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Russia: Addendum to the Letter to OPIC, Dec. 2001

Broken Commitments: Sakhalin II and Ongoing
Environmental, Social and Economic Problems

Historical Context:

The project area around Sakhalin II has a very high concentration of marine biodiversity including one of the richest fisheries on the Pacific Rim and 25 marine mammal species, including 11 endangered species (most notably the Western Pacific Gray Whale). In addition to its value in terms of biodiversity, this fishery is also a critically important resource for the local fishing industry, one of the most economically robust of its kind left in Russia. Indeed, as much as 70% of the seafood products caught in Russia are harvested in the Sea of Okhotsk and the economy of the Russian Far East has long been dependent on healthy fisheries. The threat of impacts from a potential catastrophic oil spill associated with drilling and transport of oil, and of "normal" chronic daily discharges from the operation, are an unacceptably high risk to this environment and economy. The fact that Sakhalin II is in an area of very high seismic activity increases these risks still further.

When the US Overseas Private Investment Corporation (OPIC), European Bank for Reconstruction and Development (EBRD), and the Export-Import Bank of Japan (JEXIM) considered financing the first phase of Sakhalin II, vigorous engagement and advocacy by local, national and international Non-Government Organizations (NGOs) ensued. These NGOs documented the inherent risks of the project to the environment and the local economy and the fact that the project was failing to perform adequate public consultation and proceeding illegally under Russian law because of its failure to undergo a required Ecological Expertiza (environmental impact review), part of Russia's environmental due diligence process. In response, these institutions delayed disbursement of the loans that they had committed until the Ecological Expertiza was completed and they conditioned this disbursement on the eventual development of an oil spill response plan and an Environmental Action Plan. In so doing, many board members of these public finance institutions expressed serious concerns about large gaps in the information presented by project sponsors on environmental issues and about pressure placed on the bank by project sponsors. However, in the end the decision to support the project was made because of the potential economic benefits the project would purportedly bring to the region.

Despite repeated NGO engagement, Sakhalin Energy Investment Company and the International Finance Institutions supporting the project have failed to meet their commitments to ensure adequate environmental protection, public consultation and transparency, and local economic benefits from the project. Examples include:

Decrease in Fisheries Populations in Northeastern Sakhalin

Prior to development of the first phase of Sakhalin-II, environmental groups, fishermen, and native groups raised concerns about potential impacts to fisheries offshore of northeastern Sakhalin. According to the State Committee of Fisheries, experts who participated in environmental impact reviews of the oil projects, and materials from SakhNiro in previous years, the waters of northeastern Sakhalin are rich and diverse with various species of marine biological resources. These waters are key migration, rearing or spawning areas for key commercial species upon which the fishing industry of Sakhalin and the entire Russian Far East are dependent, including salmon, crab, pollock, and herring, as well as for saffron cod, which plays a large role in the traditional food of the native Nivkh people.

In response to these concerns, EBRD stated,

"Mitigation measures found to be effective in other oil and gas production projects and those required by various regulations have been incorporated into the design of SEIC's facilities and operations. Site specific features of the environment have been considered and addresses, including …commercial fishing operations…These technologies and techniques have been proven to minimize potential environmental impacts in oil and gas operations in other parts of the world, including those with similar environmental conditions."

Yet in the last three years, since the start of the first phase of Sakhalin-II, the harvest of saffron cod, a large part of the traditional diet for native Nivkhi, has significantly dropped in Northeastern Sakhalin. In interviews with native peoples, local fishermen working throughout Northeastern Sakhalin, and local government fisheries inspectors, all noted this sharp decrease of saffron cod. Saffron cod spawns in the bays of northeastern Sakhalin and migrates, feeds, and rears along the shelf offshore of Northeastern Sakhalin, near to the oil projects. There has been no analogous decrease in commercial saffron cod harvest in other areas of Sakhalin.

