Resource exploration and environmental issues on Sakhalin Island
[This post was originally published in April 2012. My many thanks to Michael Pereltsvayg and Dave Howard for their help in working on this post!]
The Russian Far East is one of the world’s Last Great Wilds: home to numerous indigenous cultures, spectacular biodiversity, and one-of-a-kind ecosystems. But illegal logging, pirate fisheries, and reckless oil exploitation threaten this unique area. Sakhalin Island in particular has become a battleground between big Western oil companies, the Russian government, and environmentalist groups, with the Pacific salmon, gray whales, and the indigenous Nivkh people suffering collateral damage.
Sakhalin Island, which is so remote that Anton Chekhov, who visited it in 1893, called it “the end of the world”, is surrounded by a rich marine ecosystem. Its waters support the last one hundred or so western Pacific gray whales. The island’s river systems provide vital spawning habitat for six species of Pacific salmon. The traditional economy of the Nivkh people, as well as a large part of the regional economy in general, depends on salmon fisheries. Environmental and indigenous groups are extremely concerned by the rampant salmon poaching on Sakhalin, and anti-poaching efforts are currently underway. The Sakhalin area is also exceptionally rich in offshore oil and gas deposits. Billions of dollars have been invested by oil firms including Royal Dutch Shell and ExxonMobil in a series of nine projects at various stages of development (Sakhalin-1, Sakhalin-2, Sakhalin-3, and so on). The oil and gas sites are situated in relatively pristine areas, causing various groups to criticize the projects and the impact they have on the local environment.
Constructing pipelines through sensitive salmon spawning rivers is only one problem. Sakhalin lies in a highly seismically active zone: on May 28, 1995, an earthquake measuring 7.5 on the Richter scale killed some 2,000 people in the town of Neftegorsk. Furthermore, in winter, ice-sheets up to two-meter thick can easily crush a stationery offshore drilling platform. Such issues, as well as the need to attract massive foreign investment, led to the creation of the Sakhalin Energy Investment Company Ltd. (Sakhalin Energy), formed by the consortium of several Western and Japanese firms. Two of the original partners – McDermott and Marathon – sold or traded their way out of the consortium by 2000, leaving Shell, Mitsui, and Mitsubishi for a face-off with the Russian Federation.
While all of the Sakhalin enegy projects raise environmental concerns, the main drama focused on Sakhalin-2, an oil and gas development located both on- and offshore. Sakhalin-2 includes two platforms at the Piltun-Astokhskoye oil field and one at the Lunskoye natural gas field in the Sea of Okhotsk (see map), as well as associated infrastructure on the island, including the Trans-Sakhalin pipelines, an oil export terminal, and perhaps most importantly, the first liquefied natural gas (LNG) plant in Russia. Sakhalin-2 was born with the signing of the first Russian Production Sharing Agreement in 1994. Production began from the Molikpaq platform in the Piltun-Astokhskoye field in July 1999, with the first crude oil export starting in September of the same year. Originally, the Sakhalin Energy consortium had contracted to produce gas without a local partner, but due to the vital importance of the project, and especially the LNG plant, that situation was to change. Within a few years the wheels of big politics, big finance, and big business started turning, all on the axle of environmental concerns.
The three most significant environmental threats involve the last remaining western population of the gray whale, salmon fishing, and the condition of the region’s rivers and streams. The gray whales’ summer feeding grounds are close to the Sakhalin-2 offshore platforms in the Sea of Okhotsk. Mother whales and calves learning to feed are particularly reliant on this area. The whales flock here in the summer and early fall to fatten up before their long winter migration. Only about 120 western gray whales survive, of which only about 30 are reproductive females.. Scientists estimate that the death of just one breeding female each year for three years could be enough to lead to the species’ extinction. Several organizations, including the Western Gray Whale Advisory Panel (WGWAP), set up by the International Union for Conservation of Nature and the Far Eastern Regional Hydrometeorological Research Institute, are involved in monitoring the gray whale population and the potential risks it faces. Sakhalin Island’s coastal marine waters and inland freshwater streams, moreover, are vital spawning habitat for wild Pacific salmon. But the dumping of toxic drill cuttings off the coast has led to a massive fish kill, and irresponsible pipeline construction onshore has caused extensive erosion, contaminating and blocking many salmon migration streams.
