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Sakhalin II Corruption Allegations first reported on RoyalDutchShellPlc.com published in House of Commons Report

By John Donovan

A report published by The House of Commons on 14 October 2008 contains allegations of corruption between Sakhalin Energy and its contractors first published on RoyalDutchShellPlc.com. Direct reference to the website is contained in the government report. Extracts from the report are published below including the relevant section. 

On Monday we will be writing to Shell about another corruption scandal. It a scandal which the government has unsuccessfully tried to keep a lid on. We have declassified documents proving Shell’s involvement in the scandal. We will give Shell the opportunity to comment on the evidence and challenge the authenticity of documents before we publish an article with the associated supporting evidence. 

House of Commons 

Environmental Audit Committee  

The Export Credits 

Guarantee Department and Sustainable Development 

Eleventh Report of Session 2007–08  

Report, together with formal minutes, oral and written evidence   

Ordered by The House of Commons to be printed 14 October 2008  

EXTRACTS

SAKHALIN II BACKGROUND INFORMATION

Name: Sakhalin II

Project Type: Oil & Gas infrastructure

Country: Russia

Dates: Construction started and application to ECGD in 2003. Project 90% completed November 2007.

Amount: $650 million being considered

Supported Description: The Sakhalin II Phase 2 offshore oil and gas project is a US$ 20 billion project on Russia’s Paci?c Coast. The Sakhalin Energy Investment Company (SEIC) (10) consists of Shell (the project operator (22.5.5%); Mitsui (12.5%); Mitsubishi (10%); Gazprom (acquired 50% plus one share at the end of 2006, with the other partners halving their stakes). SEIC has undertaken the construction of a new oil and gas platform, offshore oil & gas pipelines, onshore pipelines carrying oil & gas the 800 km length of the island, and a liquid natural gas (LNG) production plant and oil & LNG terminal at the south end of Sakhalin island.

Environmental Impacts —

 The offshore components of the project are adjacent to the only known feeding grounds of the critically endangered Western Gray Whale (estimated 120 total population remaining). The risks posed by noise, collisions, and oil spills put the whales at risk of extinction. The winter ice cover poses a huge challenge to cleaning up any oil spills during operation. (11) SEIC has ignored the advice of a panel of whale experts, by installing a platform without keeping to the recommended noise limits. (12) Rick Steiner, an Alaskan oil spill expert quit the whale panel in July 2005 following Shell’s refusal to change its plans. (13)

— The onshore pipelines crossed over 1000 rivers. SEIC did not identify all of the sensitive rivers prior to construction. The habitat of the endangered Taimen (a type of salmon) was not surveyed prior to construction and damage has resulted. (14) SEIC failed to implement many of its mitigation measures, such as crossing rivers with the two pipelines at the same time and avoiding spawning seasons. (15) The repeated failures have been documented by regulatory inspections, consultant reviews and NGO monitoring. In 2006, SEIC’s environmental permit for construction was suspended by The Russian Ministry of Natural Resources. (16) SEIC has proposed restoring southern rivers to compensate for degraded northern rivers, which will not work, as salmon always return to the unique habitat of the river in which they were spawned. (17)

— The onshore pipeline construction has also impacted the nesting sites of endangered Steller’s Sea Eagles. Construction workers ignored the required exclusion zone around the nest, with excessive traffic continuing close to it. The nesting pair had no offspring in 2007. (18)

— The dredging of Aniva Bay resulted in material being dumped close to shore, affecting the catches of local ?shermen, resulting in a complaint to the European Bank for Reconstruction & Development (EBRD); SEIC eventually paid some compensation. The community has also not been compensated for the loss of the recreation value of the beach in front of the LNG plant.

Social Impacts and Human Rights  — SEIC failed to recognise all of the indigenous peoples on Sakhalin Island, in breach of the World Bank policy. As a result an indigenous peoples plan was not prepared until 2006, by which time the project was two-thirds completed. These most vulnerable groups were not able to have meaningful input into the design of the project. The EBRD recognised the timing of this plan did not meet policy requirements. (19)

— Affected communities have not had claims for compensation resolved in a timely manner. As a result poor communities have lost livelihoods on which they depend.

— Local communities made several protests at SEIC sites to raise the pro?le of their plight. (20)

— A report by CEE Bankwatch documents the harrowing rise of prostitution, tracking, HIV/AIDS and violence against women in communities affected by Shell’s Sakhalin II. (21)

Corruption Allegations — Allegations have been made by a whistleblower of inappropriate relationships between SEIC management and its contractors, in particular Starstroi and its subcontractor SU4. (22) 

(10) http://www.sakhalinenergy.com/en/aboutus.asp

(11) Offshore Oil Spill Response in Dynamic Ice Conditions. 2005, Nuka / WWF. http://www.panda.org/about wwf/where we work/europe/where/russia/sakhalin/news/index.cfm?uNewsID%67420

(12) http://www.iucn.org/themes/marine/sakhalin/index.htm

(13) Letter from Rick Steiner to Jeroen van der Veer, 14 July 2005.