Herring populations in northeastern Sakhalin have suffered even more significantly. In June 1999 - after Sakhalin-II's Molikpak platform started operations - an enormous herring die-off was reported in Piltun Bay, in Northeastern Sakhalin. Such a herring die-off has never before been reported in the region. A scientific review concluded that as much as 11,000 tons of herring could have died; environmentalists believe that at least 5,000 tons of herring were killed. An investigation by non-governmental organizations with the assistance of scientific laboratories found petroleum products and substances found in drilling muds used on the Sakhalin-II Molikpak platform in the dead herring. The next year, in 2000, fishermen were only able to catch 40 tons of herring - 4.5 times lower than both the allowable catch and the amount of herring that has usually been harvested in previous years.

It appears that leading International Finance Institutions supporting Sakhalin II believed that adequate and ongoing monitoring of potential impacts to fisheries, and adequate public consultation and disclosure of information would be conducted by Sakhalin Energy Investment Company. In 1997, EBRD stated:

"As part of the EIA monitoring, Sakhalin Energy has developed a detailed program to assess the effectiveness of the prevention, design and mitigation measures. The monitoring program addresses both the specific impacts on the area around the facilities (e.g. effluent discharges, dredging and physical displacement) and those of the regional environment (e.g. whale migrations, bird populations and fisheries)…Monitoring of the PA Field environment will continue to be performed…Information on fish, bird, and marine mammal resources will be required on an ongoing basis in order to ensure that any adverse conditions are promptly recognized and that potential project-related causes can be investigated…In order to be certain that no negative impacts occur, however, information is needed to supplement the information which will be collected near the platform as described. SEIC is committed to supporting and working with the appropriate Russian ministries to identify the types of population-level data which would be of value and to help ensure that programs are in place to obtain and distribute data on the biological resources in the project area. Monitoring of the regional environment includes…ongoing surveys of fisheries data.

Concurrent to this, EBRD stated:

"…(T)he Board was informed that SEIC is undertaking further public consultation…SEIC has developed an ongoing public information and consultation programme regarding the Phase I Project and the larger Sakhalin II development."

About the same time, Sakhalin Energy Investment Company stated:

"With respect to (NGO) concern over the duration of the review process, we see the latest Public Consultations as not the only review but merely another step in an ongoing series of consultations with the people of Sakhalin Island."

Soon after, Sakhalin Energy Investment Company stated:

"The Sakhalin Project is moving ahead with the cooperation, support and participation of the people on Sakhalin Island. Our program of public participation will continue after this period consultation. We recognize it is in everyone's best interest to involve the people of Sakhalin Island in every phase of our project planning and execution and we are doing just that."

Also, the US Overseas Private Investment Corporation's required Environmental Action Plan for Sakhalin II states:

"Sakhalin Energy is responsible for responding to public concern regarding project HSE (Health, Safety and Environment) issues."

Shortly after the herring collapse, the Sakhalin-based non-governmental organization, Sakhalin Environment Watch, requested that appropriate government ministries seek answers concerning whether the operations of Sakhalin II were in any part responsible. Unfortunately, these government agencies did not carry out a full investigation of the herring kill and did not test the herring for petroleum products and substances found in drilling muds. Further, the government agencies were unable to provide any other realistic cause for the herring die-off. Meanwhile, an independent analysis by Sakhalin Environment Watch indicates that pollution from Sakhalin-II was in fact the most likely cause of the herring die-off. However, Sakhalin Energy Investment Company rejected requests from Sakhalin Environment Watch to provide a sample of oil from this specific portion of the project area that could have proven or disproven this analysis. Thus, Sakhalin Energy ensured that it would be impossible to prove whether or not the Sakhalin-II project was or was not a cause of this disastrous herring die-off.

