THE SHELL LEAKS FILES
SLF-2007-024
The Sakhalin Papers XIV: The Whales, the Scientists and the Financing Test
Archive reference: SLF-2007-024
Collection: The Sakhalin Papers
Principal record: IUCN Independent Scientific Review Panel report, Shell Sustainability Report 2005, International Whaling Commission Resolution 2005-3 and European Bank for Reconstruction and Development records
Supporting record: Contemporaneous press reporting, Parliamentary material and the later High Court record concerning ECGD scrutiny of Sakhalin-2
Evidence standard: Scientific findings, corporate statements, lender records and judicial material are distinguished from campaign claims and editorial interpretation. No court is represented as having adjudicated the underlying whale science.
Introduction
By early 2005, one of the smallest surviving populations of great whales had become entangled with one of the largest energy projects then under construction anywhere in the world.
The Western North Pacific gray whale population using the waters off north-eastern Sakhalin was estimated at only about 100 animals. IUCN described the population as critically endangered and said the surviving whales’ known feeding grounds lay alongside existing and proposed oil and gas development. Its scientific review identified potential threats including disturbance, underwater noise, ship collisions, oil contamination and changes to the prey habitat on which the whales depended.
The uncomfortable feature of this story is that the scientists were not imposed upon Sakhalin Energy from outside.
Sakhalin Energy itself asked IUCN to convene them.
What followed produced one of the clearest examples in the Sakhalin archive of independent science changing the physical design of Shell’s project — while simultaneously exposing how serious the unresolved risks remained.
And behind the science stood another question.
Could Sakhalin-2 still satisfy the environmental standards of the international institutions being asked to finance it?
1. Sakhalin Energy Calls In the Scientists
In 2004 Sakhalin Energy Investment Company asked IUCN — then commonly known as the World Conservation Union — to establish an independent scientific review of the project’s potential effects on the Western gray whales.
IUCN convened an Independent Scientific Review Panel, chaired by cetacean specialist Randall Reeves. The panel met four times between September 2004 and January 2005, including a meeting and site visit on Sakhalin itself. Its mandate was scientific: evaluate risks to the whales and related biodiversity, examine mitigation options and assess the adequacy of monitoring.
That provenance matters.
This was not simply an environmental pressure group preparing a report attacking Shell.
It was an independent scientific process established under IUCN auspices at Sakhalin Energy’s request. IUCN subsequently described the review as the beginning of a longer relationship with the company on whale conservation.
2. The Population Was Already at the Edge
The February 2005 report opened with an exceptionally stark assessment.
The panel described a population of roughly 100 animals, potentially including only about 23 reproductively active females. Commercial whaling had reduced the population so drastically that it had once been thought extinct. The surviving animals faced threats throughout their range, while the north-eastern Sakhalin feeding grounds placed them directly beside major offshore hydrocarbon development.
The International Whaling Commission later incorporated the essential population concern into its own formal resolution.
At its 57th meeting in 2005, the IWC recorded that the review panel had found fewer than 30 reproductive females and noted a population model under which a hypothetical additional death of just one female whale each year could result in extinction before 2050.
That model was not a prediction that extinction would occur.
It was a risk scenario illustrating how little additional mortality such a depleted population might be able to absorb.
That distinction is essential.
3. The Feeding Grounds Were the Problem
The whales were not merely migrating past Sakhalin.
They were feeding there.
The IUCN review identified the nearshore feeding ground around Piltun as particularly important, including for mothers and calves. Construction noise, pipelines, vessel traffic, spills and physical disturbance therefore presented a different class of risk from activity occurring in an incidental transit area.
The scientists also identified substantial uncertainty.
Their report said better information was required concerning underwater-noise propagation, exposure from multiple noise sources, whale behaviour and physiological responses. It regarded significant physiological stress from industrial noise as plausible, while acknowledging that further study was required.
This is one of the recurring themes of the Sakhalin environmental record:
uncertainty itself became part of the risk assessment.
The scientists were not saying that every feared effect had already been demonstrated.
They were saying that, for a population this small, waiting for definitive proof of serious harm could itself be dangerous.
4. The Panel Had Problems With Sakhalin Energy’s Risk Method
Sakhalin Energy applied an engineering risk-reduction concept known as ALARP — reducing risk to a level “as low as reasonably practicable.”