(14) AEA Lenders Review of Sakhalin II, October 2007, p117. http://www.sakhalinenergy.com/en/documents/iec ddr2007.pdf

(15) Mathiason, “Shell Consortium in New Pipeline Dispute,” The Observer, May 21, 2006 http://www.guardian.co.uk/oil/story/0,,1779620,00.html

(16) http://news.bbc.co.uk/1/hi/business/5355504.stm

(17) Letter from the Wild Salmon Center to SEIC, 5 November 2007.

(18) AEA Lenders Review of Sakhalin II, October 2007, p160. http://www.sakhalinenergy.com/en/documents/iec ddr2007.pdf

(19) http://www.ebrd.com/new/pressrel/2005/175dec14.htm

(20) http://www.sakhalin.environment.ru/en/detail.php?slice%8b4cb37fba47da1c76cf3e44aa940cd2&sitemid%221211

(21) Boomtown Blues, November 2006, CEE Bankwatch http://bankwatch.org/documents/boomtimeblues.pdf

(22) http://royaldutchshellplc.com/2008/01/06/the-sakhalin-2-whistleblower-warnings-which-proved-100-correct/ 

Case Study 7: Civil—Sakhalin Phase II

The Sakhalin project in the Russian Far East is one of the largest developments of oil and gas reserves in the world, and ECGD was heavily involved with Phase II of this project mainly since 2003. The project consortium, the Sakhalin Energy Investment Company (SEIC), originally dates from 1991, and was formed to extract and export reserves of oil and gas. The main participants in the consortium were Shell, Mitsui and Mitsubishi—until in 2007 Gazprom bought a majority stake.

The Sakhalin II project involved substantial further development, including offshore platforms (in addition to the one installed for Phase 1), undersea pipelines, 800 km of onshore pipelines, a lique?ed natural gas plant, and oil and gas exporting facilities. Project funding was envisaged as being provided by loans from the Japanese and US ECAs (for US$3.7 billion and US$250 million respectively), some US$1.5 billion of commercial loans, a facility of US$600 million from the European Bank for Reconstruction and Development (EBRD), and equity contributions from consortium members (ie Shell, Mitsui, and Mitsubishi). In 2003, SEIC applied for support from ECGD in respect of a prospective US$650 million loan intended to ?nance UK supplies of goods and services to the project—notably from AMEC, Parsons, and Rolls Royce.

Following its appraisal of project documentation and the Environmental, Social and Health Impact Assessment (ESHIA) which SEIC published in early 2003, the BPU assessed the case as potentially sensitive and high potential impact, put details on its website, and consulted with other departments. It also liaised closely with other ECAs and other ?nancial institutions to assess the extent to which the project Environmental, Health and Safety Impact Assessment (ESHIA) met international standards. In partnership with these institutions, it concluded that the project did not fully meet some of the relevant World Bank Group guidelines, but that there was scope for SEIC to take action to bring it into line with these standards. It wrote to SEIC in March 2004 to make a conditional support over and specifying various underwriting conditions to be met.

Together with other lending institutions, ECGD continued to put pressure on the project developers to improve standards. This process of constructive engagement resulted in SEIC developing and publishing in late 2005 a far more comprehensive set of plans and commitments. These included a substantial addenda to the ESHIA and a Health, Safety, Environment and Social Action Plan (HSESAP) in which SEIC agreed to comply with both Russian and international standards and employ the higher of the two standards where these diVered. The HSESAP also contained over 2,000 speci?c commitments and constituted the basis for project monitoring by the ?nancial institutions and by AEA Technology, the independent environmental consultants appointed by SEIC but with a speci?c duty of care to the ?nancial institutions. EBRD publicly endorsed the overall documentation package as being ?t for purpose, while AEA considered that the HSESAP was both comprehensive and detailed and provides a good framework for the implementation of the required mitigation measures and monitoring programmes.

Where no international standards existed, the ?nancial institutions also negotiated with SEIC to develop measures on the basis of expert advice and best industry practice. A speci?c example of this was the creation of an advisory panel of scienti?c experts to review and report on the likely impacts of the project on the endangered Western Gray Whale. As a result of the recommendations of this panel, the offshore pipeline was re-routed to avoid crossing the feeding grounds.

ECGD’s assessment of the project was rendered more difficult due to the fact that on-site construction work on it had started in 2003. As a result, ECGD and the other ?nancial institutions were obliged not only to assess project plans against international standards, but to monitor whether SEIC commitments published in 2003 and 2005 were actually being observed. By 2006-07, it was becoming clear that this was not the case, and following further engagement with the ?nancial institutions SEIC published a Remedial Action Plan in August 2007. This detailed speci?c actions to be taken in relation to the onshore pipelines, which were still being installed although other parts of the project were substantially complete.

By early 2008, ECGD had still not made a substantive decision on whether to issue a guarantee. The BPU had not ?nalised its own evaluation of the project in the light of the latest evidence, and ECGD was awaiting further information from SEIC in respect of the ?nancial aspects of the project. In late February 2008, following a funding review, SEIC wrote to ECGD withdrawing its application for support and ECGD subsequently con?rmed that its conditional over of support had been withdrawn.

June 2008 

LINK TO THE ENTIRE REPORT

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