To: Department of Institutional Integrity
The World Bank
June 13, 2007
To the Director of the Department of Institutional Integrity:
We are writing to you to express our concern about the IFC’s ongoing involvement in the development of the Karachaganak Oil and Gas Condensate Field in light of a recent Foreign Corrupt Practices Act conviction by the US Department of Justice.
On April 26, 2007, the Texas-based oil services company Baker Hughes pled guilty to violating US anti-bribery provisions under the United States Foreign Corrupt Practices Act and agreed to pay a fine of $44 million. Baker Hughes employee, Roy Fearnley, was identified in the case as the individual responsible for paying a bribe to ensure a successful bid for a Baker Hughes contract at Karachaganak.
Baker Hughes was charged with engaging in corrupt practices in a successful attempt to win a tender to operate at the Karachaganak Oil and Gas Condensate Field in western Kazakhstan. The operator at the Karachaganak Field is Karachaganak Petroleum Operating, B.V. (KPO), a consortium of international oil companies comprising British Gas, ENI/Agip, Chevron and Lukoil. Lukoil received $150 million in financing from the International Finance Corporation in 2002 to support operations at Karachaganak.
The facts of the case are outlined below, and taken from the SEC’s website (http://sec.gov/litigation/litreleases/2007/lr20094.htm).
“The SEC’s complaint alleges that Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan’s national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley. According to the complaint, Fearnley told his bosses that the “agent for Kazakhoil” told him that unless the agent was retained, Baker Hughes could “say goodbye to this and future business.” Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent.”
According to court documents, “In or about early October 2000, officials of KPO notified BHSI and Baker Hughes that the Baker Hughes tender was successful and the Karachaganak contract was awarded to Baker Hughes. The Integrated Services Contract between KPO and BHSI became effective on or about October 23, 2000. Thereafter, Baker Hughes and operating divisions Baker Atlas, Baker Oil Tools, and INTEQ, through Baker Hughes’s subsidiary BHSI, performed services pursuant to the contract with KPO.” Baker Hughes employee Roy Fearnley, was charged with “violating and aiding and abetting violations of the FCPA” by the SEC. (http://sec.gov/litigation/litreleases/2007/lr20094.htm)
As a party to this agreement, Karachaganak Petroleum Operating, B.V. was involved in an illegal contract with Baker Hughes at the time that consortium member, Lukoil Overseas Operating, applied for and received financing from the International Finance Corporation.
The Baker Hughes’ corruption conviction appears to violate the following INT guidelines: bid manipulation, coercive practices, fraudulent bids, fraud in contract performance, bribery or acceptance of gratuities, abuse of authority, and misuse of Bank Group funds.
In particular, in addition to merely being a subcontractor to KPO—enough reason to warrant investigation—because Baker Hughes is a provider of oil service products, the question of whether Bank funds were directly used to pay Baker Hughes for their activity as contractors at Karachaganak must be thoroughly investigated.
The IFC-funded development of the Karachaganak Field has been severely detrimental to the health and safety of local populations living near the field, in particular to the residents of the village of Berezovka, which is located five kilometers from the field. Environmental degradation threatens the community, air pollution has caused serious health problems within the community, and the villagers have concluded that their only option is to seek compensation and relocation to a safe and healthy location. Detailed information on the devastating impacts of the Karachaganak operations is available at Karachaganak Campaign.
Two separate complaints about the IFC’s financing at Karachaganak have been filed with the Office of Compliance, Advisor, Ombudsman at the International Finance Corporation. The first complaint, which was submitted in 2004, has been transferred from the ombudsman’s function to compliance following an extensive investigation by the CAO’s office, which resulted in a report that was published in April 2005. The second complaint, which was filed in April 2007, has been accepted by the CAO and is in the initial phases of investigation.
Concerns about corruption at Karachaganak have been present since the onset of the project, but difficult to prove. The Baker Hughes case demonstrates to the local population what they have known all along: the project is not transparent or accountable to the public.
Therefore, we, the undersigned organizations, urge the INT to investigate the extent to which corruption that occurred at Karachaganak may extend beyond that which was investigated by the US Securities and Exchange Commission including, but not limited to, corruption that may have occurred in the establishment of the project’s Sanitary Protection Zone. We also request that the IFC withdraw its loan to KPO, cease any further engagement with the consortium and refrain from any future financing of the Karachaganak Oil and Gas Condensate Field. Additionally, we urge the INT to place Baker Hughes, Roy Fearnley, Kazakhoil and each of the companies of the Karachaganak Petroleum Operating, B.V. consortium on the list of debarred firms and individuals. Finally, we urge the IFC to cease all financing to the oil and gas sector in Kazakhstan because of the involvement of the Kazakhstani state oil company, Kazakhoil, in the Baker Hughes case.
Thank you for your attention to this matter, and we look forward to hearing from you soon.
Executive Director, Crude Accountability
Co-Chair, Ecological Society Green Salvation
Director, Berezovka Initiative Group
Director, The Kazakhstan International Bureau for Human Rights and Rule of Law