Shell's Sakhalin in river dispute, denies cover-up

Sakhalin Energy is building one of the world’s largest oil and gas projects on Sakhalin Island off Russia’s east coast.

The $20 billion development is also one of the most environmentally challenging because the oil and gas lies under the feeding grounds of critically endangered whales and must be exported via a new pipeline that will cross 1,100 rivers and streams.

ENVIRONMENTAL CHALLENGE

The consortium, which also includes Japan’s Mitsui & Co. and Mitsubishi Corp., has sought a $6 billion to $7 billion finance package from international government-backed lenders for the project, which is already more than half completed.

The package hinges on a decision, expected in the coming months, by the European Bank for Reconstruction and Development (EBRD) on whether the project meets strict environmental standards.

As part of its effort to secure EBRD consent, Sakhalin Energy, which is 55 percent owned by Shell, provides the bank with updates on the river crossings and publishes what it says are unvarnished reports on its Web site.

However, the "Winter Crossings Report" on its Web site for December 15-28, 2005, covering the period during which the two rivers referred to in the leaked reports were crossed, does not make reference to the 15 instances of non-compliance that the independent monitors noted.

WWF said Shell had tried to mislead the EBRD and green groups.

"It appears they have hidden the truth ... WWF does not see how EBRD can trust Shell to deliver this project to meet acceptable standards," said James Leaton, senior policy adviser at WWF’s UK unit.

RISK TO REPUTATION

Sakhalin Energy’s Bateson offered no reason why the non-compliance was not mentioned in the river crossing reports on the Web site but denied there had been any attempt to mislead.

"The reports reflect the comments received from external observers and Sakhalin Energy has not altered or suppressed any information in its public reporting during the river crossing activities," he said.

Mark King from the EBRD’s environmental department said that, from a cursory glance, there appeared to be a great discrepancy between the leaked reports and the information the bank received from Sakhalin Energy.

King said the EBRD would study the reports in detail in the coming days before deciding whether or not it had been misled.

EBRD officials familiar with the project have said the bank was divided over whether to extend the loan. Some bank officials have argued that it should not risk its reputation by extending cash to a project with environmental flaws.

The Sakhalin project has already been hit by a doubling of its costs, leading to tension between Shell and the Kremlin, and has damaged the company’s reputation on environmental matters.

Shell has said it believed it was following best practice at Sakhalin, and that the project’s environmental failings were minor and reflected the groundbreaking nature of the project.

Analysts also believe that Shell’s use of Russian contractors -- at the government’s insistence -- is behind some problems, noting that the Russian oil industry does not have a strong environmental record.