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The Observer: Shell consortium in new Sakhalin pipeline dispute

Shell consortium in new Sakhalin pipeline dispute

Nick Mathiason
Sunday May 21, 2006
The Observer

Sakhalin Energy, in which oil giant Shell has a controlling stake, is this weekend facing allegations that it is misleading potential funders of the world's second most expensive infrastructure project. The company is apparently claiming to comply with environmental standards despite evidence to the contrary.

A series of documents leaked to The Observer state that independent consultants monitoring the construction of a $20bn gas and oil project on Sakhalin island, off the east coast of Russia, highlight numerous breaches of environmental protocol. But versions of the same reports on the website of Sakhalin Energy, the consortium behind the project, give the consortium a clean bill of health.

The documents centre on how Shell contractors handle the construction of sensitive river crossings in areas where salmon spawn. Sakhalin Energy said: 'The company is committed to best practice and the transparent reporting of our activities. We will investigate any allegations to the contrary.'

WWF senior campaigner James Leaton said: 'This misleading of potential funders and environmental groups raises the question of trust. This is Shell's last chance to get things right on Sakhalin 2. It appears they have hidden the truth, which leaves them with zero trust. WWF does not see how funders can trust Shell to deliver this project to meet acceptable standards. Shell has blown its chances and its credibility.'

The timing could not be worse for the oil company. Today, the European Bank for Reconstruction and Development holds its annual meeting in London. Top of the agenda will be whether to lend $200m to the project. A final decision will be made this summer.

The case is a test of the newly signed Equator Principles mandating participating banks – there are more than 40 around the world – to back only projects that are ethically and environmentally sound. This weekend a senior EBRD official said the decision was 'delicately poised' and depended on whether Shell reached agreed benchmarks.

The Sakhalin 2 gas and oil project, which will take liquefied natural gas from the island to the east coast of Russia and feed the energy-hungry markets of Japan and China, has been mired in controversy and its original $10bn budget has doubled. The consortium was forced to change the route of a pipeline after campaigners said it would disturb 100 endangered grey whales.

Gazprom of Russia is negotiating to buy some of Shell's 55 per cent stake in the project.

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