Harper Marshall

September 12, 2006

Whether environmental violations are the cause for the halt of the Sakhalin-2 project, or the environmental suit is only part of the Russian government's larger strategy to tighten control over the large oil and natural gas project, the result may lead to more stringent environmental regulations. The Russian Natural Resource Ministry (RNRM) sued the Royal Dutch Shell ("Shell") company to block the foreign-financed energy project on the Pacific island of Sakhalin. The project is unique, relative to Russian oil and gas projects, because it is wholly owned by foreign companies, namely Shell and Mitsubishi. The project's ownership structure is the result of a deal made in the early 1990s, just after the fall of the Soviet Union, and commentators have opined that since Russia is now "flush with oil revenues and wooed by international banks," the government can afford to challenge these kinds of agreements. Sakhalin-2 is attracting attention because of the project's potential to produce the equivalent of a third of China's gas needs and is seen as a major part of Shells' attempt to build its business in China and the rest of the region.

Although this seems more like a struggle over power for a major natural resource project and the huge profits that it will undoubtedly deliver, the RNRM cites environmental violations as the basis of its claim. These environmental concerns, while perhaps not the sole purpose for the suit, are certainly valid. The project involves the construction of two large offshore pipelines, which will affect salmon habitats and the feeding grounds for the endangered Western Gray Whale. The Russian regulators also cite a number of environmental issues concerning erosion and the lack of protective measures taken by the project's developers. If the RNRM prevails, Shell and the other foreign owners will have to reassess the environmental impact of the project, and most likely need to renegotiate the entire deal.

Therefore, from an environmental protection perspective, the underlying purpose of the suit is irrelevant, because the environmental issues are what will be debated in court and hopefully resolved. The Shell website states, "The project complies fully with Russian and international environmental standards and is introducing environmental best practice into Russia." Hopefully this is true, but if it isn't, the Russian court will ensure the environmental regulations are fulfilled and the Russian government may increase its control over the project as a by-product.

For more information, please see the following websites:

http://www.shell.com/ (search "Sakhalin II")

http://news.bbc.co.uk/2/hi/business/5315850.stm

http://www.bloomberg.com/apps/news?pid=20601085&sid=aFuUrktb3BjM&refer=europe