Caspian Oil Projects: Safeguards Break New Ground

On November 4, 2003, the Board of the International Finance Corporation (IFC), the private sector arm of the World Bank Group, approved lending to the Baku-Tbilisi-Ceyhan (BTC) pipeline and the Azeri-Chirag-Deepwater Gunashli (ACG) Phase 1 oil field.

The preparation of the two projects breaks new ground in transparency, and environmental and social sustainability. We asked World Bank Group Director for Oil, Gas, Mining and Chemicals, Rashad Kaldany about those milestones in IFC’s drive to build on the lessons of similar successes such as Chad-Cameroon, and the challenges inherent in structuring such complex cross-border projects.

In what way are these projects considered breakthroughs in the areas of environmental and social sustainability and of transparency?

On the financial transparency front, the projects include nine layers of monitoring—four internal and five external—that will result in seven different reports being made public. This level of monitoring and transparency is unprecedented and provides the correct balance of internal monitoring verified by external, independent monitoring and public disclosure for the BTC. It also demonstrates that the project sponsors and the lenders will focus on implementation challenges and results on the ground.

Another example, and another first, is that the projects’ Host Government Agreements, Inter-Governmental Agreement, and Production Sharing Agreement were made public. In addition, Azerbaijan’s oil revenues will be made transparent, partly due to the World Bank Group’s assistance in establishing the State Oil Fund of Azerbaijan. Revenues from the oil and gas projects in Azerbaijan will be placed in a state oil fund, which will be audited by the international firm Ernst and Young and disclosed to the public.

What about the environmental concerns raised by some NGOs?

The IFC has a regular dialogue with international NGOs and their main area of concern was about the routing of the pipeline, particularly through the Borjomi area in Georgia. As part of its due diligence on the project, both IFC staff and independent environmental and technical experts assessed all routing options. Those largely independent assessments confirmed that the route chosen was the only viable one, with the significant mitigation and protection measures proposed in this area.

Another unprecedented aspect of those projects are your extensive consultations with stakeholders in each of the three countries through which the pipeline is routed. What is their reaction to the project?

IFC did a lot of listening to various stakeholders in six Multi-stakeholder Forum meetings, held with EBRD between August and September of this year. It was truly gratifying to hear directly from local NGOs and local communities. It is clear that local people want the pipeline to be built—but they want it built in a safe, sustainable, and environmentally sound way.

Local people and communities also told us they want and need community development in order to improve their lives. That’s why both BTC and IFC are working hard on generating local benefits through community investment programs, linkage programs, and small and medium enterprise development.

In addition, extensive consultation with affected communities was undertaken by the BTC company, and verified by IFC. Compensation packages for land, which are consistently above market rates, have been set and are independently monitored.

Now that the IFC Board has approved the project, what happens during implementation?

IFC worked closely with project sponsors and other lenders in the preparation phase to ensure the application of best practices, including in financial, technical, legal, and environmental and social areas. We believe our presence will be key in terms of facilitating the application of the same approach, especially with respect to monitoring social and environmental impacts, throughout the implementation phase. At the end of the day, those elements will be vital to mobilizing significant private and institutional investments in the three project countries and their respective communities. I think it’s worth noting that the board today expressed its support for our efforts in undertaking such a difficult and risky project and said that we have a role to play in projects of this nature.

The BTC pipeline is a dedicated crude oil pipeline system, which will extend from the ACG field through Azerbaijan and Georgia to a terminal at Ceyhan on the Mediterranean coast of Turkey.

The pipeline can transport up to 1 million barrels per day, and at 1760 kilometers is one of the longest of its kind in the world. The BTC pipeline will complement oil transport from two existing pipelines—the Northern Route pipeline to Novorossiyk, Russia, and the Western Route pipeline which ends in Supsa, Georgia—whose transportation capacity is limited.

The BTC pipeline will transport oil from landlocked Azerbaijan to the port on the Mediterranean Sea, bypassing the environmentally sensitive Black Sea and the Bosphorus Straits.

IFC’s investment in the BTC pipeline consists of a loan up to $125 million for its own account and a loan of up to $125 million in commercial syndication. The total project cost of BTC is approximately $3.6 billion.

The ACG Phase 1 oil field involves developing an oil field off Azerbaijan in the Caspian Sea. IFC’s investment in ACG Phase 1 consists of loans of up to $30 million for its own account and further loans of up to $30 million to be commercially syndicated. The total project cost of ACG Phase 1 is approximately $3.2 billion.

Linking small- and medium-sized enterprise (SME) development to the construction and operation of the pipeline has also been an important part of the project, which aims to benefit SMEs and smaller companies. Some 10,000 jobs are expected to be created during the pipeline construction and some 850 during operations.

For more information about the ACG Phase 1 and BTC projects, and multistakeholder forums go to http://www.ifc.org/btc.