SLF-2007-040
The Sakhalin Papers XXX: The Letter That Was Both a Commitment and “No Decision” — Inside ECGD’s 4 March 2004 Conditional Support
One day Britain’s export-credit agency told Sakhalin Energy it was able to support specified contracts, subject to conditions. The next day a minister told Parliament that approval would come only after the outstanding issues had been satisfactorily addressed. The apparent contradiction would eventually reach the High Court — but never receive a judgment on its merits.
Archive reference: SLF-2007-040
Collection: The Sakhalin Papers
Principal record: Export Credits Guarantee Department letter to Sakhalin Energy Investment Company Ltd, 4 March 2004
Supporting record: Royal Dutch/Shell Form 6-K filed with the US Securities and Exchange Commission, May 2003; Parliamentary answers of February and March 2004; Administrative Court papers in R (WWF-UK and The Corner House Research) v Secretary of State for Business, Enterprise and Regulatory Reform; National Audit Office case study submitted to the House of Commons Environmental Audit Committee; contemporaneous reporting
Evidence standard: The existence and wording of the ECGD letter are treated as documentary fact. ECGD’s later description of the letter, ministerial statements and Shell corporate filings are separately identified. Allegations advanced in the proposed judicial review are not represented as judicial findings because the proceedings ended without a merits judgment.
Introduction
The previous archive file examined what different parts of Whitehall were saying internally about Sakhalin II before Britain committed itself to anything.
This instalment examines the piece of paper that came next.
It is only three pages long.
Dated 4 March 2004, it was sent by Britain’s Export Credits Guarantee Department — ECGD — to Sakhalin Energy Investment Company Ltd in Yuzhno-Sakhalinsk.
Its own internal reference described it as:
“Confirmation of conditional support.”
The significance of those words would not become fully public for another three years.
The letter did not issue the final approximately $650 million project-finance guarantee being contemplated for Sakhalin II.
It did something more complicated.
It confirmed that ECGD was able to support a series of specified preliminary contracts — subject to a substantial list of conditions.
Years later, ECGD would acknowledge in correspondence reproduced in Administrative Court papers that the 2004 letter bound it to support the financing of the relevant contracts if its conditions were satisfied. Yet ministers and ECGD simultaneously maintained that no substantive decision had been made to support Sakhalin II as a project. (The Corner House)
That is the puzzle at the centre of this file.
Both statements appear in the documentary record.
Understanding how they could coexist is essential to understanding the British financing controversy surrounding Shell’s Sakhalin project.
1. Shell Had Already Committed to Phase 2
The corporate background is unusually well documented.
On 15 May 2003, Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company filed a Form 6-K with the US Securities and Exchange Commission announcing that Sakhalin II Phase 2 would proceed.
Shell described Sakhalin Energy as a 55 per cent Royal Dutch/Shell Group company. Mitsui held 25 per cent and Mitsubishi 20 per cent.
The filing estimated project investment at approximately $10 billion and described Sakhalin II as the largest single foreign direct-investment project in Russia. (SEC)
The same authenticated Shell filing contained an important environmental detail.
It said that the final approval stages for the project’s design and construction documentation, including a substantial environmental impact assessment, were still progressing. (SEC)
That fixes the sequence.
Shell and its partners had made their investment decision.
Construction planning and contracting were moving forward.
But environmental assessment and prospective lender scrutiny had not ended.
Britain was therefore being asked to consider financial support for an enormous project that was already advancing while significant environmental questions remained under examination.
2. 4 March 2004: The Letter
The surviving original is addressed directly to:
Sakhalin Energy Investment Company Ltd
35 Dzerzhinskogo St.
Yuzhno-Sakhalinsk
Russia
It refers to earlier applications for conditional ECGD support dated 26 December 2003 and 27 January 2004 and to a meeting held on 4 February 2004.
Then comes the operative paragraph.
ECGD confirmed that it was able to support the contracts listed in schedules attached to the letter, which it called the Preliminary Contracts, subject to specified conditions.
This was therefore not simply:
We may perhaps consider supporting Sakhalin II someday.
Nor was it:
Here is your final guarantee.
It occupied an intermediate position.
The support was real.
But conditional.
The distinction later became legally and politically contentious.
