EBRD withdraws financial support for Sakhalin-2

Jan. 15, 2007
The European Bank for Reconstruction & Development (EBRD) will not offer financial support for the controversial Sakhalin-2 oil and gas project in Russia following the change in majority control of Sakhalin Energy Investment Co. (SEIC), the company behind the $20 billion proposal.

Uchenna Izundu
International Editor

LONDON, Jan. 15 -- The European Bank for Reconstruction & Development (EBRD) will not offer financial support for the controversial Sakhalin-2 oil and gas project in Russia following the change in majority control of Sakhalin Energy Investment Co. (SEIC), the company behind the $20 billion proposal. Over the past 5 years, EBRD had reviewed the project and was considering offering a $300 million syndicated loan to SEIC.

EBRD said, "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."

Gazprom paid $7.45 billion for a 50% stake plus one share in SEIC last December from the partners Royal Dutch Shell PLC, Mitsui, and Mitsubishi, changing the ownership structure in SEIC to Shell holding 27.5%, Mitsui 12.5%, and Mitsubishi 10%.

A Shell spokesman said, "EBRD's decision is no great surprise, since it reflects the fact that the approach to financing of the project has yet to be decided by the new shareholders, so that EBRD does not see the current financing package as feasible to pursue."

Environmentalists welcomed the announcement having lobbied the EBRD for the past 5 years to ditch financial support claiming that the project has breached environmental standards.

Dimitry Lisitysn, head of Sakhalin Environment Watch, said, "Environmental groups agree with EBRD that its value added was decreasing as the project comes closer to completion. We witnessed EBRD's environmental leverage diminishing last year when the project's negative impacts on the ground overtook Sakhalin Energy's rhetoric to the contrary."

Nevertheless, a number of other lenders—export credit agencies from Japan, the UK, and US, and ABN Amro, Royal Bank of Scotland, and Mizuhoare—are yet to decide on whether they will invest in Sakhalin-2 or not. Environmentalists have urged them to follow EBRD's lead and abandon the project.

Chris Weafer, Chief Strategist at Russia's Alfa-Bank, told OGJ that EBRD's pullout would not have any major effect on Sakhalin-2's future. The project was no longer within the EBRD's remit because Gazprom's majority control meant that its status had changed from development to one of state-control, he added. "Gazprom's role will accelerate the process of Sakhalin and the partners can earn money quickly from the oil and gas. They can go out and borrow money from other banks on terms as good as EBRD's and at very favorable rates."

Contact Uchenna Izundu at [email protected].