The Scotsman: Shell seen clinching loan for Sakhalin: Friday 23 December 2005
By Tom Bergin, European Oil and Gas Correspondent
LONDON (Reuters) - Royal Dutch Shell will likely secure a loan from the European Bank for Reconstruction and Development (EBRD) for its Sakhalin-2 oil and gas project off Russia's Pacific coast, environmentalists and analysts say, but the real prize Shell seeks is not cash.
With oil around $60 a barrel, the world's third-largest listed oil firm does not need the $200 million (115 million pounds) to $300 million loan, which will only cover a small part of Sakhalin-2's $20 billion costs.
Shell's main aim is to win an environmental stamp of approval from the development lender for Eastern Europe and the former Soviet Union, analysts said. But issuing this may hurt the EBRD's own green credentials.
"It is very likely it will be a positive decision ... (but) we are sure that this project is absolutely not in compliance with the EBRD procedures," said Dmitry Lisitsyn, a campaigner with Sakhalin Environment Watch on Sakhalin Island.
Sakhalin-2 is one of the world's largest oil and gas projects, with more than 4 billion barrels of oil equivalent of recoverable reserves.
However, when Shell appraised the area, it discovered the waters around Sakhalin, which freeze over for half the year, were also home to the endangered Western Gray Whale. Previously, people did not know the whales were there.
Environmentalists fear the project will push them to extinction by damaging their habitat.
Green groups are also concerned that a plan to lay pipelines across seismic faults and more than 1,000 waterways will risk ground water pollution and destroy spawning grounds for salmon, on which the local economy relies.
Shell, which has said the project follows best environmental practice, had expected to secure the loan by now. However, the bank held it up because it was unhappy about the threat to the Gray Whale and damage to the waterways, EBRD officials said.
Last week, the EBRD finally allowed an amended development plan to proceed to the final stage in the loan-approval process -- a public consultation.
Most investments which get to this stage are approved, but, in a sign of matter's sensitivity, the bank insisted on a 120-day consultation period, rather than the usual 60 days.
IT'S NOT ABOUT THE MONEY
If the EBRD refuses the loan, other banks could also decline, fearing potential damage to reputation, and force Shell and its minority partners, Japanese companies Mitsui & Co. <8031.T> and Mitsubishi <8058.T>, to finance the project themselves, analysts said.
This would not scupper Sakhalin-2.
"It wouldn't affect the project economics .. It's more about credibility," said Jason Kenney, oil analyst at ING in Edinburgh, who expects the EBRD decision to "go to the wire".
The Shell-led Sakhalin Energy consortium is in difficult negotiations with the Russian government on whether Sakhalin-2's cost overruns will come from the state's share of revenues.
The Kremlin, whose state oil firms have a patchy environmental record at best, could use an EBRD refusal as a club with which to hit Shell in the talks, Kenney said.
Longer term, an environmental black mark against Shell's biggest project from such a prestigious body could make it harder for the Anglo-Dutch firm to win access to reserves, an area where its recent performance has worried investors.
"The ability to manage environmentally and socially complex projects is one of the reasons that host governments employ integrated majors," investment bank Citigroup said in a research note on Sakhalin.
An EBRD rejection would also be a severe dent to the socially responsible image Shell has cultivated in recent years and cast doubt on the firm's "profits and principles" mantra.
"It seems not to be about the financial transaction .. its the seal of approval that Shell wants," said Michael Bradshaw, Professor of Human Geography at the University of Leicester.
GREEN LENDER?
Bradshaw said the loan also poses "huge" reputational risks for the EBRD, whose mandate specifies care for the environment.
Non-governmental organisations (NGOs) have already accused the EBRD of breaching its own environmental policies and "caving into Shell" for not rejecting the loan application already.
"Their credibility is really on the line," Friends of the Earth (FoE) Sakhalin spokeswoman Mary Taylor said.
Anti-Sakhalin groups have dismissed Shell's plans to reroute a pipeline to avoid the whales' feeding grounds and promises that onshore waterway crossings will follow best industry practice in future, as insufficient.
Despite their pessimism, NGOs in Russia, Europe and the U.S. are planning to step up their protests over the next 120 days.
However, Sakhalin Energy CEO Ian Craig last month accused some NGOs of having no interest in seeing the project's environmental record improved. Craig believes their protests simply reflect their fundamen
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Last updated: 23-Dec-05 08:19 GMT
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