Inward Investment and Sustainable Development in Russia: The Case of the Sakhalin Oil and Gas Projects

In a recent lecture at the Kennan Institute, Michael Bradshaw, Professor of Human Geography, University of Leicester, United Kingdom described the status of the oil and gas projects underway on Sakhalin Island, and the effectiveness of local and global environmental NGO campaigns to influence or impede those projects.

Sakhalin, with a population of about 530,000, has the third highest amount of foreign direct investment as a region of the Russian Federation, and the highest on a per capita basis. Projects on the island are identified by number, which refer to lots or acreage under license for exploration and development. A different consortium of companies manages each project. Sakhalin 2 (S2), the most advanced, is managed by Shell, Mitsui, and Mitsubishi. Sakhalin 1 (S1) is managed by ExxonMobil and several other partners that include Japanese, Russian, and Indian firms. S1 and S2 are two of the three projects in operation in Russia that are governed by a Production Sharing Agreement (PSA), which provides greater security for investors. Though widely criticized now as a gift to foreign oil companies, Bradshaw stated, the PSAs were necessary when they were signed in 1994-95 to attract investment at a time of low oil prices and high political risk.

S2 production of oil began in 1999 as part of "Phase 1" of the project. It is producing 12 million tons of oil per year for export to the Asia Pacific, but due to ice conditions the offshore oil rig can only operate six months each year. "Phase 2" of the project will be a $20 billion investment in year-round production of oil and liquid natural gas (LNG) for export. According to Shell, this will be the largest integrated energy project in the world. S1 takes a different approach—it will employ horizontal drilling technology onshore from the world's largest mobile land rig. S1 will build a pipeline to the mainland for regional gasification (and eventually to for export to China), and will export oil year-round by using icebreaker ships.

These projects, and the other less advanced projects on Sakhalin, have attracted the attention of global environmental NGOs (GENGOs). Bradshaw listed some of their concerns: the planned pipeline routes will cross thousands of watersheds; exploration and drilling offshore will have unknown effects on whale and fish populations; and the effects of the projects on local biodiversity. The GENGOs cooperate and support local environmental groups on Sakhalin Environment Watch, Bradshaw stated, but the two groups have different priorities. The local groups emphasize the use of "best practices" rather than opposing development, and are more concerned about the impact of the projects on the local population (30 percent of the population is dependent on fishing). While the GENGOs have adopted an anti-oil, anti development approach.

Bradshaw noted that one strategy of the GENGOs has been to coordinate campaigns targeting financing of the Sakhalin projects. International financial institutions (IFIs) such as the European Bank for Reconstruction and Development provide not only funding, but also a stamp of credibility on projects that help in attracting additional financing on favorable terms. IFIs also have environmental sustainability clauses in their charters that preclude financing environmentally damaging projects. Bradshaw added that many private banks now use the "Equator Principles," a voluntary set of guidelines for managing environmental and social issues in project finance lending of projects with a capital cost of $50 million or more.

S2, which is more reliant on outside financing, will be an interesting test case for the "greening of project finance," according to Bradshaw. The project is in compliance with Russian legislation, but the GENGOs are bringing more stringent global practices into play. Bradshaw commented that while the Russian government has tolerated the pressure environmental groups have placed on foreign oil companies; it will be less tolerant if the general development of Russian energy sources is impacted.