May 5, 2005

Mr. Jean Lemierre
President
European Bank for Reconstruction and Development
One Exchange Square
London, EC2A 2EH United Kingdom
Fax: +44 (207) 338 6100, +44 (207) 496 6100

Kyosuke Shinozawa
Governor
Japan Bank for International Cooperation
1-4-1, Ohtemachi, Chiyoda-ku
Tokyo 100-8144 Japan
Fax +81 3(5218)3955

Philip Merrill
President and Chairman
Export-Import Bank of the United States
Washington, DC Office
811 Vermont Ave., NW
Washington, DC 20571 USA

Fax: +1 (202) 565 3684

Patrick Crawford

Chief Executive Officer
Export Credit Guarantee Department
2 ExchangeTower

Harbour Exchange Square

London, E14 9GS United Kingdom
Fax: +44 20 7512 7146

RE: Sakhalin II Environmental Assessment Remains Unfit for Purpose

Dear Sirs:

We write concerningthe status of Sakhalin II Phase 2 Environmental & Social Impact Assessment (ESHIA) material submitted to you by Royal Dutch/Shell and Sakhalin Energy Investment Company, Ltd. (SEIC). From 2003 to the present your institutions found that fundamental problems with the Sakhalin II ESHIArender it unfit for purpose and you agreed to not move forward with the project until these problems are rectified. We appreciate that the lender group has continued to pay close attention to the issues and concerns that have been raised thus far. We are sure that given the caution already applied to this process, your banks would not wish to enter a public consultation phase prematurely and squander the work done so far. Although it is anticipated that additional requested environmental assessment information will be submitted by SEIC, several crucialaspects of the larger analysisremain unfit for purpose. We urge you to uphold your environmental responsibilitiesand to not move forward with the project until it complies in full with your policies. Aspects of the Sakhalin II ESHIA that remain unfit for purpose include:

  • Lack of response to most findings in expert Western Gray Whale report
  • Lack of oil spill prevention and response plan
  • Lack of an Indigenous People’s Plan
  • Lack of precautionary approaches on biodiversity
  • Construction violations and fisheries damage
  • Korsakov community impacts

Lack of response to most findings in expert Western Gray Whale report

On March 30, 2005, SEIC announced that it will re-route its proposed undersea pipelines associated with the project’s existing PA-A and proposed PA-B platforms, which will be situated adjacent to critical habitat of the Western Gray Whale. The proposed re-routing is in response to the report of the International Scientific Review Panel (ISRP), which was commissioned by SEIC at your request.[1] The ISRP report concludes that Royal Dutch/Shell’s Sakhalin II and other oil and gas projects off the northeast coast of Sakhalin Island threaten the Western Gray Whale population with extinction. The ISRP found that:

“[E]xisting and planned large-scale offshore oil and gas activities pose potentially catastrophic threats to the population.”

And:

"The most precautionary approach would be to suspend present operations and delay further development of the oil and gas reserves in the vicinity of the gray whale feeding grounds off Sakhalin, and especially the critical nearshore feeding ground that is used preferentially by mothers and calves."

And:

“Additional whale deaths, regardless of the cause, have the most serious consequences for the population – most importantly, the loss of one additional female per year (over and above the death rates experienced in recent years) would be sufficient to drive the population towards extinction with high probability.”

We welcome SEIC’s decision to reroute subsea pipelines. However, pipeline routing comprises just one aspect ofthe largerset of Sakhalin II off-shore activities that threaten the Western Gray Whale with extinction. These include the location of the existing PA-A and proposed PA-B platforms; the potential for chronic and/or catastrophic oil spills; vessel collision; construction and operation noise; benthic smothering;and other impacts.The client is required by your policies to analyze a full range of alternatives. It is inconsistent for the client only to analyze alternatives for the pipelines and not for the platform and other fundamental design aspects. SEIC originally stated that it would not change the proposed location of either the pipeline route or platform location, so its recent decision to analyze only alternative pipeline routes is curious and insufficient.

The ISRP also found that SEIC has conducted inadequate assessment to fully understand project impacts and necessary mitigation measures, citing extensive data gaps, lack of adequate modeling and analytical rigor. As a result:

"The Panel was precluded by a lack of information and specificity from completing a comprehensive review of a number of important Sakhalin II Phase 2 elements."

Despite SEIC’s welcome decision to reroute subsea pipelines, the project continues to violate the environmental policies to which your institutions and project sponsors are committed. These include violations of policies related to the protection of natural habitats; required analysis of alternatives; adequate environmental assessment, including of cumulative impacts and transboundary impacts; and adherence to the precautionary approach.[2] The ISRP also noted:

“The fate of western gray whales will ultimately depend on their ability to cope with the cumulative effects of multiple anthropogenic and natural factors on both the whales themselves and on related key elements of biodiversity”

We support the proposed continuation of the ISRP and its attempt to assess the project’s many other threats to the Western Gray Whale. Meanwhile, given the vast array of uncertainty and the significance of potential extinction it cannot be concluded that the EA for off-shore portions of Sakhalin II can be considered fit for purpose. The evidence discussed below from the construction of the onshore aspects demonstrates that the ESHIA for the onshore elements does not correspond with construction activities on the ground.