Given the possibility that oil pollution is causing harm to these economically and ecologically importance fisheries resources, the failure of Sakhalin Energy Investment Company to meet its commitments to provide critical environmental information to government agencies and the public is suspect. Therefore, the signatory organizations do not believe that oil development in this region should expand until the oil companies can guarantee the continued health and viability of fisheries populations, including restoration of previous populations of herring and saffron cod and the provision of adequate and timely monitoring data to government agencies and to the public.

Inadequate Access to Information and Lack of Transparent Monitoring

As stated in the section above, EBRD and Sakhalin Energy Investment Company have committed to rigorous monitoring and public consultation on Sakhalin II. Yet despite repeated claims that it will share information with the public, Sakhalin Energy Investment Company has repeatedly shown its lack of corporate responsibility by not providing interested citizens with information and documents about its activities.

For example, despite repeated requests, Sakhalin Energy has refused to share its official "Declaration of Industrial Safety." Citizens have been unable to review a copy of the Production Sharing Agreement for Sakhalin-2. Sakhalin Energy Investment Company has not made public the annual environmental audits that it must submit under contract to public financial institutions. Sakhalin Environment Watch has not been able to review the various offshore environmental monitoring studies that have supposedly been completed by Sakhalin Energy. Sakhalin Environment Watch has not been able to review company studies of damages to fisheries resources from Sakhalin-2. And Sakhalin Environment Watch has not been able to review the gray whale monitoring studies financed by Sakhalin Energy.

When Sakhalin Environment Watch has been allowed to review these reports, it has often been told that it can review documents only in the offices of Sakhalin Energy and is not allowed to photocopy the documents - making any serious review or analysis of scientific documents impossible. Furthermore, Sakhalin Energy has demanded that Sakhalin Environment Watch sign a requirement that it would not distribute any information that could be seen in the Declaration of Industrial Safety - even though Sakhalin Environment Watch, as a public organization, is dedicated to providing accurate information to the public about environmental issues. Such a demand from Sakhalin Energy makes environmental organizations concerned that the Sakhalin Energy is attempting to hide the project's threats to the environment.

Sakhalin Energy blames its obligations under the Production Sharing Agreement for its inability to share information with the public. Sakhalin Energy claims that the Russian government prevents it from sharing such environmentally relevant information. However, the Russian constitution guarantees citizens' rights to information about the environment; thus, Sakhalin Energy's claims contradict Russian law.

Our organizations believe that the Sakhalin-II project should not be expanded until Sakhalin Energy Investment Company proactively shares all relevant information about the Sakhalin-II project - including the Production Sharing Agreement, the Declaration of Industrial Safety, annual environmental audits, and all monitoring reports for fisheries, environmental monitoring, and gray whales, with the public. Sakhalin Energy Investment Company should also provide to the public all information about oil spills occurring at Molikpak and other Sakhalin-2 project sites (the FSO, shuttle tankers, underwater pipeline), all information regarding discharge of wastes (amounts and times), as well as all information about polluting substances. Sakhalin Energy Investment Company should commit to providing all information to the public in paper or electronic form, upon request.

Discharge of Drilling Muds and Cuttings Into the Sea

According to the EBRD:

"Whenever possible, the highest level of environmental protection improvements have been included in the project design."

EBRD also stated:

"SEIC has incorporated specific environmental mitigation measures into project planning, design, construction, and operation. By incorporating the best available technology and using the most appropriate techniques for construction and operation, taking into account the harsh environment on the area, potential environmental impacts can be prevented or minimized."

Yet Sakhalin II has not met the highest level of environmental protection, incorporated best available technology, or used most appropriate techniques to prevent or minimize environmental harm. Sakhalin Energy Investment Company has been repeatedly criticized for its discharge of drilling muds and cuttings into the biologically rich waters offshore of Sakhalin Island. According to initial project documents, Sakhalin Energy Investment Company planned to dump 70,000 tons of drilling muds and cuttings over the first two years of the project. These drilling muds can pollute biologically rich waters and smother fisheries spawning grounds.

