Karachaganak Retribution: International Environmentalists Take Up Arms Against Major Oil Investor

Igor Ivakhnenko
RusEnergy
February 1, 2005

Oil companies may assess how actively nongovernmental environmental organizations are beginning to attack extraction projects in the Caspian region. There is a conceptual disagreement between the oil industry and environmentalists over whether investors should follow the standards of the civilized world or treat the former Soviet Union like a 21st century colony. The parties adhere to opposing views, the conflict intensifies, and the development of such events creates additional risks for investors.

Damage to Nature and Reputation

Environmentalists are utilizing new technology to influence the oil operators who are guilty, in their opinion, of inflicting harm on the environment and people. In late January, 27 environmental nongovernmental organizations (NGOs) from 19 countries in Europe, Asia and the US, approached Ian MacDonald, General Director of the Caspian Pipeline Consortium (CPC), and its shareholders. The environmentalists requested that the CPC halt the transport of hydrocarbons from the Karachaganak Oil and Gas Field, due to the negative impact of this project on the residents of Russia and Kazakhstan.

The appeal states: “Tens of thousands of residents of the Republic of Kazakhstan and the Russian Federation experience severe health consequences as a result of toxic substances emitted into the atmosphere from the Karachaganak Field” (see Appendix 1). The company responsible, Karachaganak Petroleum Operating (KPO) consists of four shareholders (see Table 1). Not long ago, one of the participants in this appeal–the organization Crude Accountability–requested that the International Finance Corporation make use of its position as lender to Russia’s LUKoil, which is a shareholder in KPO. The environmentalists do not have specific complaints against the Russian company; they want the creditor to oblige the entire consortium to pay more attention to the safety of the project.

Table 1: KPO Shareholders (%)

Source: KPO

Here is the tendency: unable to achieve results from discussions within Kazakhstan with KPO (see “Law on Environment”), the environmentalists want to place the consortium in an embarrassing situation in front of its partners and the international business community. The custodians of nature shift political confrontation from the extraction region to the global arena. Most likely, other oil investors in Kazakhstan and the Caspian region as a whole should be prepared for similar pressure tactics from environmentalists.

Fighting Zone

Over the past year, the fighting zone has expanded drastically for environmentalists concerned about harmful effects of the Karachaganak project. A year ago, the environmentalists’ main efforts were focused on the resettlement of the village of Berezovka. As of January 1, 2004, the government of Kazakhstan agreed to a request by KPO to reduce the borders of the Sanitary Protection Zone (SPZ), within which there should not be any population points. The reduction of the SPZ enabled to consortium to withhold the resources for resettlement of the Berezovka residents, and the conflict became more intense.

The policies of official Kazakhstani agencies with regard to the environmental problems of the Karachaganak project are twofold in nature. On the one hand, in 2002-2003 the Ecology Department of Western Kazakhstan Oblast (WKO) levied increasing environmental fines against KPO (see Table 2). On the other hand, as the environmentalists assert, in 2004 the authorities created obstacles for citizen activists and nongovernmental organizations. On December 14, 2004, the Oblast Ecology Department refused to provide reports on the state of the environment around Karachaganak to representatives from the village of Berezovka, and the organizations TAN and Crude Accountability.

Table 2: Total Environmental Fines Charged to KPO (per million Tenge)

Current rate: $1 = 130 Tenge
Source: WKO Ecology Department

Therefore the environmental NGOs found other allies–in Russia, adjacent to Western Kazakhstan Oblast. The Orenburg Oblast Government Environmental Protection Inspection consistently records levels of toxic substances exceeding the Maximum Permissible Concentrations (MPC) in the population points of Zatonnoe, Privolnoe, and Ilyek, situated to the northeast of Karachaganak. At one point last year, the level of hydrogen sulfide was documented at 2.6 times the MPC. Karachaganak Petroleum Operating B.V. (KPO) and the Western Kazakhstan Oblast Ecology Department report that their environmental monitoring services did not note any chemicals exceeding the acceptable concentration at the border of the SPZ in 2004.

These reports now seem unconvincing, as they are refuted by the official data from Russian environmentalists. The more KPO stubbornly fights off the NGO attacks, the more the zone of negative impacts from the extraction of Karachaganak hydrocarbons expands. Oil investors had been able to establish good contacts with Kazakhstani authorities and state environmentalists. But now this level of political safety is insufficient for the peaceful development of Karachaganak.

Export Blackmail

In their appeal to the CPC’s shareholders, the environmentalists stress, “Karachaganak oil is transported through the CPC pipeline system and exported to western countries. Without this channel, extraction at the field would be sharply curtailed. In this way, the situation regarding KPO’s violations during the extraction of hydrocarbons at this field depends to a great extent on the CPC.”