Lack of oil spill prevention and response plan

Nothing is more central to the environmental assessment of an enormously high risk oil and gas project like Sakhalin II than the assessment of oil spill risks and of necessary prevention and mitigation measures. Consequently, we were shocked to recently learn that SEIC seeks to have its Phase 2 ESHIA and addendum considered fit for purpose with little more than a proposed outline of the sections to be included in a thus-far non-existent oil spill prevention and response plan. This is no formality, as the potential client has been unable to demonstrate proven techniques for responding to an oil spill under sea-ice. The same rigor the banks have applied to other issues should be applied to this area before the project is progressed within the banks.This is a dramatic failure in environmental impact assessment given threatened impacts from the project’s proposed off-shore extraction operations to endangered species, pipelines crossing hundreds of wild salmon-bearing streams, tanker traffic in treacherous waters amidst the rich fisheries resources of SakhalinIsland and Hokkaido, Japan, and more.

The threat of an oil spill from Sakhalin II is all too real: On September 2004, the SEIC-contracted Cristoforo Colombo ran aground on the coast of Sakhalin, dumping its fuel oil. The Colombo spill – although relatively small in volume - coated six kilometers of shoreline, including a popular public beach, with toxic oil; its impacts worsened by the delayed response. Dozens of Kholmsk residents have gone to hospitals with headaches and respiratory problems. Citizens in Kholmsk and Yuzhno-Sakhalinsk have demonstrated against the damage to the environment and public health caused by Sakhalin Energy and Royal Dutch/Shell. Sakhalin’s Environmental Prosecutor has initiated a criminal case based on pollution from the Colombo spill to the marine environment. SEIC’s oil spill response was a complete failure: the containment equipment arrived only after 48 hours, and the ship still awaits salvage now over six months later.[3]

The consortium’s resistance to listening to the requirements of the banks has hindered progress on the project, and does not bode well for future compliance with lender conditions. Phase 2 has produced an oil spill even before it began producing oil. This accident provides stark proof that Sakhalin Phase 2 operations should not be allowed to commence until an adequate oil spill prevention and response plan is in place. In the absence ofan approved plan, your institution cannot assess the potential environmental impact of Sakhalin II; thus, the project EA remains fundamentally unfit for purpose.

Lack of Indigenous Peoples’ Plan and Cultural Heritage Plan

From January 20-24, 2005, over 200 members of SakhalinIsland’s Nivkh, Uilta, Nanai and Evenk peoples endured minus-30 degree Celsius temperature to blockade the Sakhalin I and II projects. They protest these projects’ impacts on their native fisheries, reindeer pastures and overall livelihoods, demanding an independent cultural impact assessment and a development fund for Sakhalin’s indigenous people. Indigenous leaders wrote to your institutions about these concerns, noting that Sakhalin II violates your policy requirements related to indigenous people and your obligation to respect international law.[4]

In response to inquiries, your institutions stated that you will require the project to adhere to IFC’s OD 4.20 Indigenous People, including the development of an Indigenous Peoples’ Development Plan. IFC’s OD 4.20 recognizes the need for Indigenous Peoples’ Development Plan to be developed early and in parallel with the project development process and with participation of indigenous people throughout the entire process:

Successful planning for indigenous peoples frequently requires long lead times, as well as arrangements for extended follow-up.

And:

The development plan should be prepared in tandem with the preparation of the main investment.

And:

Mechanisms should be devised and maintained for participation by indigenous people in decision making throughout project planning, implementation, and evaluation.

However, despite the fact that Sakhalin II Phase 2 has been in the planning stage for many years and that construction is well underway, no Indigenous Peoples’ Development Plan has been completed. Indeed, we were surprised to learn that a nascent Plan is only now being discussed. Meanwhile, on March 25-26, 2005, representatives of Sakhalin’s indigenous peoples held a Congress in which they renewed their demands for an independent cultural impact assessment and a development fund for Sakhalin’s indigenous people. Indigenous leaders have pledged to renew non-violent protests starting June 1, 2005, if their rights to these remedies are not respected.[5]

The fact that indigenous leaders feel compelled to continue non-violent protest against the project is a clear indication that IFC OD 4.20 requirements for their participation in the development of an Indigenous People’s Development Plan early and throughout the process has not been respected. This, and the fact that SEIC waited until after construction is well underway, shows that the company lacks the commitment necessary to conduct an Indigenous Peoples’ Development Plan by the letter or the spirit of IFC OD 4.20 requirements.It is not possible for SEIC to retrofit this plan on operations it has already begun and still be deemed in compliance with policies. Such a tick-box approach to social and environmental standards will only put the banks’ reputation at risk.Without an approved Indigenous Peoples’ Development Plan, or even any appearance that SEIC is willing to conduct such a plan in a timely manner with indigenous participation, the Sakhalin II ESHIA cannot be considered fit for purpose.

