EBRD Ends Talks on Financing Sakhalin II Project

LONDON, (Dow Jones Newswires), Aug 07, 2007 (Dow Jones Commodities News)

The European Bank for Reconstruction and Development Tuesday said it had ended talks on financing the giant Sakhalin II natural gas project.

The EBRD said the decision was made "by mutual agreement" with Russia's state-owned natural gas behemoth OAO Gazprom and other shareholders in the project.

"By mutual agreement with OAO Gazprom and the other shareholders of the Sakhalin Energy Investment Company, it has been decided that the EBRD will not resume negotiations on financing the Sakhalin II project," the development bank said in a statement.

The EBRD had been considering a loan of about $300 million to the project since 2001, but only on condition that the project satisfy a wide range of environmental and governance criteria.

Although its participation in the financing only accounted for a small share of the funds needed - with the overall cost of the project in excess of $20 billion - the EBRD's role was seen as key to the participation of other state-owned lenders, including the Japan Bank for International Cooperation and the Export-Import Bank of the United States, which were due to be much larger lenders.

But in January, the EBRD said it had withdrawn from "active consideration" of the loan, following an agreement in December under which the U.K.'s Royal Dutch Shell (RDSA), and Japan's Mitsui & Co. Ltd (MITSY) and Mitsubishi Corporation (8058.TO) sold a majority stake in the project to Gazprom.

That followed nearly a year of sustained attacks on the project by Russian regulators over cost overruns and alleged environmental violations.

The EBRD Tuesday said it had subsequently held "informal discussions" with Gazprom and the other shareholders on participating in the financing. But it said that "in light of the timetable envisaged by the shareholders, the financing from the EBRD was not feasible."

"Gazprom, the majority shareholder, and the other shareholders...have reached an advanced stage in the negotiations for the financing of Sakhalin II and now expect to reach financial closure in the next few months," the EBRD said.

EBRD President Jean Lemierre said the development bank had stopped its review of the environmental impact of the Sakhalin II project in January, and wouldn't have been able to bring its assessment up to date in time to participate in the financing given Gazprom's timetable.

"Gazprom needs a decision in September or October," Lemierre said. "It was clear that we would not be in a position to make a decision in this time."

Lemierre added that because the EBRD had suspended its environmental monitoring, it could not say whether the project would have failed to meet its requirements.

But he said it had not done so earlier this year.

"Before we decided to walk away in January, it was clear that the project had not met these standards," Lemierre said.

Other lenders have yet to make a decision on whether they will finance the project. The U.K.'s Export Credit Guarantee Department is one of those, and is waiting for a report from environmental consultants before reaching a judgment.

But the ECGD said it will not do so within a timetable set by Gazprom or any other lenders.

"We will make a decision when we have all the information to hand that we need," said Steve Roberts, a spokesman for the ECGD, which is the U.K.'s official export credit agency. "We are not operating to anybody's timetable."

Lemierre said that despite its decision to withdraw from Sakhalin II, the EBRD would consider working with Gazprom on other projects.

"We haven't made a decision yet to finance a project," Lemierre said. "We do not rule out doing so on very well defined projects with a strong impact on energy security and efficiency."

Copyright (c) 2007 Dow Jones & Company, Inc.