In an independent analysis, commissioned by Sakhalin Environment Watch, of worldwide practice for disposal of drilling muds and cuttings, Dr. Jonathan Wills concluded: "The discharge of any drilling wastes into shallow, inshore waters, similar to the Sakhalin shelf, is discouraged by European and North American governments and, in most areas, effectively banned."

Sakhalin Energy Investment Company disputes these claims, arguing that its use of water-based muds (WBMs) is environmentally better than the use of oil-based muds (OBMs). Yet Dr. Wills argues, "Despite being less noxious than OBMs and SBMs, WBMs have ecological effects that may be more serious, widespread and prolonged than some industry sources would suggest. In particular, the effects of underwater plumes of extremely fine particles are not properly understood and may damage larval stages of commercial fish and shellfish."

Sakhalin Energy Investment Company has an appropriate alternative for disposal of its drilling muds and cuttings that meets best available technology and best international practices. Dr. Wills writes, "Proven technology exists to re-inject and contain contaminated drill cuttings in underground reservoirs….Sea dumping is environmentally damaging, technically unnecessary and, because of unquantified, long-term liabilities, may even be more expensive than offshore re-injection or onshore disposal."

When the Sakhalin-II project began, Russia's Water Code banned the discharge of drilling wastes into the waters offshore of northeastern Sakhalin. However, the Production Sharing Agreement (PSA) specifically excluded the Sakhalin-II project from these important environmental regulations. Nonetheless, environmental groups argue that the Sakhalin-II project should have followed Russia's Water Code, which banned discharges into this important fishery.

Sakhalin Energy Investment Company is making progress in re-injecting its wastes. For its new wells, Sakhalin Energy plans to re-inject between 40% and 70% of its wastes. This commitment shows that it is technically possible for the project to re-inject its wastes. Given the importance of this fishery and the Sea of Okhotsk, we believe the Sakhalin-II project should not move into phase II without a commitment to 100% re-injection of drilling muds and cuttings - moving the project to the environmentally best "zero discharge."

Increased Danger of Oil Spills

In 1997, EBRD stated:

"SEIC has incorporated specific environmental mitigation measures into project planning, design, construction, and operation. By incorporating the best available technology and using the most appropriate techniques for construction and operation, taking into account the harsh environment on the area, potential environmental impacts can be prevented or minimized."

EBRD went on to state:

"The potential release of oil into the environment during all activities represents a critical concern regarding oil and gas development, especially in remote regions...If a release were to occur, state of the art equipment and trained personnel will be utilized to respond and recover the oil before extensive impacts to the environment occur...Although the (Oil Spill Prevention Plan) will be in place throughout the life of this project, it is a living document that will be revised over time to meet the specific needs of each phase."

Meanwhile, the US Overseas Private Investment Corporation's required Environmental Action Plan for Sakhalin II states:

"HSE (Health, Safety and Environment) documents, including the EAP (Environmental Action Plan, which includes Oil Spill Prevention, Mitigation and Response) will be updated as required, and an annual review will be conducted of the HSE system."

Since "first oil" was produced at Sakhalin-II in 1999, environmentalists, fishermen, and native communities have been concerned about the lack of oil spill prevention and response mechanisms that meet world standards, much less best available technology, that this rich and delicate marine environment and fisheries resource warrants. Given the difficult climate and weather conditions of the Sea of Okhotsk, along with the great value of marine biological resources, an oil spill anywhere along the coast of Sakhalin - or close to Japan, from a transport tanker - would be disastrous.

One significant spill - in September 1999, from the Sakhalin-II production complex - has already been reported. Environmental groups are concerned about rumors of at least two more large spills that remain unconfirmed.

In response, Sakhalin Environment Watch and Pacific Environment brought independent consultants with a background in oil spill prevention and response from Alaska and the North Sea to review Sakhalin's standards for spill prevention and response. These consultants have direct experience with the Exxon Valdez and The Braer spills in Alaska and the North Sea and have played important roles in strengthening prevention and response standards in both those regions.

