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April 28, 2006 Board of Directors European Bank for Reconstruction and Development (EBRD) London, United Kingdom RE:

Sakhalin II

Respected Directors, Today the EBRD’s public comment period on the environmental and social impact assessment of the Sakhalin II project officially concluded. This follows nearly ten years of monitoring of this project by Russian and international non-governmental organizations (NGOs). The extensive NGO comments submitted demonstrate a large number of violations of EBRD policy. Meanwhile, we have some overarching observations about this highly risky project: An assessment was produced only after the project was two-thirds built: The Sakhalin Energy Investment Company (SEIC) has submitted for your consideration an environmental and social impact assessment for a project that is already two-thirds built. This defeats the entire purpose of such assessments, which is the prediction and prevention of negative impacts before they occur. This means neither you nor the public have the ability to comment meaningfully or influence most of the project construction phase, where some of the worst impacts of the project lifecycle occur. Given the fact that SEIC has been preparing for this project’s construction phase since 1997 its failure to produce this assessment until now is reprehensible. Irreversible violations of Bank policies have already occurred yet are not accounted for in either this assessment or in the failed 2003 assessment that EBRD declared “unfit for purpose.” These violations include permanent impacts from: • The installation of the PA-B oil platform concrete base in the absence of mitigation measures recommended by the IUCN-convened independent panel of whale experts. This led the co-chairs of the whale expert review panel to say, “[u]nquestionably, their decision to adhere to their predetermined construction schedule has, in some respects, obviated or undermined the utility of our review.” • The highly-publicized damage to wild salmon-bearing streams and tributaries from the excavation of steep mountainsides and the trenching of pipelines directly through stream beds; and • The dumping of large volumes of dredging wastes into the fisheries-rich Aniva Bay. Fundamental gaps still exist: SEIC’s environmental assessment has failed to include a comprehensive oil spill prevention and response plan, despite the fact that the potentially devastating impacts of oil spills are among the most fundamental risks you are asked to bear on this project. No provisions are made in the Environmental Action Plan for the Board to be able to review and approve or reject the oil spill response plan, and the public

is only allowed to review the document in an undefined period “prior to first oil.” Since Sakhalin II is already responsible for the Kholmsk oil spill, the lack of a plan at this point recklessly endangers your reputation along with public health and the environment. There are other important concerns about gaps in the project’s public welfare and environmental safeguards: • Analyses of oil on/under ice, a key oil spill risk, are deferred until after a Board vote, making the environmental impact assessment incomplete; • The independent whale expert review panel has not been allowed to complete its analysis. At the April 3-5, 2006 panel meeting in Vancouver, British Columbia, the scientists stated, “no definitive conclusion can be drawn from the presented documents with regard to potential impacts on whales during the 2005 construction season.” This is particularly disconcerting considering that the most active SEIC construction season to date is slated to begin in just two months, i.e. in early June 2006; • SEIC has only now produced a draft Indigenous Peoples Development Plan and Resettlement Action Plan despite a World Bank/ IFC policy requirement for these to be developed early in the project in order to influence project design prior to construction; • A revised plan for pipeline crossings for rivers is criticized by the Bank’s own consultants (University of Birmingham specialists) and by an expert review commissioned by the independent Wild Salmon Center; • There is a lack of sufficient baseline data, making it impossible to satisfactorily assess project impacts and adequately design mitigation measures properly. For example, SEIC still does not know which rivers that its pipelines are crossing are inhabited by the endangered salmon species Sakhalin Taimen; • Independent expert reviews commissioned by NGOs are not even referenced in the 2005 assessment, including experts commissioned to study impacts on the endangered Pacific Grey Whale and other wildlife populations, seismic impacts, and salmon spawning river impacts. Meanwhile, EBRD has repeatedly attempted to conceal public interest information that SEIC’s and the Bank’s own environmental consultants generated as part of the due diligence process; • Alternatives were not assessed, for example, there is no real comparative assessment of the alternative dredged wastes dumping site outside of Aniva Bay. Legal violations: SEIC’s assessment fails to acknowledge the project’s violations of Russian law and international conventions despite breaches identified by NGOs, ongoing lawsuits, and a final decision in force regarding the construction of an offloading jetty. EBRD must not finance projects that violate host country laws or that cause the host country to fail to comply with international treaties and agreements. Social impacts: SEIC’s assessment fails to acknowledge that Sakhalin II is deeply unpopular with many of the island’s residents, which increases reputation and political risk for the Bank. Growing opposition has led to large protests involving local fishing communities, elected officials including the Sakhalin Governor, and Sakhalin’s indigenous peoples. Meanwhile, the project will generate far fewer national and local economic benefits than originally promised. The project simultaneously inflicts high

