Shellshock on the island terrified by oil giant's pipeline

The UK firm will make billions from one of the world's biggest gas projects. But what will it mean for the people and environment on Sakhalin? By Jonathan Brown
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They no longer let their children play in the woods beside the dachas on the hills overlooking Aniva Bay.

They no longer let their children play in the woods beside the dachas on the hills overlooking Aniva Bay.

Since the oil company Shell began building a large liquid natural gas (LNG) plant on the southern tip of Sakhalin island in Russia's Far East, bears have started straying into the village. The community believes its traditional way of life, growing its own food and fishing, is under threat. The bears have been frightened away from their feeding grounds by construction activity, they say. The natural order - from the bears to the health of the island's marine life - is being fundamentally altered.

"We had a beautiful area here. But everything has changed," says Alexander Tikhonov, chairman of the dacha community of Stroitel. It is a sentiment echoed by his neighbour Alla Gafner. "We used to bring our grandchildren here. They used to be able to ride around on their bicycles. Now there is no beach, the air is dirty and we have no quiet or calm," she said.

Shell is expected to field a barrage of angry questions at its annual general meeting this month over its activities on Sakhalin.

The former top-secret Soviet military outpost, north of Japan, was closed to visitors for many years and provided the scrambling point for the fighters that shot down Korean Airlines flight 007 in 1983.

As sensitivities and restrictions have eased, the island has become a new kind of strategic target - for Western energy companies eager to exploit the area's hydrocarbon reserves.

But for Shell, operations there are running into fierce local resistance, and the company has found itself the target of the biggest environmental campaign in Russia.

Parallels are being drawn with the resistance the company faced in the Ogoni region of Nigeria, where Ken Saro-Wiwa, the executed writer and environmental activist, led the campaign.

The Sakhalin project is one of the world's most ambitious. The oil giant, which recently announced profits of £9.3bn - the highest recorded by a British listed company - hopes its new £7bn pipeline, platform and LNG plant, will help it cash in on Asia and America's rising demands for oil and gas. The project is likely to be backed by loans from the British Government.

But those who must live with this modern-day bonanza are deeply unsettled. Environmentalists fear that disruption to the life cycle of the bear is but the tip of the iceberg. The worst-case scenario is an ecological catastrophe on the scale of the Exxon Valdez tanker disaster.

There are concerns posed by offshore drilling to the critically endangered western grey whale in the north of the island. The loss of a single breeding-age mother could drive the 100-strong population to extinction.

The 800km pipeline at the centre of the scheme will traverse 21 seismic faults in some of the world's most earthquake-prone territory. It will cross more than 1,000 rivers and streams including dozens of sensitive salmon spawning grounds. Campaigners believe the threat of a serious oil spill on land or a tanker disaster in the seas that surround Sakhalin would wreck the fisheries from which a third of islanders make their living. Worst hit would be Sakhalin's 3,500 indigenous people.

Many also believe that while Shell will make billions from the project, the people of Sakhalin - whose average income is just £28 a week - will be left with nothing but a ruined landscape.

More than 200 lorries a day thunder past the dachas on their way to deliver materials to Shell's LNG plant rapidly rising on the shores of Aniva Bay at Prigorodnoe. Mr Tikhonov says the dust storms they kick up are making people ill, polluting wells and ruining crops. Much of the public beach where families used to swim and gather mussels on the shore is now being built on. A local museum director, Elena Lopukhina, is furious. "Our losses are immeasurable," she says. "I have lost the opportunity to drink from the streams that I always did. I cannot go to the beach, which I loved. When this project is over all that will be left for us Russians is a pipeline that will cost a lot more to dig up than it did to bury."

The deal for the project was among the first of the post-Soviet era, allowing Western and private companies to exploit eastern Russia's vast resources. The fallout from liberalisation and the huge wealth it unleashed into private hands continues to resonate in Russia - witness the sentencing last week of the former Yukos oil chief Mikhail Khodorkovsky.

Shell assumed majority control of the Sakhalin project from the US oil company Marathon in 2000. But according to an energy economist, Ian Rutledge, the original profit-sharing agreement was "particularly disadvantageous" to the Russians. He compares aspects of the deal to the "oil concessions signed by Middle East rulers at the beginning of the 20th century".

Shell, under the auspices of the Sakhalin Energy Investment Company (SEIC), doesn't have to share its profits with the Russian government until it has recouped its costs and a 17.5 per cent profit. Shell says details of the deal are secret but says it and its partners Mitsubishi and Mitsui are shouldering all the risk in a difficult frontier project.

To make matters worse, last year President Vladimir Putin seized control of local resource revenues for Moscow. With no safeguards, the region's governor, Ivan Malakhov, believes Sakhalin will lose out on the benefit of the oil and gas to the tune of 1.5bn roubles (£300m) a year.

