Principal Objections: Analysis of Sakhalin II gas & oil project’s compliance with the Equator Principles

7 May 2004 admin

“Principal Objections” finds that Shell’s Sakhalin II integrated oil and gas project fails to comply with the Equator Principles on responsible lending.

The project is situated at Sakhalin Island in Russia’s Far East, and is being developed by a consortium led by Shell. It will consist of three offshore platforms, offshore and onshore pipelines, an onshore processing facility, a liquefied natural gas (LNG) facility and oil and gas export terminal.

Download the report (pdf)

It will have severe environmental impacts, including threatening the critically endangered Western Gray Whale with extinction, damaging habitats of endangered bird and fish species, and polluting important fisheries. Experts have reported that the project design falls way short of industry best practice, and that its risk assessments are inadequate. As a result, the project risks causing a catastrophic oil spill, as well as major routine impacts.

Local and international environmental organisations have demanded substantial design changes, and Russian groups have initiated lawsuits against the project.

With a capital cost of at least $12 billion, the project is expected to seek project financing later in 2004. This report recommends that commercial banks do not finance the project in its current form.

20 leading commercial banks have now adopted the Equator Principles, established in June 2003, which commit the banks to not financing projects that fail to meet their environmental and social guidelines.

While environmental organisations have welcomed the introduction of the Equator Principles, they expect the banks to apply these Principles in good faith by not supporting damaging projects. Banks must carry out rigorous due diligence on projects, and demonstrate transparency by publishing their assessments of compliance with the Equator Principles.

Recommendations of the report:

    • In the absence of fundamental changes to the project, adopting banks should refuse loans to the Sakhalin II project.
    • Banks should carry out their own rigorous due diligence of the project, rather than relying on that of project sponsors or other financial institutions.
    • In order to establish trust with civil society, and in the interests of transparency, banks should publish their analysis of project compliance with the Equator Principles.
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