Japan. Of course, if Gazprom decides to annul the LNG sales contracts, then the project will completely run out of foreign lenders.

It’s a complete shame that the largest integrated oil and gas project in Russia has had to face such problems and interruptions because of aggressive politics. Over the last fifteen years, both the government and a large percentage of the Russian population have shown almost no concern for the environment. In fact, the rapid destruction of the environment in central Russia has caused global warming in cities like Moscow and St Petersburg, both which have gone without snow this winter. Shell, through Sakhalin Energy, actually made a significant effort to minimise damages on the environment. With Gazprom at the helm of Sakhalin II, the environment will take a complete backseat.

The EBRD’s refusal to loan the Sakhalin II project may just be the first of a series of measures that will harm Russia’s interests. If all major financial institutions refuse to finance the Sakhalin II project’s second phase then this could cause further delays in the project. Moscow’s belief that extremely high energy prices will keep getting the country windfalls was shaken after the fall in crude prices caused by a warm winter in America. The recent disputes with Belarus also proved that a belligerent energy policy could easily backfire.

The damage may be done with the Sakhalin II project with regards to the EBRD loan but the Russian Government needs to woo lending institutions to support the project under the new shareholder agreement. It is in the country’s best long-term interests that the Sakhalin II project meets its deadlines and guaranteed obligations.

Respect for existing contracts and agreements and a cooperative rather than confrontational international energy policy would go a long way in improving Russia’s sagging reputation.  

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