A more direct political challenge is coming from Gennadii Zlivko, the newly elected mayor of Korsakov, the town closest to Shell's new gas plant. He has just given notice that he intends to raise the company's annual rent of $50,000 a year 100-fold. He says he could earn more than Shell pays if he let the 54 hectares to farmers.

Thousands of people in Sakhalin, where winter temperatures plummet to minus 30C, live in unheated homes. They say it was promised they would be connected to the new gas supply. But the prospect remains a distant dream. Shell says this is a matter for the Russians.

But according to Mr Zlivko, Shell must act. "I say to the shareholders of Shell - you have an operation which is going to make $3bn a year from this, surely you can spare us two bagfuls of gas?"

In Korsakov, no new public housing has been built since 1992. It irks the people, he says, that a workers' village, comprising 4,000 homes, has not been sited in the town. Instead it has been placed within the high-security confines of the plant. At the end of the construction phase, the buildings will be dismantled.

So far, he says, only $486,000 of an agreed $4.5m fund for the town, has been forthcoming. "It is embarrassing to have to go to them begging," he says.

A survey by a local citizens group found that 90 per cent now opposed the plant. Nearly 80 per cent saw no benefits. "The rest who did see some good coming out of it only did so in order not to be completely despondent," said Galina Budoragina, a teacher.

This year, bowing to pressure from conservationists, Shell relocated the proposed routes of its two offshore pipelines to protect the grey whales. Shell's chief environmental opponent is Sakhalin Environment Watch (SEW), headed by a former geologist, Dmitry Lisitsyn. As well as claiming victory for the whales, he also believes the protest persuaded Exxon to re-inject into the seabed the drilling cuttings thrown up by its offshore project on Sakhalin. This prevented 10,000 tons of toxic waste being discarded into the water.

Mr Lisitsyn said: "Nobody thought that it would be possible to stop the route of the pipelines; nobody thought it would be possible to stop the dumping of the drilling muds. But we will do whatever we have to do. Stopping the project is not our aim. We want to change it and improve it."

Fears over the consequences of a major oil spill were fuelled in September 2004 when a dredger on contract to Shell ran aground in a storm off the west coast. The company insists it did everything it could to mitigate the resulting oil spill. Critics say it acted too late and revealed the inadequacy of its disaster response plan.

Environmentalists are demanding that Shell agree to take full financial responsibility for any future spill as companies do off Shetland and Alaska following disasters there. Shell says it is complying with international standards.

SEW is also pursuing the company through the courts. Shell has successfully seen off a complaint in the municipal court that it illegally dumped dredging spoil in Aniva Bay. It is currently appealing in a second case after being found to have bypassed public consultation rules on the construction of an offloading jetty at the LNG site.

Campaigners are also attacking the funding of the project. In its May meeting in Belgrade, the European Bank of Reconstruction and Development (EBRD) of which Britain is a shareholder, came under intensive pressure to reject funding the project on environmental grounds. The EBRD is expected to signal its intentions in the autumn.

Britain's Export Credit Guarantee Department is also being urged to review its support for the scheme.

In the foyer of Sakhalin Energy's new headquarters in the capital Yuzhno-Sakhalinsk, an electronic noticeboard provides the latest information on flights to Japan, Korea and Moscow. But SEIC's chief executive, Ian Craig, insists the company is here for the long term. "We are not here to make a fast buck," he says pointing to the "quality jobs" created for locals by the project over its "30 to 40 year" lifespan.

Mr Craig, a Scot, compares Sakhalin's prospects to those of Aberdeen, home of Britain's oil industry. He insists there will be a "trickledown effect" - creating new entrepreneurs and secondary industries. The company is training welders to join its 2,700-strong local workforce.

He accepts however, that the project is not universally loved and that mistakes have been made. "This a huge development and it must have a very significant impact. Our job as management is to minimise the negative and maximise the positive. You can't have a development on this scale without an impact on one part of the community. There will be people who have concerns but there will be others who will benefit from it."

Shell and SEIC believe they are doing everything they can to comply with social and environmental standards as laid down by the World Bank and other bodies. Privately, many within Shell feel the company is the whipping boy for economic discontent in Sakhalin.But the protests are expected to intensify.

Boris Osinovets, the deputy director of Sakhalin's forest agency, with 40 years experience, is typical of local officials. His department is moribund after the collapse of the state-run system in 1998. Privatisation has failed and the timber harvest is in freefall. Replanting has virtually ceased. But in the dash to exploit oil and gas, nobody cares about the trees. "We hoped things would be different but they always turn out the same," he concludes.

Will Shell's pipeline help? "Except for the brooms which are left behind for us to sweep up with, the people of Sakhalin will get nothing," he says.

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