The panel did not reject that concept outright.
Its problem was transparency.
The scientists said they were often unable to determine exactly how Sakhalin Energy had applied the standard or how considerations such as conservation and cost-effectiveness had been weighed. According to the report, this lack of specificity prevented a rigorous independent evaluation of some important project decisions, including mitigation options associated with the offshore development.
That finding is significant because it goes beyond disagreement about a particular pipeline route.
It concerns how environmental risk decisions were being made.
A mitigation programme can contain sophisticated modelling, extensive monitoring and substantial expenditure and still be difficult to audit scientifically if the underlying decision criteria are unclear.
5. The Report Was Not a Simple “Stop Shell” Document
The panel’s conclusions need to be described accurately.
Its terms of reference did not require it to determine whether Sakhalin-2 should proceed as an economic or political proposition. The scientists expressly said they had not been asked to evaluate the strategic, economic, social or security implications of Sakhalin development. Their role was to analyse risks and options and provide evidence that could inform decision-makers.
Nevertheless, the scientific conclusion was severe.
Given the identified risks, uncertainty and doubts about the effectiveness of some proposed mitigation measures, the report said the “most precautionary approach” would be to suspend existing operations and delay further oil and gas development near the whale feeding grounds.
If development nevertheless continued, the panel said decisions needed to be conservative from the perspective of the whales and their habitat, with substantial monitoring and the ability to alter operations when necessary.
That is considerably stronger than saying merely that Sakhalin Energy should monitor the whales.
But it is also different from a legal prohibition on the project.
6. The Pipeline Became the Immediate Test
One of the clearest disputes concerned the offshore pipelines linking the Piltun-Astokhskoye facilities with the shore.
The panel examined several routing alternatives. Its analysis concluded that one alternative offered significant advantages because construction would create less disturbance to the nearshore foraging habitat and any release would occur farther from the Piltun feeding ground and lagoon. It also recognised a disadvantage: the longer route somewhat increased the probability of a pipeline leak or rupture simply because more pipeline would be installed.
This is worth emphasising.
The scientists did not pretend there was a risk-free option.
They compared competing risks.
A longer route could increase one category of pipeline risk while reducing potential consequences for the whales and their principal feeding habitat.
That is genuine risk analysis rather than slogan.
7. March 2005: Sakhalin Energy Changes the Route
On 30 March 2005, Sakhalin Energy announced that it would reroute the offshore pipelines.
Contemporaneous reporting described the pipelines as being moved approximately 20 kilometres south of the original route to take them farther from the Western gray whale feeding grounds. The decision followed publication of the IUCN review.
The company later incorporated the decision into Shell’s own official account.
The Shell Sustainability Report 2005 states that Sakhalin Energy had initiated the independent panel and then:
“took the Panel’s advice”
by moving the offshore pipelines 20 kilometres farther from the feeding ground.
That Shell document is particularly important for the archive.
There is no need to infer whether the independent scientific process influenced the design.
Shell itself said that it did.
8. Shell’s Own Version of the Whale Story
Shell’s 2005 Sustainability Report devoted substantial space to Sakhalin-2.
It acknowledged that the summer feeding grounds of approximately 100 endangered whales lay nearby and said harm needed to be avoided. Shell presented the rerouting decision as part of a broader programme involving acoustic modelling, external scientific observers, vessel speed restrictions and designated ship lanes.
Shell also stated that installation of the bases for two production platforms had been monitored externally and completed without signs of whale disturbance.
That is Shell’s corporate account of the monitored construction activity.
It should be recorded as such rather than converted into an independent finding that all project effects were harmless.
The same report said Sakhalin Energy was working with IUCN to establish a permanent Western Gray Whale Advisory Panel that would continue providing independent scientific advice during construction and beyond.
That longer-term panel was subsequently established in October 2006.
9. The International Whaling Commission Was Not Satisfied Yet
The reroute did not end international concern.
In its 2005 resolution, the International Whaling Commission expressly welcomed both the cooperation between Sakhalin Energy and IUCN and the proposed rerouting of pipelines around rather than through the feeding ground.
But the same resolution said the Commission remained concerned that noise from pipeline work, platform emplacement and onshore construction would affect the Piltun feeding ground.