3. The Environmental Condition Came First
The first condition is particularly important.
Before the support could become operative, ECGD required satisfaction as to measures proposed or taken to identify and mitigate adverse environmental and social impacts arising from Sakhalin II.
Other conditions required acceptable arrangements for project financing; acceptable loan and ECGD-support arrangements for the UK procurement element; additional applications covering individual preliminary contracts; any further due diligence ECGD considered necessary; and appropriate declarations or recourse arrangements from UK suppliers.
The environmental requirement was therefore not peripheral.
It was written directly into the conditional support.
That fact supports ECGD’s later position that the environmental assessment had not been bypassed simply because the 4 March letter existed.
But it also created the issue eventually raised by WWF and The Corner House:
Could a government department place itself under a legally binding conditional commitment before completing the environmental assessment on which satisfaction of that condition depended?
That became a legal argument.
It never became a judicial answer.
4. The Conditions Went Well Beyond the Environment
The letter also required full continuing disclosure to ECGD of facts material to the project and its financing.
It imposed UK-content requirements and warned that contracts with less than 20 per cent UK content would be a particular concern.
ECGD reserved powers to withdraw support in specified circumstances, including financial deterioration, payment problems and certain political or sovereign-risk events.
And one final provision is historically interesting.
The letter stated that the details of ECGD’s support were confidential to Sakhalin Energy Investment Company Ltd.
The document would not become public until 2007.
By then, its precise legal status had become a controversy in its own right.
5. There Were 29 Schedules
The final page records:
“Encs. 29 schedules relating to the Preliminary Contracts.”
That detail matters because it reinforces the narrowness of what the letter actually did.
This was not merely a blanket promise to finance every component of Sakhalin II.
It related to identified preliminary contracts connected with the UK procurement element of the project.
The broader ECGD application was approximately $650 million, intended to support UK goods and services associated with Sakhalin II. A later National Audit Office case study identified companies including AMEC, Parsons and Rolls-Royce among the prospective UK supply interests. (UK Parliament)
The institutional purpose was export support.
That statutory purpose would itself later become one of the issues raised by the judicial-review claimants, who questioned whether support could still be said to be “facilitating” exports once some contracting and construction were already substantially advanced.
Again, that was an argument.
It was not adjudicated.
6. The Day Before the Letter: “No Decision”
The public record immediately surrounding the letter is striking.
On 26 February 2004, Trade and Investment Minister Mike O’Brien told the House of Commons:
“No decision on ECGD cover has yet been taken”
pending a full assessment. (Hansard)
That statement was made one week before the conditional-support letter.
There is nothing inherently surprising about it.
At that point, the letter had not yet been issued.
What happened next is more interesting.
7. The Day After the Letter: Parliament Was Still Told Approval Lay Ahead
On 5 March 2004 — the day after ECGD sent its conditional-support letter — Mike O’Brien answered a series of Parliamentary questions concerning Sakhalin II.
He addressed the Western Gray Whale, river crossings, earthquake risk and waste disposal.
On the whale issue he said ECGD was awaiting further information and wanted reassurance that the potential impact would be minimised.
Asked when a decision would be taken, O’Brien said that support would be approved only if he was satisfied that the outstanding issues had been satisfactorily addressed. (Hansard)
This is the documentary tension in its clearest form.
4 March: ECGD confirms conditional support.
5 March: the minister speaks as though approval remains to be decided after further assessment.
It is tempting to call that a contradiction.
The surviving record requires greater care.
8. Commitment and Final Decision Were Not the Same Thing
ECGD’s later explanation distinguished between two stages.
There was:
a conditional commitment concerning specified eligible contracts;
and there remained:
a substantive decision whether the outstanding conditions had been met and the final guarantee should actually be issued.
The Administrative Court grounds filed by WWF and The Corner House reproduce ECGD correspondence from March 2007 acknowledging that the Department considered itself bound by the 4 March 2004 letter if its stipulated conditions were satisfied. (The Corner House)
Yet as late as February 2007, the Government was still telling Parliament that decisions on Sakhalin II support “have yet to be taken.” (Hansard)
And in January 2008, minister Malcolm Wicks stated that ECGD had not made a decision on support and that financial, technical and environmental factors were still under consideration. (UK Parliament)
The language only makes sense if “decision” is understood differently in the two contexts.
