Environmental Groups Call on Royal Bank of Scotland to Recall Loan on Sakhalin II oil and gas project

Erosion on Sakhalin Island

Nineteen local and international environmental organizations called today on Sir Fred Goodwin, CEO of Royal Bank of Scotland (RBS), to recall a controversial $1 billion loan by ABN AMRO for the Russian energy giant, Gazprom’s purchase of a controlling share of the enormous Sakhalin II oil and gas project in Russia.[1] Sakhalin II has caused many severe environmental problems and violates the Equator Principles, to which RBS has signed.  The groups also request to meet with Goodwin.  RBS leads a consortium of banks that purchased ABN AMRO in 2007.[2] 

Environmental groups opposed ABN AMRO financing for Sakhalin II because the project threatens the Western Gray Whale with extinction, damages hundreds of wild salmon runs, and negatively impacts local communities.

“When RBS bought ABN AMRO, it acquired the bank’s assets and liabilities, including financial and reputational, and thus the responsibility to address the wrongful financing of Sakhalin II,” said Dmitry Lisitsyn, Chairman, Sakhalin Environment Watch.[3]

Environmental groups and independent consultants of potential lenders, including the European Bank for Reconstruction and Development [EBRD] have for many years documented Sakhalin II’s severe, chronic and irreversible violations of bank environmental policies.  For private banks, this includes the Equator Principles on environmental performance, which both RBS and ABN AMRO have committed to follow.  EBRD eventually withdrew its consideration of Sakhalin II while many other banks suspended consideration of the project due to environmental problems.

“At the 2005 ABN AMRO Annual Meeting, Chief Executive Officer Rijkman Groenink committed to not finance Sakhalin II until it was brought into compliance with the Equator Principles,”[4]  said Paul de Clerck of Friends of the Earth International, who was at the 2005 ABN AMRO Annual Meeting where the commitment was made. “So, it came as a complete shock when the bank circumvented the Principles by financing Sakhalin II through one of the project sponsors.  RBS must now take responsibility to correct this damage.”

“The buck now stops at RBS,” said Doug Norlen, Policy Director, Pacific Environment.


Text of the letter follows below.

-end-

Notes:

 [1]  See ABN Amro slammed for $1 billion Sakhalin II deal, Environmental Finance, London, 26 April, 2007.

[2] Other banks involved in the ABN AMRO acquisition are Fortis and Santander.

[3] Sakhalin Environment Watch is the lead Sakhalin Island-based group confronting the environmental problems of Sakhalin II.

[4] This commitment was made to environmental organizations by Mr. Groenink during questions and answers at the ABN AMRO 2005 Annual Meeting.



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January 17, 2008

Sir Fred Goodwin
Chief Executive Officer
Royal Bank of Scotland (RBS)

Dear Sir Fred,

We, non-governmental organizations, write to request that you exercise your leadership to resolve environmental problems associated with the ABN AMRO-financed Sakhalin II project in Russia.  As elaborated below, we call on you to recall financing for Sakhalin II and we request to meet with you at your earliest convenience to discuss ways to remedy this and future violations of your banks’ environmental and social policies and responsibilities. 

Sakhalin II is said by project sponsor, Sakhalin Energy Investment Corporation (SEIC) to be the largest integrated oil and gas project in the world, with construction costing over $25 billion.  Unfortunately, Sakhalin II is also associated with severe environmental impacts and risks, namely:

• The project’s off-shore platforms and subsea pipelines threaten the critically endangered Western Gray Whale population;
• Eight hundred kilometers of the project’s on-shore pipelines have created severe erosion that has damaged hundreds of wild salmon runs and threatens future damage from poorly designed crossing of scores of varied geohazards;
• Fishing communities and indigenous groups have taken direct action to protest project impacts on fisheries resources and traditional livelihoods; 
• Community groups say the project has led to high inflation in housing costs, increased violence and the spread of sexually transmitted diseases; and
• The project poses unacceptable long-term risk of oil spills amidst treacherous weather and ice despite the fact that the oil industry, including SEIC, has no successful experience of responding to oil spills in ice conditions.   Meanwhile, SEIC’s complete oil spill response plans have been concealed from the public. 

The Sakhalin II environmental assessment process has been widely regarded as a failure.  Potential lenders’ consultants and independent experts have confirmed that environmental assessments were not fit for public consultation until the project was already deep into the construction phase. Sakhalin Energy also failed to collect sufficient baseline data, failed to develop adequate preventative measures, disclose information required to conduct a timely review, follow many recommendations of empanelled whale experts, and violated many other lenders’ policies and the project’s required Health, Safety, Environmental & Social Action Plan.

In just the most recent example, a November, 2007 Western Gray Whale Advisory Panel report provided additional evidence of violations.[1]  These include:

• “[T]he overall effectiveness [of the required Marine Mammal Observer program] was probably quite low;”
• “Suitable tests of the behaviour of Vityaz crude oil have not been performed in the marine environment, and the Panel considers the absence of such tests to be a significant shortcoming in preparations for oil spill response;”
• “SEIC has chosen to interpret the evidence [concerning behavioural response of whales to noise and population-level effects of industrial activities] in a decidedly non-precautionary manner;”
• “Data provided by SEIC indicate that the Panel’s recommended criteria for continuous noise (WGWAP-2) were breached by construction activities during the summer of 2007. At least one part of the feeding area was ensonified above 120 dB for >4 hours,” and “the dose-exposure criteria recommended by the Panel (WGWAP 2/INF.15) were violated by the noise levels recorded at least at three monitoring stations;”
• The Panel was unable to conclude its analysis of the negative impacts “from the ‘noisy’ events of 2007” because of “absence of systematic data” provided by SEIC; hence the company subverted the Panel process by failing to present the data that scientists needed to perform their required function.     