The IWC called for industrial organisations to minimise received noise levels, supported development of a comprehensive conservation strategy and urged oil companies, governments, scientists and other organisations to cooperate and share relevant data.
That produces another important evidential distinction.
The reroute was a recognised improvement.
It was not regarded as the end of the conservation problem.
Both propositions are supported by the official record.
10. Oil-Spill Risk Remained
Noise was only one issue.
The IUCN report examined possible oil spills, pipeline failures and blowouts.
Using information contained in Sakhalin Energy’s own Comparative Environmental Assessment, the panel calculated that different offshore pipeline options carried differing lifetime spill probabilities. It also emphasised that probability alone was insufficient: the location and consequences of a release mattered greatly because spilled oil entering the feeding areas could affect the whales directly or damage the benthic prey on which they fed.
The report criticised gaps in parts of the spill analysis, including the absence of calculations quantifying how much of the feeding areas might lie inside projected spill trajectories in particular scenarios.
Again, this was not a prediction that a catastrophic spill would occur.
It was an assessment that consequences potentially affecting such a vulnerable population required unusually conservative treatment.
11. The Scientists Were Working With Incomplete Information
There is another revealing detail buried inside the review process.
The panel said its work had been complicated because Sakhalin Energy’s Comparative Environmental Assessment — described as important to Phase 2 decision-making — was not completed and supplied until 30 November 2004.
By then, the panel’s original review period was largely over.
Its contracts therefore had to be extended and the final report delayed until February 2005.
This does not establish that Sakhalin Energy deliberately withheld information.
The panel explicitly explained that the relevant documentation had not yet been completed.
But it does establish a timing problem:
independent reviewers were being asked to assess a rapidly advancing industrial project while some of the central environmental analysis was itself still being finalised.
That fact becomes particularly significant when the financing timetable is added.
12. The Whales Meet the Banks
Sakhalin-2 required enormous amounts of capital.
Among the institutions considering Phase 2 financing was the European Bank for Reconstruction and Development.
Shell’s own Sustainability Report stated in 2005 that the EBRD and other institutions were considering funding and that, late that year, the Bank had judged Sakhalin Energy’s environmental, social and health-and-safety approach “fit for the purpose of public consultation.”
Those words require care.
“Fit for the purpose of public consultation” was not an EBRD financing approval.
The distinction is confirmed by EBRD’s own later records.
13. EBRD: Due Diligence Was Still Open
At a May 2006 meeting of the EBRD’s Environmental Advisory Council, Bank staff reported that Sakhalin-2 remained in due diligence.
No decision had been taken to submit the project to the EBRD Board for financing approval.
The Bank identified numerous significant matters still requiring work, including the status of the Western gray whales, oil-spill planning, river crossings, fisheries, indigenous peoples, resettlement, cultural heritage, stakeholder relations, consultation and legal issues. EBRD staff also discussed the Bank’s commitment to applying the precautionary principle to biodiversity.
This is a crucial documentary correction to a common shorthand account.
The late-2005 milestone did not mean:
“EBRD approves Sakhalin-2.”
It meant that the documentation had reached a stage at which formal public consultation could proceed while due diligence continued.
That difference matters enormously in reconstructing the financing history.
14. Why the Whale Question Became a Financing Question
By this stage, the Western gray whale issue was no longer simply a dispute between conservationists and an oil company.
It was embedded in institutional finance.
The EBRD was examining environmental performance while considering whether to participate financially. UK export-credit officials were separately considering support. The IUCN process had generated independent scientific recommendations. The International Whaling Commission had adopted a formal resolution. Sakhalin Energy had altered its pipeline design.
The result was a form of external leverage that does not fit neatly into the categories of regulation or litigation.
No international scientist had the legal power to order Shell to move the pipeline.
But lenders could insist upon environmental standards.
Governments considering export-credit support could demand environmental assessment.
And a project seeking billions of dollars in external finance had strong commercial reasons to demonstrate that internationally recognised concerns were being addressed.
That is an inference from the documented financing and review structure, rather than a finding that any single lender forced the March 2005 reroute.
15. What the Contemporary Press Saw
The press immediately recognised the connection.