The report, Sakhalin's Oil: Doing It Right, made 78 recommendations, including key and basic recommendations such as:

- The Russian Government's marine surveyors should thoroughly inspect shuttle tankers on arrival;
- A comprehensive vessel traffic risk assessment of the entire Sakhalin coast is required;
- The identity, position, course and speed of all oil tankers around the coast of Sakhalin and the Kuril Islands should be continuously monitored by the Russian authorities;
- The state marine rescue services should include a tanker traffic advisory notice in their regular weather broadcasts;
- Russian border guards should do random alcohol screening of shuttle tanker crews;
- Shipping lanes and areas to be avoided should be marked on nautical charts and enforced for tankers trading to Sakhalin;
- Escort tugs should accompany all large tankers navigating the La Perouse Strait or other constricted waterways;
- To assist disabled tankers, a second Neftegas-class tug is required on station in the offshore oil and gas fields, also to act as an escort.

Despite the commitment stated in EBRD and OPIC documents that the Oil Spill Response Plan is a living document to be revised and upgraded over time, that oil spills have subsequently occurred, and that international expert review and recommendations have been provided to the company, very few of these basic recommendations have been implemented. For example, Sakhalin Energy Investment Company has resisted efforts by the Korsakov Port Administration to inspect all tankers upon arrival at the Sakhalin-II complex - despite the fact that such inspections are called for under the Tokyo Memorandum. These inspectors also complained about the use of at least two extremely old tankers in 2000 for transporting oil from the Sakhalin-II complex. Furthermore, Sakhalin Energy does not have necessary permits for piloting escort in Russian waters. This means that oil tankers leaving the Sakhalin-II complex continue to present a high risk for a catastrophic oil spill, potentially as serious as the Exxon Valdez disaster.

The lax effort by Sakhalin Energy Investment Company and Sakhalin governmental authorities to increase the oil spill prevention and response standards in Sakhalin raises significant concerns about the risk of the Sakhalin-II project. Although future oil and gas transport is planned to be conducted out of Prigorodnoye in southern Sakhalin, many of these same concerns - including lack of tanker routes, lack of inspection, and lack of escort tugboats - remain. Indeed, as Phase II of the Sakhalin-II project is implemented, tankers will leave directly into La Perouse Strait, a waterway crowded with transport and fishing vessels, so the risk of a major accident will remain or increase.

Our organizations remain concerned that Sakhalin II has apparently failed the commitment to upgrade its Oil Spill Prevention, Mitigation, & Response Plan, and thus its commitment to meet the highest level of environmental protection, incorporate best available technology, or use most appropriate techniques to adequately prevent or respond to a major oil spill. If any small upgrades have occurred, they were not publicly disclosed, which is another concern itself. Hence, we do not believe the Sakhalin-II project should move forward until Sakhalin has oil spill prevention and response standards that are equivalent to those currently practiced in Alaska and the North Sea.

Ecological and Economic Problems in the Production Sharing Agreement

Project sponsors and public finance institutions supporting Sakhalin II have also failed to ensure that the project will bring substantial economic benefit to the Russian government and local community. At least two of the three public finance institutions involved in Sakhalin II, OPIC and EBRD, cite the local economic development of projects they support as a measure of their success. Sakhalin Energy bolstered this claim in the case of Sakhalin II by stating:

"…(O)ur joint concern is to ensure that the region and its people receive their due proportion of the benefits of our developments, and that those benefits are sustainable and long lasting.

The Sakhalin-II project was supposed to bring significant economic benefits to the people of Sakhalin while protecting the environment. However, a review by the Auditing Chamber of the Russian Federation of the Sakhalin-II Production Sharing Agreement shows that the Sakhalin-II project has brought environmental problems with questionable economic development.

