"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
All rights reserved

Oil Spills: Lessons from Alaska for Sakhalin

Rick Steiner

Safety Concerns at the FSO:
There are several very important unanswered questions regarding the safety of operating procedures at the FSO Unit. These include such issues as weather operating conditions stipulating in what conditions a tanker and the FSO must secure from offloading and disconnect from the mooring, what the SALM hawser tension limits will be and how it will be monitored, pilotage to be required in the exclusion area around the site, the adequacy of the size of the exclusion area, what standby protocols will be required during loading, the pre-transfer conference, verification of Inert Gas System (IGS) operation, monitoring of loading rate and pressures, substance abuse screening, and a pre-departure conference. In response to such issues, SEIC has simply stated that "operational procedures will be developed to address the concerns listed above."
Spill Response Preparedness:
As presently planned, the oil spill response capability for Sakhalin is woefully inadequate.
SEIC states in the EIA simply that they will mount "an adequate response in the event of a spill," without defining exactly what they consider "an adequate response." There should be response planning standards in Sakhalin as are required in Alaska to have the equipment and personnel in place to respond to a maximum probable discharge, which off Sakhalin should be considered to be the loss of a full load from a VLCC, or 2 million barrels.
The company also states in its EIA that "response techniques for spills under ice-free conditions are well established and are generally recognized as effective worldwide." This is categorically not so, and leads to a dangerous misperception that a major spill can be effectively recovered. It must be understood that this has simply never occurred. One of the best spill response in history was the response to the "American Trader" spill off Huntington Beach, California in 1990 (when the tanker broke loose from the offshore mooring) with just 25% of the spilled oil being recovered in ideal conditions of calm seas and extensive inventories of response equipment and personnel on hand. Most responses recover less than 10% of the spilled oil, which is generally inconsequential to the amount of biological damage the spill causes.
It is apparent that SEIC is not planning on a major spill. Importantly, there still exists no pre-approved process for the use of chemical dispersants in the event of a spill. While controversial in some arenas, dispersants can sometime offer the only response tool available in a large, offshore spill. Confusion regarding dispersant-use protocols can lead to delay in their application thus rendering them ineffective. This must be clarified, and a sufficient amount of dispersant and applicator aircraft should be readily available to treat a maximum probable discharge. At a 1:20 dispersant-to-oil ratio, SEIC would need ready access to 100,000 barrels of dispersant to treat a 2 million barrel spill. Having access to some amount of dispersant through contracts with East Asian Response Limited (EARL) in Singapore and Oil Spill Response Limited (OSRL) in the U.K. may or may not be helpful, depending on how fast the dispersant can be transported to Sakhalin. In poor weather conditions, no flights would be able to transport response equipment or dispersants to the island. And, apparently SEIC only has a few hundred drums of dispersant on-island. Also, it is evident that not enough ocean boom, skimming capability, storage capacity, and trained response personnel and vessels would be on hand for a major spill. Spill response preparedness can have a very positive economic benefit to Sakhalin.
Response planning is particularly complicated in this instance in that a spill could spread across international jurisdictions. The government of Japan and the government of Russia should develop a clearly articulated agreement as to spill response and command protocols if this were to occur. While SEIC acknowledges that a spill from their facility could spread to the coast of Japan and have therefor established liaison with the Japanese Marine Disaster Prevention Center, a rigorous, cooperative response protocol and command structure must be pre-established.
Liability Standards:
Financial liability is the primary incentive for responsible conduct by industrial interests throughout the world. With adequate liability on the line, oil companies will be motivated to design, construct, and operate their projects as safely as possible. Conversely, without adequate financial liability, even the most stringent government regulation and oversight will not achieve a safe system.
It is evident that the financial liability standards for the Sakhalin operation are inadequate.
Sakhalin Energy states that they carry insurance coverage for various phases of the project as follows:
- preconstruction period: US $100,000,000 including pollution damage and cleanup
- construction period: Operator's Extra Expense (OEE) coverage of not less than US $200,000,000, to cover costs of well blowouts including property damage, personal injury, and pollution cleanup. This coverage will continue during operational phase.
- operations period: at start up of the Molikpaq, Sakhalin Energy will have General Liability Insurance in the amount not less than US $150,000,000.
- FSO insurance: Sakhalin Energy will contractually require the owner of the FSO to provide Protection and Indemnity coverage in the amount of US $700,000,000 per incident.
- shuttle tankers: The Russian Federation requires only US $81,000,000 liability cap for tanker owners
