March 14, 2004

Mr. Jean Lemierre
President
European Bank for Reconstruction and Development (EBRD)
One Exchange Square
London, EC2A 2EH
FAX: 00 44 207 338 6100

Kyosuke Shinozawa
Governor
Japan Bank for International Cooperation
1-4-1, Ohtemachi, Chiyoda-ku
Tokyo 100-8144
Japan
Fax +81 3(5218)3955

Philip Merrill
President and Chairman
Export-Import Bank of the U.S.
Washington, D.C. Office
811 Vermont Ave., NW
Washington, DC 20571
USA

Patrick Crawford

Chief Executive Officer
Export Credit Guarantee Department, UK
1 Canada Square
London, E14 5DX
United Kingdon
fax: +44 (0)207 860 2437

RE:International Scientific Review Panel Findings on Sakhalin II Impacts on Western Gray Whales.

Dear Sirs,

We write concerning therecent International Scientific Review Panel (ISRP) report on Sakhalin II project impacts on the critically endangered Western Gray Whale[1]. The ISRP, commissioned at your urging by the World Conservation Union, contains findings that must compel your institutions to decline financing for Sakhalin II in its current design.

The ISRP report concludes that Royal Dutch/Shell’s Sakhalin II and other oil and gas projects off the North East coast of SakhalinIsland threaten the Western Gray Whale population with extinction. The ISRP found that:

“[E]xisting and planned large-scale offshore oil and gas activities pose potentially catastrophic threats to the population.”

And,

"The most precautionary approach would be to suspend present operations and delay further development of the oil and gas reserves in the vicinity of the gray whale feeding grounds off Sakhalin, and especially the critical nearshore feeding ground that is used preferentially by mothers and calves."

The ISRP report details how Sakhalin II increases the critically endangered western gray whales' risk of extinction through construction and operation impacts including ship collisions, oil spills, and noise. The panel points out that the loss of one additional adult female per year “would be sufficient to drive the population towards extinction with high probability.”

These and other findings of the ISRP report demonstrate that the Sakhalin II project violates the environmental policies to which your institutions and project sponsors are committedfor all projects and on this project in particular. These include the environmental policies of the European Bank for Reconstruction and Development (EBRD), of the Export Credit Agencies of the US, UK and Japan, and of the World Bank Group’s International Finance Corporation.[2] This includes, inter alia, violations of policies related to the protection of natural habitats; required analysis of alternatives; adequate environmental assessment, and adherence to the precautionary approach.[3]

Key Findings of the ISRP: The major findings of the ISRP include:

  • SEIC has not presented an overall assessment of the cumulative impacts of noise, sediment, collision and spills on the gray whale population over the lifetime of the project;
  • The timing of decisions on platform and pipeline siting indicates that they were made without full knowledge of the risks to the gray whale feeding area;
  • The current operations of removing oil by tanker during the summer months are high risk and should be suspended;
  • The mitigation measures and oil spill response plans are not based on rigorous science and therefore cannot ensure protection of the gray whales;
  • There is still a lack of understanding regarding the behaviour of the whales, and more significantly regarding the potential impact of oil and gas operations on the whales.

Violation of policies for endangered species: IFC’s Operational Policy 4.04 Natural Habitats states that“IFC does not support projects that, in IFC’s opinion, involve the significant conversion or degradationof critical natural habitats.” This policy defines “critical natural habitats” as “areas with known high suitability for bio-diversity conservation; and sites that are critical for rare, vulnerable, migratory, or endangered species.” This certainly includes habitat for the critically endangered Western Gray Whale. The policy defines “degradation” as “modification of a critical or other natural habitat that substantially reduces the habitat's ability to maintain viable populations of its native species.” Thus, the ISRP finding that existing and planned large-scale offshore oil and gas projects including Sakhalin II pose potentially catastrophic threats to the populationdemonstrates a prima facie violation of this policy.

Violations of required assessment of alternatives: IFC and EBRD policies require thorough, systematic, quantifiable assessment of alternatives. However, Sakhalin II has never seriously considered alternative locations for the Piltun-Astokhskoye B (PA-B) platform, which is currently proposed to be built adjacent to the Western Gray Whales only feeding habitat. The ISRP found that the project’s Comparative Environmental Assessment (CEA), which represents“the culmination of extensive design, survey, monitoring and modelling work begun by SEIC” contains no systematicor quantifiable analysis of alternative PA-B platform location:

The CEA does not specify why this particular site was selected or

whether additional geological, technological, ecological and economic constraints were taken into account.

