BRITISH taxpayers are expected to offer a £500m lifeline to a troubled Russian oil and gas project despite warnings that it is turning into an environmental disaster.

The Sakhalin II project, to extract fossil fuels from beneath the freezing seas off Russia’s northeast Pacific coast, is among the world’s largest and most controversial energy schemes.

Britain’s Export Credits Guarantee Department (ECGD) has agreed, in principle, to underwrite it, and John Hutton, the secretary of state for business, enterprise and regulatory reform, is expected to make a final decision within weeks.

Sakhalin II has angered environmentalists on several counts. The construction of three giant oil and gas rigs is said to have endangered the last population of western Pacific grey whales. Two pipelines, running almost the full 590-mile length of Sakhalin Island, north of Japan, have damaged pristine rivers and forests.

Peter Ainsworth, Conservative environment spokesman, said: “I am very concerned about the ECGD. We should not be using taxpayers’ money to support projects that contribute to climate change and could help make an entire species extinct.” The ECGD backed the £10 billion Sakhalin project subject to reports on environmental impacts and on work going to UK contractors.

This offer was made three years ago when the project was controlled by Shell, the Anglo-Dutch oil company. Late last year, however, the Russian government gave control to Gaz-prom, the Russian energy giant, leaving Shell with a minority share. It also emerged that only a handful of British companies had won contracts.

That change in ownership led the European Bank for Reconstruction and Development to revoke its £150m of support for Sakhalin, but the ECGD, which has a different mandate, has refused to do likewise.

A final report on the environmental impacts by AEA Technology, an independent consul-tancy, is due to be issued this month. Insiders expect it to endorse the funding.

“We have given an in-principle commitment to fund this project and will make a final decision based on the report,” said an ECGD spokesman.

Until the 1990s Sakhalin Island a remained largely untouched wilderness because of freezing seas, difficult terrain and its use as a military base under the Soviets.

But confirmation of massive oil and gas reserves in the Sea of Okhotsk, north of Sakhalin, plus the collapse of the Soviet Union, prompted an influx of western oil companies.

Shell set up the Sakhalin Energy Investment Company (SEIC) to run Sakhalin II, including constructing the rigs. The pipelines were needed to carry oil and gas to ice-free ports at Sakhalin’s southern tip.

The involvement of the ECGD, and hence the British taxpayer, arose because the enormous costs, together with Russia’s poor record on debt repayments, made the banks that normally fund such projects unusually cautious.

The SEIC approached the export credit agencies of America and Japan, as well as Britain, to underwrite any loans, and so reassure the banks.

Any decision to fund Sakhalin II would infuriate WWF, Friends of the Earth and other British environmental groups. They say the ECGD and Shell should have carried out a full assessment of Sakhalin II before it started. They also say the report has taken so long that construction work is nearly over.

WWF and the Corner House, another pressure group, have launched a High Court judicial review to force the ECGD to pull out.

Nicholas Hildyard, of the Corner House, said the ECGD had been foolish to support such a scheme. “The ECGD gave a binding promise to support this project before getting assurances on its environmental impact. This decision was unlawful and we want it overturned.”

However, Ivan Chernyakhoz-skiy, a Moscow-based spokesman for the SEIC, said the company still wanted the ECGD’s support.

“They have made a commitment to support us in principle and we expect them to honour that,” he said. “It is a good scheme which meets all our environmental obligations.”

Giant oil project that endangers nature

- Sakhalin II is the world’s largest energy project with an estimated 4 billion barrels of oil reserves.

- Russia will reap huge rewards. With oil prices at $50 a barrel - far below the current range of $72-$74 - Sakhalin II will generate £40 billion over 40 years. It is just one of six such projects.

- The ECGD, formed in 1919 to help British firms to win overseas contracts, has a long history of supporting controversial projects. It initially offered £200m to the Ilisu dam in Turkey that would have displaced 60,000 people, but pulled out.

- It also backed a 2001 deal to sell Tanzania an air traffic control system worth £30m -– half the country’s annual debt relief - when it had only a tiny air force.

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