Contemporaneous reports in March 2005 described Shell and Sakhalin Energy moving the offshore route after intense concern over the whales. The Guardian reported that the change did not end the campaign against the project, with environmental organisations continuing to press prospective lenders and the UK Export Credits Guarantee Department not to provide support.
Other contemporary reporting noted the commercial importance of satisfying the environmental requirements attached to international financing. Energy-industry coverage explicitly linked the reroute with Sakhalin-2’s effort to obtain loans from international financial institutions.
Those articles are contemporaneous interpretations.
They support the proposition that financing pressure formed part of the public context.
They do not, standing alone, prove that Shell would have refused to reroute the pipeline in the absence of prospective financing.
16. The Court Record Later Captured the Same Collision
Three years later, Sakhalin-2’s whale controversy appeared in the English High Court record.
In Export Credits Guarantee Department v Friends of the Earth [2008] EWHC 638 (Admin), the court described the project as potentially having a major impact on the habitat and feeding grounds of the Western Grey Whale and recorded that approximately US$650 million of project finance support had been sought from ECGD.
As explained in SLF-2007-023, that case concerned disclosure of government environmental information.
It did not decide the scientific merits of the whale controversy.
It did, however, place into a formal judicial record the connection between the endangered whale habitat, Sakhalin-2 and the proposed taxpayer-backed financing.
The science and the money had become inseparable parts of the public controversy.
17. A Rare Example of Science Changing a Megaproject
With hindsight, one feature of the record is difficult to dispute.
The independent scientific process changed the project.
IUCN later highlighted the 2005 pipeline reroute as a concrete example of the advisory process influencing corporate action. Its retrospective account says Sakhalin Energy changed the route preferred by the independent panel, moving it roughly 20 kilometres south to reduce disruption to the feeding grounds.
Shell’s own contemporaneous sustainability report says essentially the same thing.
This should not be understated merely because serious criticism of Sakhalin-2 continued.
An independent scientific panel recommended a different route.
A Shell-led project changed its engineering design.
That is a real outcome.
18. But It Was Not a Scientific Clean Bill of Health
The opposite exaggeration would be equally misleading.
The pipeline reroute did not mean the independent scientists concluded that Sakhalin-2 was environmentally safe.
Their report remained concerned about cumulative effects, acoustic disturbance, vessel strikes, oil-spill risks, habitat alteration and uncertainty surrounding mitigation. The most precautionary option identified by the panel went considerably further than rerouting a pipeline.
The International Whaling Commission likewise welcomed the reroute while retaining explicit concerns about construction noise.
The accurate documentary conclusion therefore lies between two competing caricatures.
It would be wrong to say:
“Shell ignored the scientists.”
It would also be wrong to say:
“The scientists approved Sakhalin-2.”
Neither proposition reflects the record.
19. What Is Established
The documentary record establishes that the Western North Pacific gray whale population using Sakhalin waters was extraordinarily small and regarded as critically endangered in 2005. Sakhalin Energy asked IUCN to convene an independent scientific panel. That panel identified substantial risks and uncertainties associated with Phase 2 and concluded that the most precautionary course would be suspension or delay of development close to the feeding grounds.
It is also established that the panel preferred a different offshore pipeline routing from the original proposal and that Sakhalin Energy subsequently moved the pipelines approximately 20 kilometres farther from the feeding ground. Shell itself attributed the decision to the panel’s advice.
The International Whaling Commission welcomed the cooperation and reroute but remained concerned about industrial noise and the extreme vulnerability of a population containing fewer than 30 reproductive females.
And it is established that environmental performance, including whale protection, remained part of EBRD’s continuing due diligence while the Bank considered possible financing.
20. What Is Not Established
The records examined here do not establish that Sakhalin Energy’s activities caused the extinction, or near-extinction, of the Western gray whale population.
They do not establish that a major oil spill affecting the whales actually occurred.
They do not establish that IUCN approved Sakhalin-2 as an environmentally acceptable project.
They do not establish that the EBRD approved Phase 2 financing in 2005.
They do not establish that the English courts ruled Sakhalin-2 environmentally unlawful.
And while financing considerations plainly formed part of the institutional environment surrounding the project, the documents examined here do not prove that Sakhalin Energy changed the pipeline route solely because it needed lender approval.
Those boundaries are as important as the findings themselves.