And,

Regarding the proposed location of the PA-B platform, “it appears that the site was chosen prior to analysis of spill trajectories. If so, then risks to key areas such as the nearshore foraging habitat for gray whales were not understood and considered in the site selection process”.

The ISRP also concludes:

"Clearly, from the perspective of gray whale conservation, the further away the platform is from the foraging grounds the better."

Violations of requirements on scope and detail of environmental assessment: IFC environmental policies and procedures state that an Environmental Assessment report’s “scope and level of detail should be commensurate with the project's potential impacts.” Similarly, EBRD’s Environmental Procedures state “[t]he detail and scope of an EIA depends upon the likely type and extent of a project’s environmental effects and the sensitivity of the locations affected.”The EBRD Environmental Procedures state that if the EIA“process and / or documentation are deficient, the Project Sponsor will be required to carry outadditional work to comply with the Bank’s requirements.”

The potential for Sakhalin II to cause the extinction of the Western Gray Whale indicates that the scope and level of detail of the project’s Environmental, Social, Health Impact Assessment (ESHIA) and associated analysis is high. The lack of proper analyses led the EBRD in 2003 to deem the ESHIA “unfit for purpose.” Sakhalin Energy’s Comparative Environmental Assessment is intended to address some of these shortcomings for off-shore portions of the project. Yet, the ISRP report refers repeatedly to "information gaps" associated with the CEA and other information provided and states:

"The Panel was precluded by a lack of information and specificity from completing a comprehensive review of a number of important Sakhalin II Phase 2 elements."

The ISRP also states:

“Descriptions of analytical methods for [oil spill] trajectory analyses in the CEA are inadequate. Asnoted above, the CEA does not present model results for risks and trajectories for a broad range of spill volumes, andpresents only cursory analytical results. This circumstance hinders the task of evaluating potential effects of theProject on western gray whales.”

“The CEA did not model the worst-case scenario, i.e. that of a platform blowout, but such modelling isessential for a thorough and unbiased assessment of risk. The risks associated with such a low-probabilityevent may exceed considerably those from the spills that were modelled.”

“The CEA did not model spills occurring during winter months when weather conditions may be moresevere than those modelled (10-year averages for spring, summer and autumn) and when the sea may becovered with ice.”

“The CEA did not model the effects of spills and accidents on gray whales and their habitat as a result of an accumulation of leaks, spills and accidents over the lifetime of Phase 2. Such an exercise is essential to a thorough and balanced assessment.”

“[T]he potential for smothering of benthic communities by sedimentation has not been adequatelydescribed in the CEA or the EIAs.”

“Once again, from the perspective of gray whale conservation, the available information precludes a conclusiveassessment of the effects on primary feeding habitat. The CEA and other documents do not adequately reflect the

uncertainty that exists and in many cases reflect an overly optimistic view.”

“The CEA does not address any potential ecological effect from the construction of the pipeline landfall and nomitigation is proposed.”

Regarding noise impacts, “Some temporary displacement of WGW from prime feeding areas is a probable effect of Sakhalin II Phase 2”

Regarding noise impacts, SEIC “ consistently interpret uncertain data optimistically and thus may seriously underestimate the nature of threats posed by the operations and hence the requisite mitigation measures.”

Regarding noise impacts, “Without further details on SEIC’s plans, the Panel is unable to evaluate the efficacy of the monitoring and mitigationmeasures proposed”

Regarding the potential for collisions, “the proposed mitigation measures are unlikely to be adequate to prevent collisions entirely. For that reason and because any mortality in addition to that already experienced by this population would jeopardise recovery, a precautionary approach to risk assessment and mitigation is required.”

“The collision risk to gray whales posed by this new traffic was not addressed with any degree of rigour in the documents received from SEIC.”

Regarding oil spill accidents, “the apparent lack of attention to gas associated risks is a serious shortcoming of plans for Sakhalin II Phase 2”

“[W]hales are not normally affected by oil carpets and will avoid polluted areas, and that the potential effects of oil will be of short duration (<1 month) and moderate severity are not supported by available data”.

Regarding the impact of a potential oil spill, “[a] precautionary interpretation of those studies suggests that oil spills directly affecting preferred feeding areas could reduce food availability to feeding whales over an extended time period, with unknown but potentially serious consequences for fitness and population growth in the whale population.”

Regarding the weakness of SEIC modeling for oil spills, “[The] effects of spills and accidents on gray whales and their habitat as a result of an accumulation of leaks, spills and accidents over the lifetime of Phase 2. Such an exercise is essential to a thorough and balanced assessment”.

