Kashagan

Overview
Crude Accountability is working in partnership with a number of international NGOs, including Campaign for the Reform of the World Bank (CRBM), CEE Bankwatch Network, The Corner House, Friends of the Earth France and Platform, to address the extensive environmental and social risks associated with the Kashagan offshore oil project, and to stop or condition international finance institution (IFI) investment in the project. Below you will find an overview of the Kashagan project and the key environmental and social concerns. For more detailed information on Kashagan developments, the financing of the project, and the international NGO campaign, please see the Dodgy Deals section of the BankTrack website.

What is Kashagan?
An offshore oil project in the north Caspian Sea, Kashagan is part of the North Caspian Sea Production Sharing Agreement (PSA), a 40-year contract that was signed in 1997 and includes the development of 11 offshore blocks. The Italian oil company Eni estimates Kashagan’s recoverable reserves at 7 to 9 billion barrels.i  Phase I of Kashagan’s development has been extended three times–most recently in January 2008–and current reports put the end of Phase I and the beginning of commercialization at the end of 2012. Construction costs spiraled from $27 billion to $60 billion in 2006.  The consortium’s July 2007 projection for total project costs was $136 billion. In February 2010, Kazakhstan’s Minister of Energy and Mineral Resources anticipated that spending on Kashagan this year would be cut by $3 billion.ii

Kashagan Field
Kashagan Field

In addition to the offshore extraction itself, a number of supporting infrastructure projects in western Kazakhstan and throughout the Caspian pose great environmental and social risks. These projects include the development of the Atash Sea Port at Bautino north of Aktau, the construction of the Bolashak Onshore Processing Facility near Atyrau, oil pipeline construction and extension projects, and a future trans-Caspian transportation system linking Kashagan to BP’s Baku-Tbilisi-Ceyhan pipeline.

Kashagan and its supporting infrastructure projects combine the dangerous mix of new, untested technologies, a fragile environment, a multinational oil consortium operating under a confidential agreement with the government of Kazakhstan, and the prospect of financing by the world’s largest international finance institutions.

Companies Involved
In January 2009, operational responsibility for the Kashagan project was transferred from Agip KCO (a company fully owned by Eni S.p.A.) to the North Caspian Operating Company (NCOC) BV, which is a consortium comprised of the following major oil companies:

Eni/Agip (Italy) 16.8%
ExxonMobil (USA) 16.8%
Kazmunaigaz (KMG), Kazakhstan’s State Oil Company 16.8%
Royal Dutch Shell 16.8%
Total (France) 16.8%
Conoco Phillips (USA) 8.4%
Inpex (Japan) 7.6%

According to Eni’s website, “development, drilling and production operations are delegated by NCOC BV to the main partners of the consortium, with Eni retaining responsibility for the execution of phase 1 (the Experimental Programme) and for the onshore parts of the subsequent development phase (phase 2) of the oil field.”iii

Financial Institutions Involved
A number of private banks and a few international finance institutions have provided financing to support the Kashagan project. We believe that international financing of Kashagan and the other components of the North Caspian Production Sharing Agreement (PSA) must be halted or conditional to stringent compliance with the highest international standards for environmental protection and corporate responsibility. Environmental, health, transparency, labor and financial problems plague this project, and we believe that investment in Kashagan would be unsound, unsustainable and irresponsible.

More information on the international financial institutions involved in the Kashagan project to date can be found on the Dodgy Deals section of the BankTrack website.

Environmental Concerns
The Kashagan oil field is located within a protected territory—the shallow nature reserve zone of the north Caspian Sea. Most notably, the endangered sturgeon migrate through this area to their spawning grounds, the Caspian Seal’s whelping grounds are found here, and numerous bird species migrate through this area.

The shallow water depths (2-10 meters) and extreme weather conditions (summer highs of 45 degrees Celsius/winter lows of –40 degrees Celsius), create a situation in which oil extraction and transport is extremely difficult and bears high risk of causing irreparable environmental devastation. Of particular concern are the winter ice floes that threaten to overrun the artificial islands constructed for extraction activities and the undersea pipelines that transport the crude to shore. In 2005/2006, construction was forced to stop for four months due to ice movement.

