Shell on track to win key Sakhalin loan: EBRD sources:

Posted By: Martha Buffett

By Tom Bergin

After much skepticism, the bank's management has become much more supportive of the $20 billion project in recent months, partly due to the desire of key bank shareholders, including the United States and Japan, to secure new energy sources, and other strategic goals, the sources said.

"There has been a change of mood (in favor of the project)," one senior source told Reuters.

The EBRD's board is expected to vote on the loan in June, an official told Reuters this week.

Sakhalin-2 will proceed even without the loan but it would be a big win for Shell's reputation. The bank's strict environmental rules mean the loan effectively endorses the project's ecological record.

The world's third largest publicly traded oil firm has taken a battering from green groups because of the risks the project poses to endangered whales, salmon spawning grounds, indigenous peoples' lifestyles and other aspects of the largely empty and undeveloped island's delicate ecology.

The bank insists it remains neutral on whether to approve the loan and environmental officials at the bank deny any pressure is being exerted on them to take a less critical view of the development.

Environmental officials said any warming toward Sakhalin-2 on their part reflected the fact they have forced Shell and its partners to make a number of key improvements to reduce the ecological impact.

"The gap between our expectations and reality on the ground have narrowed considerably," Mark King, group head of the bank's environmental department, told Reuters at the sidelines of a public meeting in Yuzhno-Sakhalinsk this week.

However, the sources said this was not the only reason the bank's management had become less skeptical about Sakhalin-2.

"There was political pressure from different sources, and undoubtedly some of that came from the U.S.," a second senior bank insider said.

CONTROVERSIAL LOAN

Sakhalin-2, off the north coast of Sakhalin Island in Russia is one of the largest hydrocarbon developments in the world, with recoverable reserves of 4.5 billion barrels equivalent of oil and gas.

Shell and its partners, the Japanese firms Mitsui (8031.T) and Mitsubishi (8058.T), have asked the EBRD for around $300 million to develop the fields and a $6-7 billion financing package including other government-backed lenders hinges on the bank's decision.

EBRD officials say it is the most controversial application they have ever had to consider.

The oil and gas fields off the north coast of the island are located near the feeding grounds of the critically endangered Western Grey whale.

A pipeline must be run across around 1,100 rivers and water courses to connect the fields to an export terminal in the south of the island. The island's economy is heavily reliant on fish which spawn in the rivers.

At a public meeting in Korsakov on Friday, locals expressed worries about the impact of the dumping of dredged material in their bay, the loss of a public beach to the gas export terminal and other concerns.

Shell, which has spent tens of millions of dollars to improve the project environmentally, had hoped to secure the EBRD loan last year but the bank delayed approval because it was unhappy with the way the rivers were being crossed.

Green groups accused the EBRD of giving into Shell by putting the project forward for public consultation -- the final stage before approval -- in December.

The senior bank sources said the EBRD did face heavy lobbying from Shell but was also being steered by the interests of its shareholders.

The United States and Japan, two of the largest customers for Sakhalin-2's production, are also two of the largest shareholders in the EBRD.

"Pressure is coming on . . . (from) governments who feel that anything away from the Persian Gulf is advisable," the second senior bank source said.

Other shareholders -- who have to vote on approval -- will also be reluctant to antagonize Russia by refusing the loan, especially those like the UK and France, who have large oil firms who seek to do business in Russia.

Ian Craig, chief executive of the consortium running Sakhalin-2, agreed the project enjoyed wide support.

"It's a very strategic development and for that reason, it's broadly supported by the (United) States, by Europe and by the Far East countries," he told Reuters this week.

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