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«Complaint Regarding the Lukoil Overseas Project (Karachaganak Oil and Gas Field) Burlinsky District, Western Kazakhstan Oblast, Kazakhstan April 15, ...»

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Assessment Report

Complaint Regarding the Lukoil Overseas Project (Karachaganak Oil and Gas Field)

Burlinsky District, Western Kazakhstan Oblast, Kazakhstan

April 15, 2005

Office of the Compliance Advisor/Ombudsman

International Finance Corporation and

Multilateral Investment Guarantee Agency

Table of Contents

List of Acronyms



Figure 1. Diagram of KOGCF

Complaint Assessment

Appendix 1: Complaint

Appendix 2: Health and Environmental Indicators for Kazakhstan

Appendix 3: CAO Methodology

Appendix 4: Environmental Actions Taken by Sponsor

Appendix 5: Timeline

Appendix 6: Scale map of KOGCF with Surrounding Villages

2 List of Acronyms AMR Annual Monitoring Report BG British Gas CA Crude Accountability CAO Office of the Compliance Advisor/Ombudsman EMP Environmental Monitoring Plan ESIA Environmental and Social Impact Assessment GoK Government of Kazakhstan IFC International Finance Corporation KIO Karachaganak Integrated Organization KOGCF Karachaganak Oil and Gas Condensate Field KPO Karachaganak Petroleum Operation b.v.

KZT Kazakhstan Tenge (currency) MIGA Multilateral Investment Guarantee Agency MoH Ministry of Health SPZ Sanitary Protection Zone 3

1. INTRODUCTION The Office of Compliance Advisor/Ombudsman (CAO) is the independent accountability mechanism for the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). The CAOreports directly to the President of the World Bank Group, and its mandate is to assist parties in addressing complaints raised by people affected by projects.

CAO acts in a manner that is fair, objective, and constructive and to enhance the social and environmental outcomes of projects in which IFC and MIGA play a role. In the first instance, complaints are managed through the CAO’s Ombudsman function. The purpose of this

assessment is to:

1. Provide a neutral assessment of the facts gathered during the assessment that are associated with questions raised in the complaint;

2. Propose appropriate steps to assist parties to achieve resolution of this complaint.

This assessment is not a formal compliance audit of IFC’s or its partner’s adherence to established policies. Such an audit, as specified by CAO’s Operational Guidelines, could occur if deemed necessary, at a later stage. The assessment report presents facts, gathered by the CAO during assessment about activities that relate to and address concerns raised in the complaint.

CAO received a complaint on 1 October 2004 regarding the Lukoil Overseas Project, an International Finance Corporation (IFC) investment in the Karachaganak Oil and Gas Condensate Field (KOGCF) in Western Kazakhstan. Lukoil is a member of an international consortium, the Karachaganak Petroleum Operation b.v. (KPO) that has developed and operates the KOGCF.

Individuals from the village of Berezovka, located approximately 5 kilometers from the Karachaganak production facilities, submitted the complaint, dated 22 August 2004. The CAO acknowledged the complaint on 4 October 2004, appraised it and accepted it on 8 October 2004.

The Complainants have requested that their names remain confidential.

The complaint raises three specific questions:

• Does the proximity of Berezovka to the KOGCF mean that its inhabitants are exposed to adverse health impacts?

• Have the operations of KOGCF caused deteriorating economic circumstances for the residents of Berezovka?

• Was the reduction in the Sanitary Protection Zone justified?

A desk review of pertinent IFC and project documents was conducted during October and November 2004. The CAO met with the IFC project team to discuss the project and the substance of the complaint on 9 November 2004; CAO staff undertook a field mission to Kazakhstan from 7 through 15 December 2004, where they assessed the allegations contained in the complaint, and met with the Complainants and project sponsors.


KOGCF is located in the Burlinsky district of the Western Kazakhstan Oblast of Kazakhstan, near the town of Aksai. The project represents the second phase (Phase 2) of the Initial Program of development of the KOGCF, one of the world’s largest gas-oil-condensate fields; the field’s total 4 proven oil reserves are 1.9 billion barrels, and 13 trillion cubic feet of gas.1 The field currently produces about 220,000 barrels per day (bbl/d) of oil, and 1.3 billion cubic feet per day (BCF/d) of gas. The development program commenced in the last quarter of 2000.