In October, 2007, Sakhalin Energy announced that a new consultant report by AEA for potential lenders gave the project a “clean bill of health.”  However this report actually reveals, amongst other things, systematic and chronic violations of policies and standards of international lenders. The project is now 90% complete, and it is too late to prevent past impacts on endangered species such as western gray whale, steller's sea eagle and Sakhalin taimen (salmon) as documented by the potential lender's consultant.[2]

On December 20, 2007, the Russian environmental enforcement authority, Rosprirodnadzor, notified SEIC that the full damage to forest resources from onshore pipelines was calculated as 390 million rubles (around $16 million) and that failure to pay may result in court action. 

Since Sakhalin II positioned itself as a precedent-setting Project Finance scheme, leading banks have committed to applying the Equator Principles environmental and social safeguards as a condition of financing.  The failure of Sakhalin II to meet the Equator Principles has become a fundamental test of the credibility of potential financiers’ commitments to the Principles.  Indeed, the project’s failure to achieve compliance with the Equator Principles has led some private banks to decline participation and others to suspend their financing decision for several years.  Concurrently, public banks, including the European Bank for Reconstruction and Development (which no longer considers the project for financing) and the Export Credit Agencies of the UK, US and Japan have delayed their financing decisions on Sakhalin II for five years based on a chronic inability of the project to comply with their environmental policies.  These violations contribute to public opposition to financing that was voiced by the vast majority of participants at EBRD public consultations held in 2006 at Sakhalin Island, Moscow, Sapporo and London.    

Environmental organizations have secured commitments from the highest levels of ABN AMRO, including public promises made at its 2005 Annual Meeting by Chief Executive Officer Rijkman Groenink, that the bank would not finance Sakhalin II until it can demonstrate compliance with the Equator Principles and until after significantly more consultation with our organizations occurs.  Hence, it came as a complete shock to our organizations when in 2007 ABN AMRO quietly financed Gazprom’s purchase of a controlling share of Sakhalin II.[3] 

Your banks’ purchase of ABN AMRO obviously results in the acquisition of ABN AMRO’s assets and liabilities, both financial and reputational.  Hence, your banks must now assume responsibility for ABN AMRO’s wrongful circumvention of the Equator Principles through the non-transparent financing of Gazprom’s stake in Sakhalin II.  It is incumbent upon you to now review the project’s ongoing risks and Equator Principles violations, to indicate to us how the new banking group will respond to these violations, and to begin to rebuild the trust of our organizations by correcting ABN AMRO’s transgressions.  To this end, we believe that ABN AMRO’s financing of the projects should be recalled, and we call on your banks to professionally review this financing and to publicly acknowledge transaction details regarding the level of Gazprom’s social and environmental liabilities under this deal as well as any evidences of the project’s current compliance with the Equator Principles.

All financial decisions made by any Equator Principle Finance Institution should occur only after compliance with the Equator Principles can be demonstrated, and should be transparent, publicly announced and open for discussions.   This did not occur with ABN AMRO financing of Sakhalin II.  Meanwhile, the international NGO coalition campaigning on Sakhalin II has requested a set of round-table discussions and consultations with Gazprom, however the company has not agreed to this request.  This experience is contrary to previous meetings with other project sponsors that were encouraged by prospective lenders.   

We would like to request a meeting with you at your earliest convenience to advance progress in resolving these issues.  For scheduling, please contact Doug Norlen, Pacific Environment, +1 (202) 465-1650, dnorlen@pacificenvironment.org.

Sincerely,

Dmitry Lisitsyn
Chairman
Sakhalin Environment Watch
Russia

Johan Frijns
Coordinator
BankTrack
The Netherlands

Dr. Andreas Missbach
Private Finance Programme
Berne Decaration
Switzerland

Antonio Tricarico
Campagna per la Riforma della Banca Mondiale
Italy

Petr Hlobil
Campaigns Director
CEE Bankwatch Network
Czech Republic

Darek Urbaniak
Extractive Industry Campaign
FOE Europe
Belgium

Paul de Clerck
Coordinator Corporate Campaign
Friends of the Earth International
The Netherlands

Naomi Kanzaki
Development Finance and Environment Program
Friends of the Earth, Japan

Sébastien Godinot
Campagne acteurs financiers
LES AMIS DE LA TERRE (Friends of the Earth)
France

Grigoriy Tsidulko
Campaigner-Whales
International Fund for Animal Welfare
Russia

Nick Hildyard
The Corner House
United Kingdom

Doug Norlen
Policy Director
Pacific Environment
United States

Mika Minio
PLATFORM
United Kingdom

Jan Cappelle
Proyecto Gato
Belgium

Becky Tarbotton
Director, Global Finance Campaign
Rainforest Action Network
United States

Regine Richter
Urgewald
Germany

James Leaton
Senior Policy Advisor
WWF UK

Volker Homes
Head Species Conservation Section
WWF Germany and TRAFFIC Europe-Germany

Huub Scheele
Both ENDS
The Netherlands

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[1] Report of the Western Gray Whale Advisory Group at its Third Meeting, convened by the International Union for the Conservation of Nature in Lausanne, Switzerland, 10-13 November, 2007.

[2] Material Breach:  A Review of AEA’s Independent Environmental Consultant Final Report to Agency Lenders Regarding Sakhalin II, Phase 2, November 7, 2007, Pacific Environment, WWF, Sakhalin Environment Watch, available at http://www.pacificenvironment.org/downloads/Material%20Breach%20-%20Review%20of%20AEA%20Report_PE_SEW_WWF.pdf

[3] Environmental Finance, ABN AMRO slammed for $1 billion Sakhalin deal, April 26, 2007