Following a significant change in the ownership of the Sakhalin Energy Investment Company, the EBRD will no longer consider the financing package of the Sakhalin II project that it had been considering for the past five years. If the new group of shareholders were to request it and make a case that the project could be eligible for EBRD investment, the bank could consider financing in the future. The closer the project comes to completion, however, the less value EBRD financing could add.

With the recent acquisition by the Russian company Gazprom of a majority stake in Sakhalin Energy, there has been a significant material change to the project which the EBRD had been considering. The shareholders and the structure of the company have changed and the approach to financing has yet to be decided by the new shareholders, meaning that it is not feasible for the EBRD to pursue the current project.

In 2001, the shareholders of Sakhalin Energy – Shell, Mitsui and Mitsubishi – asked the EBRD to partially finance Sakhalin II, which will produce offshore gas and oil from Russia’s far eastern coast. Much collaborative work was undertaken with Sakhalin Energy to ensure the project could meet the expectations – especially environmental standards – of EBRD financing, but the bank had not taken any decision on whether to make the investment.

The EBRD declared a year ago that the project met sufficient requirements for the bank to seek the views of the public and conducted an intensive consultation process in Russia, Japan and London. For the past year, pending a decision on whether to finance, the EBRD has continued to monitor construction and encouraged the adoption of long-term safeguards, especially related to environmental and social aspects of the US$20bn project.

The EBRD saw its potential role in Sakhalin II as a financial partner to encourage the highest standards of environmental protection in the design and construction phases of the project, which includes offshore drilling and underwater pipelines to Sakhalin Island, land pipelines for oil and gas, a liquefied natural gas plant and oil and gas export terminals.

Through its engagement in the development of the project, the EBRD has helped to introduce commitments to consultation, transparency and treatment of indigenous people. The EBRD has worked with Sakhalin Energy on many enhancements during the construction phase: Sakhalin Energy rerouted pipelines to accommodate the rare Western Gray whale that feeds in the region; a panel of recognised whale experts was established to monitor and advise on operations; significant improvements were introduced to the strategy for onland pipeline construction, especially the environmentally sensitive crossings of some 1000 rivers; and Sakhalin Energy adopted a standard-setting plan for treatment of indigenous peoples as well as transparency and consultation.

The EBRD made about one-third of its investments last year in Russia, more than any other country among the 29 countries where the bank operates. Russia’s share of EBRD investments is forecast to continue to increase in 2007.