There had been a binding conditional contractual commitment.
There had not been the final substantive underwriting decision.
9. That Distinction Was Not Obvious to Everyone
Environmental organisations regarded the distinction as deeply problematic.
After obtaining the 2004 letter, WWF and The Corner House argued that ECGD had represented publicly for years that no decision had been made when in fact it had already entered into a legally binding conditional arrangement.
They also argued that environmental assessment should have been completed before any such binding commitment was given. (The Corner House)
Those claims became grounds for judicial review.
But contemporaneous reporting also recorded ECGD’s answer.
When The Guardian reported on the proceedings in August 2007, an ECGD spokesman stressed that there was no actual cover in place, no premium had been received and no taxpayer money was then at risk. (The Guardian)
Both sides were therefore talking about something real.
WWF and The Corner House focused upon the legal significance of the conditional promise.
ECGD focused upon the fact that no final guarantee had been issued.
The disagreement was not merely semantic.
It concerned what legal consequences flowed from that intermediate stage.
10. ECGD Had Not Finished Its Environmental Work
A later official retrospective helps explain why the final decision remained outstanding.
The National Audit Office case study published through the House of Commons records that ECGD and other prospective financial institutions concluded that Sakhalin II did not fully meet some relevant World Bank Group guidelines at the time, but believed the deficiencies could be addressed through further action by Sakhalin Energy. (UK Parliament)
ECGD therefore continued what it described as constructive engagement.
The project subsequently produced expanded environmental and social documentation, a Health, Safety, Environment and Social Action Plan containing more than 2,000 commitments, further lender scrutiny and, eventually, a Remedial Action Plan. (UK Parliament)
This history matters.
It prevents the March 2004 letter from being represented as an unconditional environmental approval.
It plainly was not.
The environmental test was still alive.
11. But That Created the Campaigners’ Central Legal Objection
The same chronology supported the opposite argument.
If substantial environmental assessment remained unfinished, WWF and The Corner House asked, should ECGD have entered into any legally binding support arrangement at all?
Their legal grounds challenged the March 2004 decision on several bases, including the timing of environmental assessment, the Department’s statutory export-facilitation powers and the alleged absence of adequate consultation before the conditional commitment. (The Corner House)
Their Parliamentary evidence later argued that ECGD’s own case-handling material described preliminary indications of cover as being given without commitment, whereas Sakhalin II had produced something different: a conditional arrangement that ECGD itself later accepted was binding. (UK Parliament)
That is a serious legal contention.
But the evidential label is essential:
Claimants’ argument — not judicial finding.
12. 15 August 2007: Judicial Review Begins
WWF-UK and The Corner House filed their judicial-review proceedings on 15 August 2007.
The challenged act was the March 2004 conditional-support decision.
They sought to have its legality examined by the Administrative Court. (The Corner House)
By this point Shell was no longer the majority shareholder in Sakhalin Energy; Gazprom had taken control during the restructuring completed in 2007.
But that subsequent ownership change does not alter who controlled the company when the 2004 letter was issued.
At that time, the authenticated Shell SEC filing establishes that Royal Dutch/Shell held 55 per cent. (SEC)
13. The Case Never Reached Judgment
This is the most important qualification in the entire file.
The court did not decide whether ECGD’s 4 March 2004 conditional commitment was lawful.
On 29 February 2008, Sakhalin Energy withdrew its application for ECGD support.
The later official case study records that ECGD had still not reached its substantive decision whether to issue the guarantee. Its Business Principles Unit had not completed its evaluation and further financial information was still awaited.
After Sakhalin Energy withdrew, ECGD confirmed that its conditional offer had also been withdrawn. (UK Parliament)
Contemporaneous Interfax reporting quoted a Sakhalin Energy representative saying there was significant uncertainty over the timetable for final decisions by ECGD and the US Export-Import Bank. (Interfax.ru)
With the application gone, WWF and The Corner House did not proceed with their judicial review. (The Corner House)
Therefore:
No merits judgment exists.
14. Do Not Confuse This Case With the Friends of the Earth Case
The Sakhalin archive contains two British legal proceedings that are easily conflated.
One concerned disclosure of government environmental information.