These amounts are simply inadequate. By comparison, the cost to Exxon for the Exxon Valdez oil spill in Alaska is likely to exceed US $10 billion, including private compensatory and punitive damages, natural resource damages, criminal fines, and cleanup costs. While this may seem extreme, the $81 million liability cap for shuttle tankers in Russia is ridiculously low given that a spill of comparable magnitude and consequence could occur there. To their credit, SEIC publicly stated at the SRC Symposium in Sapporo that they agree that the $81 million liability cap for tankers is insufficient, and that Russia should consider raising this cap. Also, since a spill could spread from Sakhalin into Japanese waters, standards for liability in Japan should be considered here as well.
Similarly, the coverage for the operational phase of Sakhalin II is inadequate. Sakhalin NIPImorneft estimates that a winter well blowout off Sakhalin could spill as much as 230,000 barrels over a 20-30 day period, an amount that is comparable to the official estimates of the amount spilled by the Exxon Valdez.
Also, because there would inevitably be a drawn-out disagreement between the spiller, their insurer and the government concerning damages in a major spill, a $1 billion response and compensation fund similar to the U.S. "Oil Spill Liability Trust Fund" should be established to expedite response and supplement oil spill claims. Liability standards for this project should be assessed much more carefully, and increased. As they stand now, they do not provide adequate incentive for the safest operation possible.
Another related financial consideration for the government and people of Sakhalin is the Production Sharing Agreement. The fact that the Sakhalin government will only begin receiving royalties from the project after SEIC shows a profit seems reasonable, but as companies are quite adept at burying profits as costs with clever accounting practices, this issue should be carefully reviewed. Oil companies have become so proficient at hiding profits in the U.S. that they have avoided billions of dollars in corporate taxes, leading to concerns that the U.S. has for quite some time had a highly developed state of "corporate welfare." It is important that the companies involved off Sakhalin not be allowed to play a "shell-game" with earnings, thus delaying payment of royalties to the local government.
Regarding federal revenues from OCS oil and gas development, it is recommended here that the Russian government consider implementing legislation similar to that in the United States. In the U.S., each year the Minerals Management Service (MMS) collects and distributes about $3.5 billion from bonuses, rents, and royalties from offshore oil and gas leases. Of this amount, $900 million/year is to go to the Land and Water Conservation Fund (LWCF) to be used to purchase protections on critical habitat areas, and $150 million/year is to go to the National Historic Preservation Fund. While this has been the law for many years, in practice much of these monies have been used for deficit reduction and not been appropriated to their mandated purpose. Presently, legislation is pending in the U.S. Congress to fully appropriate these funds as originally intended. The LWCF provides a 50/50 matching grant program with States and local governments to acquire and develop public recreation areas and facilities, and federal monies are used to purchase federal park lands. As of FY 1997, over $4.3 billion has been appropriated from the LWCF for federal park purchases and about $3.2 billion has funded over 37,000 park and recreation projects by the State governments. In this way, rents from non-renewable public resources are translated into long-lasting public benefit.
Public Oversight:
In addition to adequate financial liability, public oversight is an important factor in assuring the protection of the environment. The author has proposed to the Governor of Sakhalin that the government there establish a Regional Citizen's Advisory Council to monitor government and industry vigilance during all phases of the offshore oil operations. Such a council was established in Prince William Sound, Alaska by the pipeline owner after the Exxon Valdez spill, and funded by industry at approximately US $2 million/year. This council has been responsible for continuing improvement in the safety of the oil transportation system in the region. A Sakhalin Shelf Citizens Advisory Council (SSCAC) would greatly enhance citizen confidence in the safety of the offshore oil and gas development project. It should involve representatives of the local indigenous community, commercial fishing industry, environmental groups, scientific organizations/universities, local governments, etc. It is also recommended here that the establishment of such a citizen's council be considered in Japan.
Sakhalin Energy officials stated, correctly, at the SRC Symposium in Sapporo that the safety of the oil production and transport system is largely a matter of corporate culture.
In keeping with this reality, it is proposed here that SEIC establish, among other safeguards, a confidential reporting system whereby employees can report potential problems without fear of retribution by the company. Self-policing does have a place in ensuring safety, and employees need a corporate environment conducive to freely discussing problems without fear of losing their jobs.
Clearly, the government and oil industry have a long way to go to bring the Sakhalin offshore oil operation up to a "best available technology" standard. The potential consequences of not doing so should become evident in the following discussion.