Project development included: 1) deepening and working over of 85 wells; 2) refurbishing of the existing primary separation facility, and construction of an additional facility; 3) construction of a gas/condensate separation facility and installation of gas injection compressors; 4) construction of a 635 km liquids pipeline to connect to the Caspian Pipeline Consortium (CPC) pipeline to export the field’s liquids; 5) environmental remediation work at the existing site (due to Soviet-era contamination); and 6) construction of a web of infield pipelines, roads and related infrastructure, including a 120 MW power plant to supply the project and the local community with electricity.

Construction activities were completed by the end of 2004.

Figure 1. Diagram of Karachaganak Oil and Gas Field

–  –  –

The sponsor of the IFC-funded project is Lukoil JSC of Russia, which has a 15% stake in the Karachaganak field through its subsidiary Lukoil Overseas Karachaganak B.V. The project was developed by an international consortium originally called the Karachaganak Integrated Organization (KIO), but now called Karachaganak Petroleum Operation (KPO). Consortium members include British Gas (BG) with a 32.5% stake, ENI-Agip of Italy (32.5%), ChevronTexaco (20%), and Lukoil (15%). BG and ENI-Agip are the field operators.

The project has been classified as a Category A project. The total cost of the Phase 2 Initial Program is US$3.7 billion. Lukoil’s share of project costs is US$575 million. IFC’s financing 1 The natural gas in the Karachaganak field is sour gas, referring to the high levels of sulfur it contains, in the form of 4.0% to 4.3% hydrogen sulphide (H2S).

2 This is a diagram and it is not to scale. See Appendix 6 for a scale map which shows the villages surrounding the KOGCF.

–  –  –

In order to protect populations adjacent to industrial areas, where emissions and other environmental impacts may occur, Kazakhstan has historically employed the use of artificial zones of protection, known as a Sanitary Protection Zone (SPZ). These zones allow for emissions within the SPZ, but restrict any new activity occurring within the zone. The decision as to whether existing human activities and residential areas are accommodated in situ or required to be resettled is made on a case-by-case basis. The size of the SPZ is determined as appropriate in each case. The purpose of a SPZ is to allow for emissions from industry while at the same time limiting exposure to the general public.

There are several villages which are located in the vicinity of the KOCGF; Table 1 lists these villages, along with their ethnic makeup, population and distance from the SPZ.

–  –  –

Complaint Allegation I: Are emissions from the KPO field responsible for adverse health impacts experienced by the Berezovka population?

The Complainants contend that the proximity of Berezovka to the KOGCF and the emissions from its facilities, have caused residents to suffer adverse health effects including disorders of the upper respiratory tract, cardiovascular system, allergies and cognitive difficulties including memory loss.

Supported by Crude Accountability (CA)–a Washington, DC-based NGO – the Complainants maintain that the levels of hydrocarbon emissions to air by KPO exceed the permissible standards identified by various U.S. government environmental agencies—Environmental Protection Agency (EPA), U.S. Occupational Safety and Health Association (OSHA) and others—beyond which human health is compromised or damaged. In addition, the Complainants believe that KPO is responsible for contamination of drinking water.

IFC standards3 require measurement of point-source monitoring of air quality – i.e. air quality at the point of emission. KPO must also comply with Kazakhstan regulatory requirements for ambient air monitoring – i.e. air quality in the field as a whole and in surrounding villages. It is understood by the CAO that KPO has increased in 2002 its ambient pollution monitoring capacity by purchasing four mobile monitoring vehicles that can move to different sites to test emissions. Pollution levels are monitored inside every oil and gas field facility (at the source), inside the field, and in each village, every six hours. KPO air emissions monitoring data, made public on a weekly and monthly basis in all area villages and local newspapers distributed free of charge, show that air emissions do not exceed Kazakh air emissions standards in village measuring points. The Complainants have expressed a lack of trust in the reliability of these results. KPO applies annually for emissions license to the local environmental regulator, which is given based on the planned level of field activities.