impacts on the island’s infrastructure and environment, drives up local housing prices, and guts the tax base through nonpayment of taxes and other fees. Compliance failures: EBRD’s ability to assure compliance on the enormous Phase Two can be judged by its inability to achieve compliance on the much smaller Phase One. The “RSK ENSR Lenders Tier III HSE Audit for Phase One” reveals that over two-thirds of its 90 findings were negative, including many that “indicate weakness in current operating procedures and / or practices that could result in leading to a high risk situation…,” and “where findings indicate an immediate HSE risk…” Thus, the EBRD’s board can be assured that if the Bank finances Phase Two its reputation will be linked with the subsequent severe compliance failures. Reputation risks to EBRD: As environmental professionals we can comfortably say that Sakhalin II is one of the most irresponsible industrial projects we have ever examined. We have engaged with SEIC and EBRD in good faith over the life of the project, providing thoughtful comments and independent analysis. We have helped to generate over 7000 public comments in the years since Phase Two was considered. We have participated in public hearings in which the very large majority of participants oppose EBRD financing for the project. Yet, we have seen the performance of EBRD management transition from being correctly critical of the project’s shortcomings to supporting it with increasingly unfounded optimism. We have seen staff transition from calling for independent reviews of impacts to whales and salmon to turning a blind eye to the critical results of those analyses. We are seeing Sakhalin II become one of the most controversial oil and gas projects world-wide, accruing over one hundred international press stories on the project’s negative environmental, social and economic impacts. As this occurs, we see an attempt by management to shirk responsibility for making controversial decisions by shifting them to the Board. There is an eerie sense of déjà vu in the EBRD Board’s consideration of the enormous Phase Two of Sakhalin II. As with its 1997 decision on Phase One, we hear Board members’ concerns about potentially serious impacts, nervousness about the lack of information on which to comfortably base a decision, and trepidation about fundamental decisions being delegated to staff to be made after a Board vote. Like with Phase One, we hear that management tells the Board: “trust us, and we will come back to you if there is a problem.” Then, as crises arise, the Board learns about it from NGOs and the press. A decision by EBRD to finance Sakhalin II will send a message to civil society that people need not waste time engaging the Bank in good faith. It will send a message to other oil companies that they need only bully the EBRD long enough and the Bank will eventually sag and cave in. And the Bank will suffer long term damage to its reputation as it is held responsible along with SEIC for the negative impacts of this damaging project. Instead EBRD must reject the project and send a message that its standards and expectations are higher.

Many of our organizations have submitted separate detailed comments to the EBRD Environment Department. Some of these comments can be found at the following three reference points: We strongly urge EBRD not to finance Sakhalin II! Sincerely, Dmitry Lisitsyn Chairman Sakhalin Environment Watch

Janneke Bruil IFI Coordinator Friends of the Earth International

Igor Chestin CEO WWF Russia

Petr Hlobil Campaigns Coordinator CEE Bankwatch Network Czech Republic

Robert Napier Chief Execuitve WWF UK Sue Lieberman Global Director of Species WWF International

Antonio Tricarico Reform the World Bank Campaign Italy Huub Sheele Both ENDS The Netherlands

Dr. Peter Prokosch Chief Executive Director WWF Germany

Regine Richter Urgewald, Germany

Naomi Kanzaki Shoko Murakami Development Finance and Environment Program Friends of the Earth Japan

Dr. Andreas Missbach Private Finance Program Berne Declaration Switzerland

Mary Taylor Friends of the Earth England, Wales and Northern Ireland

Dr. Masha Vorontsova Director IFAW-Russia

Mika Minio Paluello Platform United Kingdom

Brendan Cummings Center for Biological Diversity United States

Nick Hildyard The Cornerhouse United Kingdom

Doug Norlen Pacific Environment United States