Adding concern to the project is the fact that Agip KCO and the Kazakhstan Ministry of the Environment are in conflict regarding a waste management plan for the project, despite the fact that the PSA requires zero discharge.
There is also serious concern that greater tanker traffic from the Bautino Port will commence without the requirement of double-hulled tankers for oil transport, and without the establishment of a comprehensive oil spill response plan. In the event of a spill, the destruction to the natural environment will be devastating, exacting an unacceptable toll from this fragile ecosystem.

Health Concerns
We are concerned about the impact of the field on residents living nearby, including in the “oil capital” of western Kazakhstan, the city of Atyrau. Residents of Atyrau city and Atyrau region are at risk of toxic exposure from the development of the Kashagan field itself, as well as from the Bolashak Processing Plant, which is under construction approximately 30 kilometers from Atyrau. The plant will separate hydrogen sulfide and other sulfates from the highly sulfurous Kashagan oil, making it “ready” for transport to the west. We are also concerned for the safety of workers on Island D, the artificial island in the Caspian Sea, where oil is extracted. The hydrogen sulfide content in the oil has been reported as high as 15 percent.iv

The risk of exposure to hydrogen sulfide, which is known for its toxicity to humans, is highly concerning. According to the United States Agency for Toxic Substances and Disease Registry(ATSDR), hydrogen sulfide is a neurotoxin, and long-term exposure causes disruption of the brain, including permanent memory loss, vision problems, dizziness, headaches and nausea. Acute exposure can cause severe illness or death. The United States Environmental Protection Agency has reported that prolonged exposure to hydrogen sulfide results in “neurological deficits” among residents of communities close to oil and gas fields.v

A 2007 Financial Times article supported these concerns, raising questions about the safety of the Kashagan field for people impacted by the project. According to the article, simulations conducted at the field revealed that living quarters, control rooms and other facilities “were in danger of mass poisoning” from the extremely high levels of hydrogen sulfide. In some cases, according to the article, “workers must carry gas masks”.vi  The removal of sulfur is extremely polluting, and carries major risks not only for the workers, but also for nearby communities. Furthermore, location and modalities for its storage are highly sensitive matters for the fragile north Caspian environment.

Public Access to Information
According to local residents, those living closest to the Bolashak Onshore Processing Facility have not been included in any public consultations regarding the construction, and have received no information about the risks of airborne hydrogen sulfide and other toxic emissions—such as mercaptans—to their community.

Kazakhstani law requires consultation with the public in the form of public hearings prior to starting construction work at the Port of Bautino and the Bolashak Onshore Processing Facility. Atyrau residents and environmentalists were not provided adequate information about the public hearings that were held in Bautino in the early autumn of 2006. The public hearings that were held were not open to all interested parties, including residents of Atyrau. The public hearings also failed to provide access to an expert, who could have provided the public with commentary regarding the technical elements of the construction plans.

Local residents surrounding the Bolashak Onshore Processing Facility state that they were never informed about public hearings regarding the construction of the Processing Facility. Finally, the public was not involved in the project’s Environmental Impact Assessment. And, the EIA itself is not readily available to the public; it is housed in the offices of local government officials, which, unfortunately, are not accessible to average citizens.
Kazakhstan is a signatory to the Aarhus Convention, which requires public access to environmental information, public participation in environmental decision-making, and legal recourse when those rights are denied.

Social Concerns
Kashagan not only threatens the environment, it also threatens the livelihoods of millions of residents of the Caspian region. Oil development in the north Caspian places the tourism and fishing industries at risk and prevents investment in other economic ventures that could contribute to the sustainability of the region.

Though Kashagan’s expected profit is approximately $600 billion, 90 percent of residents in Atyrau region live below the poverty line (the corresponding figure for the country as a whole is 20 percent). According to local activists, unemployment in Atyrau is at 70 percent.

According to the Production Sharing Agreement, one percent of the annual budget of Agip KCO must be spent on social and infrastructure projects. Agip KCO must consult with the Kazakhstani government to decide which projects are needed, and the government should then decide on the priorities together the local administration and present them to the company. Residents of the most impacted villages and other members of civil society have no input into how the money is spent; in fact, the PSA is designed to protect Agip KCO from the demands of NGOs and local citizens, who can only ask the government for information on how the money is being spent.
Water projects, sanitary projects and schools have been created with this funding. However, corruption is rampant throughout the projects, in particular in connection to the tender process in bidding for the contractors for each project.