Regarding SEIC’s proposed response to potential oil spills, “none of the response strategies assigns sufficient priority to nearshore gray whale feeding habitat”.

These information gaps prevent the adequate assessment of potential impacts of Sakhalin II, none the least of which are EBRD and IFC requirements related to the assessment of cumulative impacts.

Violation of the Precautionary Principle: The ISRP findings reinforce the fact that the Sakhalin II project fails to comply with EBRD and IFC policies related to the precautionary principle. For example, OP 4.04.1: states:

“IFC supports, and expects project sponsors to apply, a precautionary approach to natural resource management to ensure opportunities for environmentally sustainable development.”

Similarly, EBRD’s Environmental Policy states:

“The Bank “supports a precautionary approach to the management and sustainable use of natural biodiversity resources (such as wildlife, fisheries and forest products) and will seek to ensure that its operations include measures to safeguard, and, where possible, enhance natural habitats and the biodiversity they support.”

The ISRP report states:

"The most precautionary approach would be to suspend present operations and delay further development of the oil and gas reserves in the vicinity of the gray whale feeding grounds off Sakhalin, and especially the critical nearshore feeding ground that is used preferentially by mothers and calves."

Yet, Royal Dutch/Shell’s unwillingness to properly analyze risks and impacts to the Western Gray Whale, and its unwillingness to take necessary measures to protect the whale (typified by its unwillingness to relocate the PA-B platform) indicate a blatant disregard for the precautionary approach. This represents a blatant violation of EBRD’s and IFC’s environmental policies and procedures.

Decline financing for Sakhalin II:

The EBRD Environmental Policy states:

The EBRD also clearly establishes the principle that a proposed project can be rejected on environmental grounds, when there are major environmental problems, or when a proposed project fails to address environmental issues in a satisfactory way.

Export Credit Agencies considering financing for Sakhalin II have similar institutional prerogatives. EBRD’s determination that the Sakhalin II ESHIA is “unfit for purpose” demonstrates that the Sakhalin II project is a clear candidate for this rejection. The ISRP report provides your institutions with additional expert opinion to support such a conclusion. This includes the determination that the Sakhalin II project threatens the Western Gray Whale population with extinction; that to do so is a violation of EBRD and IFC policies; that the supplementary analysis is incomplete and misleading, and that the Comparative Impact Assessmentand other environmental assessmentsremain unfit for purpose. Thus, we agree with the ISRP recommendation that the precautionary approach calls for the suspension of present operations and delay of further development of the oil and gas reserves in the vicinity of the gray whale feeding grounds.

We call on Royal Dutch/Shell to immediately halt oil production at its existing Molipak platform and to delay a proposed platform and associated pipeline construction until it can demonstrate that these activities will not lead to the extinction of the western gray whale population.

We also call upon your institutions to decline financing for Sakhalin II in its current design. Public banks should not finance projects that could drive thewestern gray whale population into extinction.

Sincerely,

Dmitry Lisitsyn

Chair

Sakhalin Environment Watch

Igor Chestin

Director

WWF-Russia

David Gordon

Executive Director

Pacific Environment

Petr Hlobil

Campaigns Coordinator

CEE Bankwatch Network

Joel Reynolds

Director, Marine Mammal Protection Project

Natural Resources Defense Council

Huub Scheele

Both ENDS

Environment and Development Service for NGOs

Maria Vorontsova

Director, Russia Office

International Fund for Animal Welfare

Tokiharu Okazaki

Executive Director

Friends of the Earth – Japan

Greg Muttitt

Project Co-Director

PLATFORM

Donald Pols

Teamleader Climate and Energy

Milieudefensie/Friends of the Earth Netherlands

Elizabeth Bast

International Policy Analyst

Friends of the Earth - US

[1] Impacts of Sakhalin II Phase II on Western North Pacific Gray Whales and Related Biodiversity: Report of the Independent Scientific Review Panel:

[2] See documented commitments of EBRD and Export Credit Agencies in Preliminary Evaluation of Conformity Sakhalin II, Phase 2 and the Environmental Standards of the World Bank (WB) andInternational Finance Corporation (IFC)By Pacific Environment—January 2004

[3] IFC OP 4.04 Natural Habitats; IFC OP 4.01 and IFC OP 4.04 requirements for analysis of alternatives; EBRD Environmental Annex Annex 2 requirement for analysis of alternatives, IFC OP 4.01 on scope and detail of environmental assessment; EBRD Environmental Procedures 2.3.3 on scope and detail of Environmental Investigation; IFC OP 4.01 on Precautionary Principle; EBRD Environmental Policy II.6.