Based on these issues, environmental groups, such as Pacific Environment, claimed in a petition that Sakhalin Energy’s environmental impact assessment was inadequate. Although a Russian court upheld this appeal in July 2005, Sakhalin Energy denied the claims, dismissing them as vague and inaccurate. The environmental and social concerns came to a head in November 2005, when the chief executive of the WWF (World Wildlife Fund), Robert Napier, asserted that Sakhalin-2 threatens both marine life and local communities. Sakhalin Energy responded to the WWF’s assertion by saying that the project meets lenders’ environmental and social policies. But in the same year, Royal Dutch Shell had to reroute an offshore oil pipeline to avoid whale habitat off of Sakhalin Island.
In early August 2006 Oleg Mitvol, the deputy chief of the Russian Federal Service for Natural Resources, announced that Sakhalin Energy failed to take all actions required to eliminate environmental dangers. This announcement was supported by President Vladimir Putin. In September of the same year, Sakhalin Energy briefly suspended construction work on its pipelines. The official reason for the suspension was violation of technical provisions by a subcontractor. Escaping attention in much of the Western media was the fact that the subcontractor, LLC “Starstroi”, is a Russian company whose involvement in the project was imposed on the Western partners by the Russian side of the Production Sharing Agreement. At the time, the controlling interest in Sakhalin Energy, 55%, was in the hands of Royal Dutch/Shell, with the rest shared by Japanese Mitsui (25%) and Mitsubishi (20%). Since 2005, Gazprom, Russia’s state-controlled energy giant, was negotiating with Shell for the transfer of 25% of the interest in Sakhalin-2. Already in 2006, many energy analysts believed that alleged violations of environmental regulations were a mere pretext by the Russian government to pressure Sakhalin Energy to sell a large stake in the project to Gazprom at a fraction of its true cost.Indeed, on December 21 of 2006, Gazprom took control over a controlling 50%-plus-one-share stake in the project by signing an agreement with Royal Dutch Shell, whose share has been reduced to 27.5% minus one share. Mitsui’s and Mitsubishi’s shares have also been cut back (to 12.5% and 10%, respectively). According to an article in The Telegraph, this change in ownership resulted from a “campaign of bureaucratic harassment against Royal Dutch Shell”. The same article also speaks of “Russia’s use of energy supplies as a political weapon [which] should be a wake-up call to Britain and the West to deal urgently with the threat”. That “Gazprom… forced the pro-Western former Soviet republic of Georgia to accept a doubling of gas prices” and “dramatically cut supplies and doubled the price of gas to out-of-favour Ukraine at the beginning of [2006]” were yet additional reasons for alarm.
Russian President Vladimir Putin attended the signing ceremony for the new ownership agreement in December 2006 in Moscow , indicating at the time that the environmental issues had been resolved. But is that so? Ecological controversy over Sakhalin-2 continues, as does the work of Pacific Environment and the WWF in the region: monitoring potential oil spills, petitioning oil companies to follow environmental regulations, and developing control measures during seismic surveys and construction works.
Perhaps even more ironically, Russia still lacks the expertise or the funds to finance the exploration of its oil and gas resources. Although the oil and gas sector generated more than 64% of Russia’s export revenues in 2007, the plunge in commodity prices in 2008 and the sharp reversal of Russia’s economy due to the financial crisis mean that it needs external funding and expertise to develop its fossil fuel reserves. Thus, Russia has been forced to invite Royal Dutch Shell to help develop two new oil and gas fields off Sakhalin Island, just three years after Russia’s government forced the company to cede majority control in the Sakhalin-2 project to Gazprom.
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