Lack of Precautionary Approaches on Biodiversity

The wetlands and coastal areas of North East Sakhalin are highly valued for their biodiversity. The areas meet the criteria for the Convention on Wetlands of International Importance, especially as Waterfowl Habitat. Whooper Swan, other gooses and ducks, and endangered bird species such as Steller’s Sea Eagles depend on the wetlands to catch fish. In November 2004, BirdLife International, which consists of organizations in 100 countries and regions, announced “Important Bird Areas (IBA) in Asia.” It includes four areas on Sakhalin, from the NortheastCoast to AnivaBay. IBA selects important habitat areasbased on common global standards to be protected. However,the Sakhalin II project has beenthreatening a number of endangered bird species withhabitat degradation and disturbance.

EBRD’s Environment Policy states that the bank supports a precautionary approach to the management and sustainable use of natural biodiversity. A precautionary approach must be established from sound baseline data. However, the baseline data in the ESHIA on biodiversity including wetlands and waterfowl is inadequate and poorly structured, making impossible any determination of whether a precautionary approach to avoid the negative impacts on these biodiversity resourceshas been made. As a result, the ESHIA remains unfit for purpose.

Construction Violations and Fisheries Damage

SEIC’s stated commitment to your institutions to protect water and fisheries resources are betrayed by its actions on the ground. News media have recently published a number of leaked pictures from Sakhalin IIshowingreckless pipeline construction slashing through forests and turning streams muddy brown.[6] According to the WildSalmonCenter:

“These photos seemed to indicate a number of potentially serious lapses of quality control, including construction roads directly through streams, vehicle tracks through streams, bridges that obstructed stream flow, water flowing unchecked through construction sites, and small streams clogged with construction debris.”[7]

WildSalmonCenter also cited separate project violations, stating:

“Averina field surveys from 2003-2004 identified at least 121 river crossings at or within 100m of known spawning grounds. Although the project has passed the RussianStateexpertiza process, construction of pipelines through spawning areas and wintering pools is specifically and directly prohibited by the Russian Federal Law on Wildlife and related regulations. We are very concerned this construction violates Russian and US law and best practices.”

In addition, WildSalmonCenteralso expressed concerns about ongoing and unresolved problems associated with the lack of quality control over subcontractors, lack of adequate archiving of pipeline inspection records, lack of an oil spill response plan, construction schedule pressures, and increased poaching access resulting from the project.

Meanwhile, SEIC has begun to dump more than two million tons (2,390,200 cubic meters) of dredged materials into the central part of the AnivaBay, which provides 1/3 of the island’s commercial fisheries resources. Material dredged from the Liquid Natural Gas (LNG) plant jetty in Prigorodnoe is being dumped in the central part of AnivaBay at a depth of 63 meters. This part of AnivaBay isan important habitat for many of commercial species of fish, crabs and scallops. Dredged material dumped in the Bay will cover a significant part of the Bay bottom, smothering benthic organisms. Public hearings, several protests, and a petition signed by approximately 1,500 people demonstrate that local people and fishermen are strongly against the dumping soil into AnivaBay. The local population, fishermen and ecologists demand that dredged material be dumped away from the fisheries-rich Bay at a safer depth of 900 meters in the open sea. SEIC claimed to have studied this option but refused, claiming concerns about additional air pollution and potential for ship collision with marine mammals. SEIC shows no commensurate concern when it comes to air pollution and collision risks from its oil and gas export tankers.

Also SEIC does not have a positive conclusion of the State Ecological Expertise

for the“work project” to construct a jetty associated with the LNG jetty. The Federal Law, entitled, "AboutEcological Expertise," requires that a StateEcological Expertise be done for all "work projects."[8]

The leaked pictures of streambed destruction, Wild Salmon Center’s documentation of current and potential future violations to wild salmon habitat, recent investigations of illegal work projects, and harmful dumping in Aniva Bay provides clear evidence that your institutions cannot be assured that promises by SEIC to protect the fisheries of Sakhalin Island will be fulfilled. In the absence of any credible plan to end these violations, SEIC’s ESHIA and addendum are hollow commitments that cannot be considered to be fit for purpose.

Korsakov Community Impacts

SEIC initially assured your institutions that it knows how to undertake a project aslarge and complex as Sakhalin II. Therefore, it comes as a shock that it would commence construction of the enormous LNG plant without sufficienthousing and health services forarriving workers. As a result, several thousand imported workers needing housing and health services have descended on the community and surroundings of Korsakov, overwhelming the city’s housing, water, sewage and medical infrastructure. Inflation, rates of violence, sexually transmitted disease, and tuberculosis are on the rise. Meanwhile, heavy equipmentcauses serious damage and safety risks on the community’s transportation infrastructure.[9] SEIC’s stunning lack of planning at the project’s construction phase bodes poorly for anyhopesof compliance with requirements over the long-term phase of its operations.