According to the Auditing Chamber, the Production Sharing Agreement (PSA) was initially adopted with violations of federal laws. Furthermore, the PSA supercedes other federal legislation, including environmental legislation. For example, we have already seen that the PSA agreement excludes Sakhalin-II from such important environmental regulations as pollution in discharge of its wastes.

According to the PSA,

"Drilling muds, drilling cuttings, and liquid extracted from the wells….should not be seen as wastes that are forbidden for discharge into the sea."

The Auditing Chamber reported:

"As a result of the named agreements, the interests of the State in issues of ecology, mineral use, tax and customs legislation, as well as government control, were not adequately taken into consideration, which has led to damaging the interests of the Russian Federation during the process of realization of the given projects."

At the time of the Auditing Chamber report, the chamber evaluated the the damages to the federal budget from inappropriate financial transfers at no less than $19.7 million U.S. dollars.

The Auditing Chamber also pointed to the problems with the PSA in the ability for the investor to increase their costs in an unjustified manner, and as a result, decrease the amount of production value provided to the Russian government.

Indeed, the Auditing Chamber argues that the entire PSA was signed illegally, calling into question the entire basis of the Sakhalin-II project. The Chamber writes:

"In this way, the signing by Ministry of Fuel of Energy of Russia (as representative of the government) of the Agreements 'Sakhalin-1' and 'Sakhalin-2' in consideration of Art. 17 of the Law of the Russian Federation from February 21 1992 #2395-1 'About Minerals' is an unjurisdictional action of an agency of government authority. In accordance with the articles of the 'Sakhalin-2' Agreement, customs agencies of the Russian Federation, as well as government agencies that are responsible for protection of the natural environment, need to be commanded not by the norms of legislation of the Russian Federation but by the articles of the given Agreement."

According to the Auditing Chamber, the Production Sharing Agreements for "Sakhalin-1" and "Sakhalin-2" free the companies for paying annual fees for mineral use to the Russian government of an average of 1.875 billion dollars per year and frees them from 61.692 billion dollars of payments during the life of the project.

Meanwhile, the Auditing Chamber claims that the Oversight Council for the Sakhalin-2 project was not able to provide reports on the financial activities of the project in line with the conditions of the PSA or Russian legislation.

Given the harm to the environment and the lack of adequate benefits to the economy of Sakhalin Island and the Russian Federation, the future of the Sakhalin-II project is at risk - at least as long as the current PSA remains in place. Our organizations believe that the Sakhalin-II project should not move forward until the PSA is rewritten in a manner that guarantees the authority of environmental laws over the PSA, provides for transparent accounting systems that are open for public review, and ensures that sufficient profits are provided for the Russian Federation and the people of Sakhalin Island.

Threats to Endangered Gray Whales

According to EBRD:

"The north-eastern Sakhalin Shelf is highly productive in terms of phytoplankton biomass (greater than 1,000 g/m3)…In the adjacent Sea of Okhotsk thirty-two species of marine mammals…have been observed…The ten cetacean species known to occur in the waters adjacent to Sakhalin are Minke, Fin, Northern Right, Gray, Sperm, Bowhead, Bairds, Killer, Dall's Porpoise, and White Whale. The Bowhead, Northern Right, Fin, and Gray species are currently listed in the Red Book of the International Union for the Conservation of Nature and Natural Resources. The stock of Korean-Okhotsk Gray Whales is recovering from near extinction."

In addition to the International Union for Conservation of Nature's "critically endangered" status for the Korean-Okhotsk Gray Whale, the International Whaling Commission (IWC) at its July 2001 meeting issued a resolution calling upon states "to actively pursue all practicable actions to eliminate anthropogenic mortality in this stock and to minimise anthropogenic disturbances in the migration corridor and on their breeding and feeding grounds." The Scientific Committee of the IWC "noted that it is a matter of absolute urgency [emphasis maintained]….to reduce various types of anthropogenic disturbances to the lowest possible level." The IWC went on to recommend an expanded research, monitoring, and management program for the gray whales.

