Gazprom, Shell, Mitsubishi and Mitsui have closed the $5.3 billion project financing for their $20 billion Sakhalin II oil and liquefied natural gas project. The deal deserves to be a case study for the financing of large extractive industries projects. Few others have managed to combine environmental, construction and political risks in such a dramatic fashion. The project also created the sternest test of banks' environmental lending standards since the signing of the Equator Principles.

Sakhalin II is a larger and more complex sister project to the Exxon-led Sakhalin I project. It involves the production of oil from the Piltun-Astokhskoye field and gas from the Lunskoye field, located off the northeastern coast of Sakhalin Island. The project was the subject of Russia's first ever production sharing agreement, signed in 1994, a full two years before Sakhalin I.

But Sakhalin II came to embody the Russian Federation's more assertive approach to its oil and gas assets. Once a Shell-led project, Gazprom now owns a 50% plus one share stake in project company Sakhalin Energy Investment Ltd, with Shell owning 27.5%, Mitsui owning 12.5% and Mitsubishi 10%. The Japan Bank for International Cooperation is providing $3.7 billion in debt directly, with six banks providing an additional $1.6 billion on an uncovered basis.

Next to the project's epic 14-year development, changing cast of sponsors and lenders and fierce criticism from non-governmental organisations, the debt financing is relatively unexceptional, though it is the largest project financing ever in Russia can be described as such. As a proportion of the total project cost, the debt size is small, and dwarfed by the sponsors' equity contributions. The sponsors are guaranteeing the completion of construction, which is in any case almost complete.

Japan accounts for an outsize proportion of the project's output under long-term contracts. Japan's desire to diversify its sources of supply, and Sakhalin's proximity to Japan, explain why JBIC and its lenders stuck with the project while other ECAs and multilaterals fell by the wayside.

Of the six commercial bank lenders on the project, three – Bank of Tokyo-Mitsubishi, Mizuho Corporate Bank, and Sumitomo Mitsui Banking Corp – are Japanese. Financial adviser Credit Suisse took another spot, with BNP Paribas and Standard Chartered, a late arrival, taking the remaining two. All but BNP are signatories to the Equator Principles, although none have publicised their roles in the financing.

And there lies the central element of the Sakhalin drama. The site of the project lies close to the migration routes of the endangered western Pacific grey whale, and the sponsors were not able to convince the European Bank for Reconstruction and Development that the project's environmental safeguards were adequate.

Both US Ex-Im and the UK's ECGD were approached for roughly $1 billion financing, but in early March the project company withdrew its application. The move came as a huge relief to both, neither of which had been forced to give a yes-no to the project. US Ex-Im has encountered NGO pressure before while the ECGD's involvement with the project had attracted two lawsuits from NGOs.

JBIC has lined up one NGO supporter – the Hokkaido Fisheries Environmental Centre. Friends of the Earth Japan, however, claims that the project's pipeline routing and noise and spill minimisation policies are not robust enough. The company's plans for routing pipelines across rivers have encountered particularly fierce criticism.

The Russian government challenged the project's environmental licences before Gazprom's take-over, and the challenges faded thereafter, either through Gazprom's superior knowledge of, or superior integration with, Russia's bureaucracy. Japan's priority is finding alternative sources of supply to the Middle East. Sakhalin II will account for fully 10% of Japan's energy imports once it comes online.

Japan's reasoning is that with the arrival of Gazprom any further upsets are unlikely, and JBIC's experience with financing the first phase of Sakhalin I has been broadly positive. Sources close to Gazprom highlight the fact that estimated project costs have not increased since Shell's disclosure in late 2006 that they had doubled from $10 billion. For Gazprom, the project marks its arrival as a developer of complex cutting-edge integrated oil and gas projects.

Moreover, the margins on the financing, at roughly 150bp over Libor for the confinancing banks, are extremely generous for ECA debt. For JBIC and its lenders, which normally subsist on the thin, if rising margins on offer in the Middle East, the Sakhalin spread, around 50bp above its original level, is welcome. As one banker close to the financing noted "they wanted to get hold of the money as quickly as possible, and they paid for it."

The lenders have been generous in one respect. The sponsors are understood to be able to increase the debt total to a level around $7 billion without getting additional consents. Following completion, and if credit markets recover, an additional financing is possible, subject to lender consents.

The projects' security package is relatively straightforward, and gives lenders security over all the stock of project companies, the project's contracts and assets. The sponsors are providing completion guarantees, which bring the JBIC margin down to 50bp precompletion (it rises to 100bp afterwards). Most novel is JBIC's embrace of the concept of environmental monitoring and default, which sources close to the institution insist will be enforced.

But Sakhalin is a larger and more important project to its participants. And with Japan ready to strike deals with PDVSA for crude supplies, even as PDVSA nationalises heavy oil projects, JBIC's decision to work with Gazprom is understandable. Whether Gazprom's looming Shtokman LNG project, which looks like serving the US market, can assemble a similarly strong bank financing is less clear.

Sakhalin Energy Investment Company
Status: Signed 15 June, some bank commitments pending
Size: $20 billion
Location: Sakhalin Island, Russian Federation
Description: 9.6 million tonnes per year LNG, and 150,000 barrels of oil per day oil and gas production and liquefaction facility
Sponsors: Gazprom (50% plus one share), Shell (27.5%), Mitsui (12.5%) and Mitsubishi (10%)
Debt: $5.3 billion, split between $3.7 billion direct JBIC loan and $1.6 billion commercial bank co-financing
Arrangers: Bank of Tokyo-Mitsubishi, Mizuho Corporate Bank, Sumitomo Mitsui Banking Corp, Credit Suisse, BNP Paribas and Standard Chartered
Sponsor legal adviser: Linklaters
Banks' legal counsel: White & Case.