The majority of Kazakhstan’s citizens think that this money is a gift from the company and do not understand that this money is owed to them by both the company and the Kazakhstani government. Furthermore, the majority of Kazakhstan’s Parliamentary members do not fully understand the investment issues at hand and their responsibility to Kazakhstan’s citizens.

Labor Concerns
The majority of workers employed in the early stages of the Bolashak Onshore Processing Facility construction were not local residents. Many of the brigade workers came from other parts of Kazakhstan, from Russia or from abroad. According to local activists, knowledge of English was a requirement—even to work as a cleaner at the railway station—in order to be hired. The official languages of Kazakhstan are Russian and Kazakh; this policy discriminates against local residents.

According to a May 2009 report, an agreement was made between government authorities and the consortium to appoint an additional 3,000 local workers for the Bolashak construction project.vii

Local Community Profiles: Karabatan and Iskenye
Agip KCO is building an inland complex approximately 30 km east of the city of Atyrau, the Bolashak Onshore Processing Facility. A pipeline will take crude from the Kashagan Field to the Bolashak complex, which covers an area the size of Amsterdam.viii  While the Kazakhstani government asked Agip KCO to separate the sulfur from the oil at the offshore, artificial island known as Island D, only initial separation will occur there, and not even half of the sulfur will be clean there. Rather, the majority of the sulfur will be separated from the oil at the Bolashak complex, and the sulfur will then be stored in 30-meter pool-pyramid structures.

The Bolashak complex is situated 7 km from the settlement of Karabatan (approximately 25 homes), and 5 km from the settlement of Iskenye (approximately 60 homes). There are no stores, services, schools, telephones or streets in either community.

Water is provided to Karabatan by the Kazakhstani government via pipes that draw the water to the “center” of the settlement. Families must go to the center and draw the water they need using a hose system and their own buckets. As of summer 2006, water trucks from the Bolashak complex were coming to the village twice a day, taking approximately 20 tons of water each day. Inhabitants are worried that there will not be enough water in the future.

There are approximately 30 children in Karabatan. Agip KCO built a new school that is located about an hour away from the village using funds from the social and infrastructure budget, but there is no public transportation to reach the school and the residents have no means to take their children to school. When Karabatan residents requested a bus take their children to school, they found that their settlement is situated at the intersection of three local districts, and none are taking responsibility for the situation. Agip KCO offered to supply a bus, but will not pay for the gasoline. As the local districts cannot decide who should take responsibility for the cost of the gasoline, the process of creating a means for the children to go to school is effectively blocked.

The result is that children as young as six years old take the train to school on Monday morning and stay there until the Saturday afternoon, sleeping on the floor in the school building, in winter sometimes without heating, and return to Karabatan on Saturday evening, to spend only Sunday with their families.

When construction began at the Bolashak complex, there was so much dust in the air that the local residents could not recognize their cows when they returned from the steppe in the evening; the animals were completely covered in dust.

There is no emergency plan for local people living near the Bolashak complex, there is only an emergency plan for the workers. The wind blows from the Bolashak complex toward Atyrau, and an accident at the complex could have a devastating effect on this city as well as on the settlements of Karabatan and Iskenye.

Campaign Next Steps
Crude Accountability and our international partners are urging international financial institutions to refrain from financing any portion of the Kashagan project due to the numerous concerns outlined above.

 

i. http://www.eni.com/en_IT/eni-world/kazakhstan/eni-business/eni-business.shtml, (accessed February 15, 2010).
ii. http://www.neurope.eu/articles/98937.php,  (accessed February 15, 2010).
iii. http://www.eni.com/en_IT/eni-world/kazakhstan/eni-business/eni-business.shtml,  (accessed February 15, 2010).
iv. http://www.rigzone.com/news/article.asp?a_id=49533,  (accessed February 15, 2010).
v. Toxicological Review of Hydrogen Sulfide (CAS No. 7783-06-4), June 2003, U.S. Environmental Protection Agency, Washington, DC.
vi.  “Developing Kashagan is Painfully Slow,” The Financial Times.  January 22, 2007.
vii. http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=689764,  (accessed February 15, 2010).
viii.http://www.agipkco.com/wps/wcm/connect/agip+kco/AgipKCO+EN/Home/Kashagan/
Kashagan_+the+challenge/Project+Progress+Onshore/,  (accessed February 15, 2010).