Expansion of the Sakhalin-II project poses threats to marine mammals and perhaps grave threats to endangered population of gray whales that feed offshore of Northeastern Sakhalin. Less than 100 individuals are estimated to remain in the Korean-Okhotsk Gray Whale population, including fewer than 50 reproductive individuals.

Scientific research on the Okhotsk population of gray whales shows that the Sakhalin-II activities have had some negative impacts on the gray whales. Sakhalin-II's platform Molikpak is located only 20 kilometers from the whale's primary feeding ground, and expansion of Sakhalin-II to the north could further impact the whales. Leading scientists including Dr. Robert Brownell, Dr. Alexander Burdin, Dr. Dave Weller, and Grigory Tsydulko write, "Concerns about this [oil and gas] development include threats of an oil spill to the whales and/or their benthic food, and disturbance to the whales by underwater noise from seismic surveys, drilling and production rigs, and associated support vessels and helicopters operating in the areas around the Sakhalin I and Sakhalin II projects."

Another leading Russian scientist from the All-Russian Scientific Research Institute for Fisheries Management and Oceanography, Dr. Valeriy Vladimirov, writes, "Intensive construction, drilling, oil-extraction and transport activity can endanger the Okhotsk-Korean gray whales directly and pose a threat to their only food-reach foraging habitat in the Okhotsk Sea."

In 1999 and 2000, for example, after the Molikpak platform started operations, scientists recorded that whales were displaced to the north of their feeding grounds, further away from the platform. Also in 1999-2001, scientists have noticed a significant number of "skinny" whales, which has raised a great deal of concern about the future viability of the gray whale population. In 1999, 10 such "skinny" whales were recorded; in 2000, 27 "skinny" whales were recorded, and in 2001, 19 "skinny" whales have been recorded according to preliminary results. The population is in such a fragile state that the loss of even one reproductive whale could be disastrous for this critically endangered population.

Some scientists note that the weakening in the health of the Okhotsk gray whale population may be related to Sakhalin-II activities. Academician M. E. Vinogradov, chairman of the interdepartmental ichthyological commission of the Ministry of Natural Resources, the Russian State Committee for Fisheries, and the Russian Academy of Sciences, believes that it is possible that Sakhalin Energy's activities have impacted the gray whales. He writes, "It is quite possible, that the starvation of part of these whales and their displacement to the north, observed during 1999-2000, is connected to the following:

- Constant noise produced by oil-rig "Molikpack [sic]," built 24 km south-east to the entry of Piltun Bay in the Fall 1998;
- Intense aerial and marine traffic;
- Marine pollution due to current developmental works on the sea bed;
- Partial death of bottom animal communities in the adjacent to "Molikpack" [sic] southern part of the feeding ground of gray whales as a result of chemical contamination of the sea;
- Accumulation of toxic substances in tissues and various organs of whales."

Indeed, Vinogradov goes on to write, "Without designing special measures for gray whale conservation, the continuation of the 'Sakhalin-2' project can lead to extinction of this unique population."

Environmental groups point out that continued discharge of drilling muds and cuttings could be impacting the benthos community, which is key to the feeding of the Okhotsk Gray Whales. They also point out that in the State Environmental Impact Review for Sakhalin-2, government experts recommended that a "zakaznik," or "wildlife sanctuary," be created for gray whale conservation. However, neither the Russian government nor Sakhalin Energy Investment Company has yet to take steps to implement this important recommendation from the State Environmental Impact Review.