Friends of the Earth ultimately succeeded in preserving an order requiring disclosure when ECGD’s appeal was dismissed by Mr Justice Mitting in March 2008.
The other concerned the legality of the March 2004 conditional-support decision itself.
That second case — WWF and The Corner House — ended without a judgment after Sakhalin Energy withdrew its application.
The first produced a judicial ruling.
The second did not.
Any account stating that a British court declared the March 2004 financing commitment unlawful would therefore be incorrect.
15. Did Britain Ultimately Finance Sakhalin II?
No.
Not through this ECGD application.
The 4 March 2004 letter did not become a final $650 million guarantee.
By early 2008 the official record says ECGD had still not made the substantive underwriting decision.
Sakhalin Energy then withdrew its application and ECGD’s conditional offer fell away. (UK Parliament)
That fact must sit alongside the equally important fact that a meaningful conditional commitment had existed since 2004.
Neither should erase the other.
16. Did Ministers Mislead Parliament?
The surviving documents do not justify stating that as an established fact.
Campaigners argued that Parliament and the public had not been given an adequate account of the legal significance of the March 2004 letter.
The chronology explains why they made that argument.
A document headed “Confirmation of conditional support” existed.
ECGD later accepted that it was bound if its conditions were fulfilled.
Meanwhile ministers repeatedly spoke of a support decision as still lying in the future.
But the Government’s distinction between conditional commitment and final substantive approval was also genuine and is supported by the later official record.
No court decided that ministers deliberately misled Parliament.
No such finding should be manufactured now.
The defensible historical conclusion is narrower:
The terminology used publicly did not make the legal significance of the March 2004 conditional commitment obvious, and that ambiguity became sufficiently serious to generate judicial-review proceedings.
Documentary Findings
Established
Royal Dutch/Shell held a 55 per cent interest in Sakhalin Energy when Phase 2 was approved in 2003. Shell’s SEC filing described the project as requiring approximately $10 billion at that stage and recorded that environmental approval work remained in progress. (SEC)
ECGD sent Sakhalin Energy a letter dated 4 March 2004 expressly confirming conditional support for identified preliminary contracts.
The letter imposed environmental, social, financing, due-diligence, disclosure and UK-content conditions.
It referred to 29 schedules covering preliminary contracts and stated that details of the support were confidential to Sakhalin Energy.
ECGD later accepted, in correspondence reproduced in the judicial-review papers, that it considered itself bound to provide the relevant support if the conditions were satisfied. (The Corner House)
Government ministers nevertheless continued to state that no final support decision had been made. (Hansard)
The official later retrospective records that ECGD had still not made its substantive decision by early 2008.
Sakhalin Energy withdrew its application on 29 February 2008.
ECGD’s conditional offer was then withdrawn. (UK Parliament)
Alleged in legal proceedings but never adjudicated
WWF and The Corner House alleged that ECGD had acted unlawfully by entering into the conditional commitment before completing the environmental and social assessment.
They questioned whether ECGD had properly exercised its statutory export-facilitation powers.
They challenged the transparency and consultation surrounding the March 2004 decision.
They argued that the public description of the decision-making process did not adequately reflect the binding nature of the conditional support.
Those propositions were pleaded or advanced by the claimants.
They were never determined by the court because the financing application was withdrawn.
Not established
It is not established that ECGD ever issued the contemplated final Sakhalin II guarantee.
It is not established that British taxpayers ultimately financed Sakhalin II through this ECGD application.
It is not established that a British court declared the 4 March 2004 letter unlawful.
It is not established that a court found Shell or Sakhalin Energy environmentally liable in these proceedings.
It is not established that ministers deliberately deceived Parliament concerning the conditional-support letter.
It is not established that the environmental conditions in the letter would inevitably have been satisfied.
And the existence of the conditional commitment should not be described as proof that ECGD had completed or approved its environmental assessment.
The official record shows the opposite: that work continued for years.
Commentary
The importance of the 4 March 2004 letter lies precisely in its refusal to fit comfortably into a simple category.
It was not nothing.
It was not the final guarantee.
It was a conditional commitment with legal significance.
That middle category explains much of the later confusion.
To Sakhalin Energy, the document offered meaningful assurance that specified UK-related contracts could receive ECGD backing if the stipulated conditions were satisfied.
