May 2, 2006
Sakhalin weighs environmental cost of Shell project
By Tom Bergin
STARODUBSKOYE, Russia -- Soil particles hang suspended in the frozen water and machine-crushed stone has replaced pebbles on the riverbed since a consortium led by Royal Dutch Shell dug it up to lay an oil pipeline.
"There was a spawning ground here but they have destroyed it," said Dmitry Lisitsyn, an environmentalist on Sakhalin island, a harsh, starkly beautiful land off Russia's Far East.
Lisitsyn said that when the thaw comes, soil particles in the ice and from damaged river banks will seep downstream and leave large parts of the river unsuitable for spawning fish.
Residents of Sakhalin, historically one of Russia's poorest regions, had great hopes for Shell's giant oil and gas project, the biggest undertaken by the Anglo-Dutch oil major.
However, some people on the island north of Japan now fear the environmental costs of the $20 billion project may leave them worse off than before.
The consortium's fields contain 4.5 billion barrels of reserves but extracting them is complicated because they lie under the feeding grounds of the critically endangered Western Gray Whale, and the sea in the north is frozen for six months.
Shell and its Japanese partners Mitsui and Mitsubishi must construct an 500-mile pipeline to a new export terminal on ice-free Aniva Bay in the south.
The pipeline must cross 1,100 rivers and water courses -- home to salmon spawning grounds -- and the terminal requires dredging and dumping in Aniva Bay.
Islanders are not too worried about the whales, the focus of opposition from western environmental groups. They are more concerned about the fishing industry, which accounts for 22 percent of industrial production and employs 40,000 of the 530,000-strong population during the summer salmon season.
At the port city of Korsakov, near the export terminal, residents say the project is already causing problems.
One elderly man told a public meeting that a local firm could no longer sell seaweed to Japanese customers because of the perception that Aniva Bay was polluted.
Others said that since the dredging and dumping, once-rich harvests of lucrative scallops -- whose shell is the oil giant's corporate emblem -- had dwindled.
"We are worried about the environmental dangers of a potential oil spill ... (but) ... our troubles are centered on scallops," Korsakov Mayor Gennadiy Zlivko said.
The Korsakov meeting was hosted by the European Bank for Reconstruction and Development (EBRD), which is assessing the environmental and social effects before deciding whether to advance a loan to the consortium, called Sakhalin Energy.
In November, Sakhalin's sole representative in the federal parliament, Ivan Zhdakayev, wrote to the EBRD saying the project did not meet the bank's strict policies, citing non-compliance with environmental and economic requirements.
Last week, conservation group WWF said the EBRD should not grant the loan without more measures to protect the environment. It said ice and poor weather around the fields would make it nearly impossible to clean up any spills for half of the year.
Jeroen van der Veer, Shell's chief executive, said earlier this year that from an environmental perspective the project was one of the best in Russia.
Sakhalin Energy says careful execution and monitoring means the river crossings will have little impact on spawning areas.
It says it moved an offshore pipeline route away from the whales' feeding grounds to remove any threat and that dredging and dumping in Aniva Bay was limited to a small part.
Despite describing some early river crossings as "appalling," improved practices have led EBRD environmental officials to deem the work acceptable, while even environmentalists accept Sakhalin Energy's performance is mostly better than Russian oil firms' traditional record.
The EBRD's board is expected to vote in June on whether to approve the $300 million loan to support the project.
Officials at the bank say some of the complaints about risks are a form of negotiation -- common on the part of communities near oil developments -- to extract more benefits from Shell, the world's third-largest listed oil firm by market value.
Many residents, especially outside the capital Yuzhno-Sakhalinsk, say they have not gained much from the project, although unemployment has fallen from 20 percent in 1999 to 7.1 percent in 2004, according to EBRD figures.
"No sustainable business development has been created on Sakhalin," Ivan Stepanchenko, a member of a small business association, told an EBRD public meeting in the capital.
Sakhalin is unlikely to develop an oil services industry like that of Scotland's North Sea hub Aberdeen, said Michael Bradshaw, professor of human geography at Britain's University of Leicester.
The economy is likely to remain dependent on fishing, making it vulnerable to any environmental damage caused by the project, or even the perception of such damage.
So far, official data suggests salmon stocks are buoyant and EBRD officials said there was no convincing evidence of any negative impact on the whales.
Shell has, however, been hit. The environmental disputes and partly related cost overruns have damaged its reputation, and led investors and analysts to question the way it handles big, environmentally-sensitive projects.
"Shell should have been able to spot that dealing with endangered whales was likely to require exceptionally careful handling and the deployment of best practice in every respect," Citigroup said in a research note.
Sakhalin could also harm Shell's ability to turn around one of the poorest industry records for adding new reserves.
"Despite many key international project successes over recent years, Sakhalin may appear as a black mark on Shell's resume when it pitches to resource-holding nations for involvement in future world-scale projects," said Jason Kenney at ING.