The environmental protection organizations want the CPC to halt the transport of Karachaganak liquid hydrocarbons. At first glance, this is a completely unrealistic demand. All of KPO’s shareholders are also CPC shareholders and have a transport quota. The CPC pipeline itself was built to transport a planned 20 million tons in 2004, thanks to the inclusion of Karachaganak crude. The provision of over 7 million tons of hydrocarbons from Karachaganak holds great significance for the full capacity of the CPC system this year.

But there are more hidden political circumstances connected with the development of the CPC pipeline. Russia is on one side, and on the other side are the western shareholders and Kazakhstan, opposing one another on the issue of expanding the pipeline and increasing its transport tariffs. Officially, Moscow does not want to increase the CPC pipeline from 28 to 67 million tons per year, but has lately increased, not tariffs, but the transport of Kazakhstani oil via the pipeline owned by the Russian company “Transneft”. And now the opposing sides are using a variety of tactics to pressure each other.

The appeal by the international environmental movement for the CPC to halt transport of Karachaganak oil as “the economic interests of your shareholders…need not be based upon the misfortunes and suffering of local people in Kazakhstan and Russia” is a new argument for freezing this pipeline project. Or for its development under conditions that do not correspond to the direction of the CPC’s western shareholders.

The environmentalists’ appeal does not exert decisive influence on the position of the consortium’s participants. But it reinforces the negative background of the CPC project, which pertains to the oil companies, causing the global community, the mass media and political-populists to presume that they are dangerous to nature and humanity. This attack on the Karachaganak consortium converges with the interests of the CPC’s adversaries, consequently creating additional risk for the CPC and forming an opinion of KPO as the source of problems for business partners, including buyers. The environmentalists make it clear that they will complicate the sale of Karachaganak crude.

New Power

In 2003, KPO completed the Phase-2 development of Karachaganak, enabling the creation of the industrial and transportation infrastructure necessary to steadily increase extraction and obtain large profits. This important achievement assured its investors of Astana’s good favor in 2004, not considering the capital’s brief attack on British Gas during the noteworthy Kazakhstani intrigue. But this year, the participants in the Karachaganak consortium will have to find a resolution to the environmental problems outside of the offices of the high-ranking Kazakhstani officials.

KPO’s current problems appear to be a warning for many investors. For example, for the North Caspian Consortium, which is developing the Kashagan field on the sensitive marine shelf. The North Caspian Consortium has established good relations with the Kazakhstani authorities; its operator Agip KCO employs national environmental services, such as the Agency of Applied Ecology “Nedra”. But the investor has hostile relationships with the regional NGOs “Globus”, “Kaspii Tabigati” and “Caspian for the 21st Century”, which have already created unpleasantness for Agip KCO by organizing independent monitoring and assessments.

Having amassed experience pressuring oil employees in the western world, international NGOs are extending their activities to the former Soviet Union and the Caspian region. A number of such organizations, based in the United Kingdom, are applying pressure on the Baku-Tbilisi-Ceyhan pipeline construction project. Others are attacking the LUKoil project on the shelf of the Baltic Sea, and a third group is unfolding in Kazakhstan. The involvement of environmental NGOs is turning these groups into a new power affecting the oil business in the Caspian region. Investors can agree with them or fight them, but it is not worth it to ignore them.

Appendix 1: Letter to the Boss

The extraction of hydrocarbon reserves from the Karachaganak Field is accompanied by serious human rights and environmental safety violations; violations that increase in intensity with each year. Tens of thousands of residents of the Republic of Kazakhstan and the Russian Federation experience severe health consequences as a result of toxic substances emitted into the atmosphere from the Karachaganak Field. In addition, their land is subject to degradation and traditional land use (agriculture and cattle breeding) has been disrupted by the deterioration of the quality of the land.

The legally recognized demands by local residents to be relocated and receive compensation have been ignored; accurate information on the state of the environment has been concealed, and attempts by residents to obtain independent information about the pollution of their environment and the state of their own health have led to illegal, strong-arm tactics on the part of the Republic of Kazakhstan’s law enforcement structure…

As representatives of environmental organizations in the countries of the Caspian region, in countries that consume Caspian oil, and in countries worldwide, we urge you and the CPC shareholders to make a formal decision to no longer transport hydrocarbon reserves extracted from the Karachaganak Field until the violations to human rights, including the right to a healthy environment, are eliminated.

We are certain that the economic interests of your shareholders and the benefits obtained by oil consumers need not be based upon the misfortunes and suffering of local people in Kazakhstan and Russia…

Translation by Crude Accountability