Commentary
The whale file is revealing precisely because it refuses to fit a simple corporate morality tale.
Shell’s project faced serious environmental criticism.
But Sakhalin Energy did something corporations under attack do not always do: it voluntarily invited an external scientific body to examine the problem.
The scientists then produced conclusions considerably more uncomfortable than corporate public-relations language would normally welcome.
And at least one major engineering decision changed.
That deserves recognition.
But the same record also demonstrates why independent oversight was necessary.
The whale population was so small that conventional industrial assumptions about acceptable risk became difficult to apply. A low-probability event could have disproportionate consequences. Scientific uncertainty could not simply be treated as evidence of safety. And the panel itself complained that it could not always determine how Sakhalin Energy was balancing conservation risk against other considerations.
The financing dimension sharpened everything.
A lender assessing billions of dollars of exposure was not simply asking whether the project held Russian regulatory approvals. International financial institutions were asking whether environmental and social performance could satisfy their own standards.
That made the whales financially relevant.
The pipeline reroute is therefore more than an environmental footnote.
It is evidence of the moment when independent science, corporate engineering and international finance collided — and the physical route of Sakhalin-2 changed as a result.
The more difficult question was whether changing one route could resolve the much larger collection of risks accumulating around the project.
By 2005, the answer was plainly not yet known.
Source Record
The principal source is the February 2005 Report of the Independent Scientific Review Panel on the Impacts of Sakhalin II Phase 2 on Western North Pacific Gray Whales and Related Biodiversity, convened under IUCN auspices at Sakhalin Energy’s request. The report documents the population assessment, noise and collision concerns, oil-spill analysis, alternative pipeline routes, cumulative-risk modelling and the panel’s precautionary conclusions.
Shell’s own Sustainability Report 2005 provides the corporate account of Sakhalin Energy’s response, including the statement that the company took the panel’s advice and moved the offshore pipelines approximately 20 kilometres farther from the feeding ground. It also records Shell’s account of acoustic mitigation, external monitoring, vessel controls and prospective EBRD financing.
The International Whaling Commission Resolution 2005-3 independently records both the significance of the rerouting decision and continuing concern about noise, while documenting the exceptionally small number of reproductive females identified by the review.
EBRD records establish that environmental review continued beyond the late-2005 public-consultation milestone and that the Bank had not yet decided to submit Sakhalin-2 to its Board for financing approval in May 2006.
Contemporaneous reporting provides the public context surrounding the March 2005 reroute and the continuing campaign aimed at prospective project financiers.
The later High Court record provides additional confirmation that the Western Grey Whale issue formed part of the environmental controversy surrounding ECGD’s consideration of approximately US$650 million in project-finance support.
PS.
Encouragingly, subsequent monitoring indicated substantial growth in the whales using the western North Pacific feeding grounds. The International Whaling Commission lists a 2015 best estimate of approximately 200 animals for the Western Feeding Group, compared with an estimated 74 in 1995. Later research has, however, demonstrated considerable movement between the western and eastern North Pacific, complicating the older concept of a wholly separate western population.
Archive disclaimer: Scientific modelling describes risk scenarios and should not be confused with predictions that a particular outcome would necessarily occur. Corporate sustainability reports record the company’s own account and are identified as such. Environmental campaign statements and contemporaneous journalism are distinguished from independent scientific findings and judicial determinations. Nothing in this instalment should be read as asserting a finding of unlawful conduct unless attributed to a competent court, regulator or other authority. Site-wide disclaimer also applies.
Next Archive File
SLF-2007-025 — The Sakhalin Papers XV: The $20 Billion Shock — When Shell Doubled the Price of Sakhalin-2
Only months after the whale-panel confrontation, another disclosure transformed the project.
The original Phase 2 cost estimate had been approximately $10 billion.
In 2005 Shell acknowledged that the expected cost had effectively doubled to about $20 billion, while first LNG deliveries were pushed back.
That was not merely an accounting revision.
Under Sakhalin-2’s production-sharing arrangements, project costs were intimately connected with when Russia would begin receiving substantial profits.
The next file will follow the documentary trail behind the cost explosion, what Shell told investors and the Russian authorities, and why the $20 billion figure became one of the central triggers in the confrontation that eventually stripped Shell of control of Sakhalin-2.