However, when intercasing pressure (ICP) needs to be relieved by burning gas off of a particular well, or if necessary, from a plant, KPO exceeds the planned level of emission in the field. In those instances, KPO must pay a fine to the local Ministry of Health (MoH); based on the amount of excess emissions it produces4. These burn offs are done for field safety, to remove potentially explosive levels of gas from wells or facility equipment, thus preventing blowouts. During June, July and August 2004, according to IFC, the project did not exceed permissible levels at emission measuring, although the project did exceed KPO’s planned levels of emissions for this period.

IFC, in completing the project’s Phase 2 development, found that KPO has successfully reduced emissions through a variety of upgraded equipment which uses cleaner technology than had been employed under previous management, i.e. Gazprom (for details see Appendix 4.) The sponsor has also removed significant amounts of drill cuttings, cleaned up drilling pits, and disposed of abandoned oilrigs.

As KPO indicated to IFC, hydrocarbon flaring is carried out in accordance with the environmental and health protection measures required by the GoK Law on Environmental Protection GOST 12.1.005-88. To prevent atmospheric pollution of populated areas in excess of Maximum Permissible Concentrations (MPC), well or flow line-flaring operations producing atmospheric emissions may only commence after permission is received from KPO’s Environmental Control 3 IFC's Pollution Prevention and Abatement Handbook, 1998. http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1999/06/03/000094946_99040905052283/Rendered/PDF/multi 0page.pdf 4 See Appendix 4.

–  –  –

As referred to in the project Environmental and Social Impact Assessment (ESIA) KPO commissioned a baseline health study in and around the field in 2001 (March 2001 Kenesary Study).5 On the basis of the study results, KPO indicated that “KGOCF environmental status is currently wholly satisfactory when considering the impact that the field has on the health conditions.”6 Overall, the Kenesary study found that “concentrations of harmful chemicals in soil, drinking water and foodstuff [sic] in the surveyed settlements do not exceed the established hygienic standards.”7 The study only includes a comparison of the health situation of field villages with another village not in the vicinity of the field. This report was not publicly released.

The GoK Ministry of Health (MoH) commissioned a health study and a SPZ Size Justification Study in mid-2002 (2002 Kenesary Study); a third party review of this study was commissioned by KPO.8 In addition, the GoK Western Kazakhstan Oblast Health Committee conducted a medical study in Berezovka from 11 to 17 May 2004,9 a two-page summary of which was shared with CAO and CA.

The full text of the 2002 Kenesary Study was not made public. According to KPO, the study found no link between ambient pollution and the health status of residents of Berezovka. KPO’s view is that Berezovka’s current community health situation results from Kazakhstan‘s overall social and economic deterioration following the dissolution of the Soviet Union, as well as inadequatelymaintained Soviet-era infrastructure, in particular water supply, sewage treatment and disposal systems. According to the 2002 Kenesary Study, human health conditions in villages surrounding the field are, on average, better than conditions in villages in the south of the Western Kazakhstan Oblast; it is considered that field employment at KPO—linked to higher income and better nutrition—benefited “field” villagers more so than those who live farther away from the KOGCF.

With respect to contamination of water supplies, the project maintains concrete-lined polygons for storage of liquid and hazardous waste as per its waste management system. This should mean that no contaminants escape into the surrounding surface or ground water. KPO performs ground and surface water testing within the field and 12 wells within the village areas were also tested and analyzed. According to KPO confidential reports, which were not seen by CAO, the results do not indicate contamination resulting from the field activities. (See Appendix 4, Para. 2) Crude Accountability (CA), together with the Complainants, sponsored a health survey in 2002, and has recently (as of December 2004) undertaken blood-testing work in Berezovka10. According to CA,11 the door-to-door survey of 400 households was taken in Berezovka by the Complainants.

Their results stated that there were widespread muscular and skeletal problems, memory loss, 5 KPO commissioned study by Centre of Preventative Medicine “Kenesary,” Kazakh State Medical University, March

2001. This work includes a comparison with the “control” settlement of Alexandrovka within the Oblast but distant (50km) from the field’s influence.

6 ESIA, paragraph 3.2.2.

7 Ibid.

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