Sakhalin Energy Investment Company committed to developing a Gray Whale Conservation Plan in 1997 as part of its obligations to lenders. However, Sakhalin Energy Investment Company is only drafting the Conservation Plan now, in late 2000. This delay raises concerns from environmental organizations that Sakhalin Energy Investment Company is only developing the plan in order to meet lenders' requirements as it prepares to request funding for expansion of the Sakhalin-II project. Even Sakhalin Energy Investment Company's Gray Whale Conservation Plan only deals with Phase I of the project and does not address the expanded impacts to gray whales that will occur with the implementation of Phase II of the Sakhalin-II project.

Meanwhile, neither Sakhalin Energy Investment Company nor the lenders for the project have considered cumulative impacts from full development of the Sakhalin-II project as well as cumulative impacts from all the Sakhalin offshore oil development (Sakhalin-I and II are under active development and plans are under development for several other offshore projects). Scientists are concerned that the cumulative impacts of Sakhalin project development will make it extremely difficult for skinny whales to feed enough to become healthy and to successfully wean a calf that can survive its migration south. A lack of reproductive and survival capabilities due to Sakhalin offshore oil development could threaten the very survival of the gray whale population.

Further expansion of the Sakhalin-II project, which includes plans to develop mineral resources to the north of the current Molikpak platform, is likely to bring Sakhalin Energy Investment Company into an even greater direct conflict with gray whales. Expansion of the Sakhalin-II project to the north could threaten the very viability of the critically endangered Okhotsk-Korean population of gray whales.

Our organizations believe that the sponsors and financial institutions of Sakhalin II have abrogated their responsibilities under Russian domestic law and international treaties to protect the endangered Korean-Okhotsk Gray Whale. Indeed, through its support of the Sakhalin-II project, OPIC has abrogated its own responsibilities to comply with the U.S. Endangered Species Act, which protects the Korean-Okhotsk Gray Whale. We strongly believe that construction of additional platforms, pipelines, and infrastructure in northeastern Sakhalin will be a violation of these laws and treaties, and that it could be the last straw for survival of this critically endangered gray whale population. We therefore believe that further expansion of the Sakhalin-II project should be delayed until Sakhalin Energy Investment Company can guarantee the survival and viability of this internationally recognized, critically endangered gray whale population.

Absence of a US Client

OPIC has as a condition of its potential support for projects that a minimal percentage of that project's ownership be comprised of one or more US corporate clients. Since its support for Sakhalin II, the US company involved in the project, Marathon Oil, has sold its entire holdings in the venture. The absence of a US corporate client raises questions about the economic and environmental liability for Phase One of the project, and it legally precludes its involvement in Phase Two.

Conclusion

Sakhalin Energy Investment Company is now moving ahead with plans to develop Stage 2 of the Sakhalin-II project. While the public has so far received very little specific information about Stage 2 of the project, it is clear that Stage 2 will sharply expand both the Sakhalin-2 activities and its impacts on the environment and the Sea of Okhotsk.

Given the poor track record of the Sakhalin-II project - with associated problems involving decrease in fisheries populations; discharge of drilling muds and cuttings into the sea; increased danger of oil spills; ecological and economic problems in the Production Sharing Agreement; threats to endangered gray whales; and inadequate access to information and lack of transparent monitoring - it is clear that Sakhalin Energy Investment Company has proven itself to be a poor corporate citizen in Russia's Far East. In the few years that Sakhalin-II has been developed and operating, Sakhalin Energy has shown a lack of environmental and social corporate responsibility.

From these factors, it can be said that neither the Sakhalin-II project sponsors, nor the public finance institutions that supported the first phase of the project, can credibly show that the environmental protection and local economic gains that were claimed have actually come to pass. These problems also eviscerate any claim that the public finance institutions supporting the project are providing the environmental leadership that they have promised.

These problems reflect on the public and private finance institutions that are currently backing the Sakhalin-II project, and will reflect on those that consider financing Stage 2. Our organizations believe that your institutions should reject backing of Stage 2 of the Sakhalin-II project until all the above-mentioned problems are fully resolved to ensure environmental protection and true economic gains for the region with full public participation and input.

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