To ECGD, the decisive underwriting judgment remained outstanding.
To environmental campaigners, entering that commitment before the environmental process was complete placed the cart before the horse.
To ministers answering Parliamentary questions, the final decision still lay ahead.
All four propositions can be found in the documentary history.
The central question is therefore not whether the 4 March letter existed.
It did.
Nor whether it was conditional.
It plainly was.
The unresolved legal question was whether a government export-credit agency was entitled to bind itself in that conditional way at that stage of the environmental assessment and contracting process.
WWF and The Corner House asked a court to answer it.
The court never did.
Sakhalin Energy withdrew its application first.
Twenty-two years later, the most reliable conclusion remains written on the document itself:
conditional support.
Two words that proved considerably more complicated than they sounded.
Source Record
The principal primary record is the Export Credits Guarantee Department letter to Sakhalin Energy Investment Company Ltd dated 4 March 2004, subsequently disclosed following information requests. The surviving three-page document records the conditional support, its environmental and financing conditions, disclosure requirements, withdrawal provisions, confidentiality clause and 29 accompanying contract schedules.
The principal authenticated Shell record is the Royal Dutch Petroleum Company/The “Shell” Transport and Trading Company Form 6-K filed with the US Securities and Exchange Commission in May 2003. It identifies Sakhalin Energy as a 55 per cent Royal Dutch/Shell Group company, records the then approximately $10 billion Phase 2 investment and states that final approval work on project documentation, including substantial environmental-impact assessment, was progressing. (SEC)
The contemporaneous Parliamentary record includes Mike O’Brien’s answers of 26 February and 5 March 2004, documenting the Government’s position that the full assessment and final approval process remained unfinished. (Hansard)
The principal legal record is the filed Administrative Court material in R (WWF-UK and The Corner House Research) v Secretary of State for Business, Enterprise and Regulatory Reform, which identifies the March 2004 decision challenged and reproduces ECGD’s later description of its legal effect. The claims contained in those papers are treated as pleadings rather than judgments. (The Corner House)
The principal independent official retrospective is the National Audit Office Sakhalin Phase II case study published through the House of Commons Environmental Audit Committee, which records the approximately $650 million application, the continuing environmental due diligence, the initial failure to meet some relevant World Bank Group guidelines, subsequent mitigation work, the absence of a substantive ECGD guarantee decision and Sakhalin Energy’s eventual withdrawal. (UK Parliament)
Contemporaneous reporting includes The Guardian account of the August 2007 judicial-review challenge, recording both the campaigners’ allegation that the commitment was legally problematic and ECGD’s response that no cover had actually been issued. (The Guardian)
Archive disclaimer: A conditional commitment is distinguished throughout from a final guarantee. Allegations advanced in judicial-review proceedings are not treated as findings of law. The judicial review concerning the March 2004 decision ended without a merits judgment after Sakhalin Energy withdrew its application. Nothing in this instalment should be read as asserting environmental liability, ministerial misconduct or illegality beyond a finding made by an identified competent authority.
Site wide disclaimer also applies.
Next Archive File
SLF-2007-041 — The Sakhalin Papers XXXI: The Judicial Review That Never Reached Judgment — WWF, The Corner House and the Unanswered Legality Question
On 15 August 2007, two campaigning organisations placed the question raised by the 4 March letter before the Administrative Court.
Their case went considerably further than saying that the Government had been unclear.
They challenged the legal basis of the conditional commitment itself.
Was ECGD entitled to make a binding conditional decision before completing its environmental assessment?
Had its statutory power to “facilitate” British exports been properly engaged when construction and contracting were already under way?
Should interested parties have been consulted before a commitment carrying legal consequences was made?
And what was the legal difference between an indication given “without commitment” and the arrangement ECGD had actually given Sakhalin Energy?
The court papers set out those allegations in detail.
ECGD rejected the campaigners’ interpretation and continued examining the project.
The hearing was approaching.
Then, on 29 February 2008, Sakhalin Energy withdrew its application.
The legal question disappeared from the court list.
It did not disappear from the historical record.
SLF-2007-041 will reconstruct the judicial review that came within weeks of testing Britain’s Sakhalin financing process — and explain precisely what the court was never asked to decide.
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