RUSSIA: FOREIGN INVESTMENTS IN OIL AND GAS From Taiga-News no 13 (March 1995)

FOREIGN INVESTMENTS AND THE FUTURE OF THE RUSSIAN OIL AND GAS INDUSTRY

By

Alexei Grigoriev, Socio-Ecological Union, Russia

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The present development of the Russian oil and gas fields in Western Siberia, facilitated by among others the World Bank and the European Bank for Reconstruction and Development, does not only represent a severe threat to boreal forests and fragile arctic ecosystems. Furthermore, the Oil Rehabilitation Projects means that donor nations and their taxpaying citizens will invest money to promote greenhouse gas emissions. This direct investment in global warming will be much larger than the investments by the same donors and taxpayers to prevent global warming (for example in support of Global Environmental Facility (GEF) projects, also managed by the World Bank).

This is one of the conclusion drawn by Alexei Grigoriev in this review of the Russian oil and gas sector and its present and future socio-ecological impacts.

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ABOUT 10 PERCENT of the global oil supply and 30 per cent of the world's production of natural gas is extracted from Russian oil fields. Nearly half of Russian's hard currency revenue is generated by oil and gas exports. This is the biggest source of income to the Russian state. One million Russian people are directly employed in oil and gas extraction. Over ten million people are dependent upon this sector for their livelihood.

Russia's future oil policy is not clear. Nor is there a clear, official understanding of what is happening within the Russian oil sector. There are even widely differing assessments, ranging from 4 to14 percent, of the Russian part of the world's oil reserves. Only one fact is obvious: Russian oil production decreased from nearly 600 million tonnes in 1987 to 300 million tonnes in 1994. The exploitation over the next few years will largely depend on the outcome of the process aiming at transforming Russia into a market economy, as proposed by the World Bank and International Monetary Fund (IMF).

According to the World Bank Country Assistance Strategy (CAS), the restructuring of the economy over the coming decade will have to be paid to a large extent by revenues from the oil and gas industry. At the same time, macroeconomic reform is a prerequisite for recovering the Russian energy sector.

MAJOR FOCUS OF WB LENDING

According to the World Bank Country Assistance Strategy (CAS), the Russian energy sector is expected to be a major focus of World Bank lending, accounting for roughly 40 percent of the new commitments during the years 1993-1997. The loans could range from US$500 million to US$1 billion annually. CAS recognizes that developments in the energy sector, especially in the petroleum subsector, are critical for Russia's export prospects over the next several years.

Multinational financial organizations - such as the World Bank and the European Bank for Reconstruction and Development (EBRD) - are among the main foreign investors in the Russian oil and gas sector. Already, these banks have authorized US$1.3 billion in loans. The First and Second Russian Oil Rehabilitation Projects are presently in their implementation phase. Both received major loans from the World Bank.

The results of these investments are evident. Russian oil exports to industrialized countries, mainly in Europe, have increased from 50-60 million tonnes annually to a present level of 90 million tonnes per year. At the moment, the capacity of the pipelines is limiting the export. While oil exports have almost doubled, domestic oil consumption and oil refinery activity have experienced substantial decreases. There is often a shortage of gasoline for Russian consumers. This was, for example, the case in Moscow in the fall 1994 and in Saint Petersburg this winter.

WORLD BANK LENDING STRATEGY

The World Bank's future lending strategy concerning new Russian projects is outlined in the June 1994 Staff Appraisal report for the Russian Federation Second Oil Rehabilitation Project:

1. Joint Ventures: Support to joint venture development of new oil fields. In the medium to long term, this is the only way to halt the decline in production and exports. One or two operations of this type are envisaged, to encourage the early implementation of joint ventures between Russian and international oil companies.

2. Refinery Upgrading: Relatively modest investments in refinery modernization could significantly reduce the volumes of crude oil consumed by domestic refineries, freeing up crude oil for export.

3. Crude Oil Transport: "Debottlenecking" investments in the crude oil transport sector can be expected to expand exports and improve production incentives. Investments of this type will be critical to the success of governmental policies intended to free up crude oil exports.

Although multilateral financial organizations provide a relatively small part of money needed for "development" of the Russian energy sector, the role of the World Bank is very important. The involvement and activity of the Bank in this area creates the basis for and serves as a catalyst to private investment.

At this moment, the known new oil and gas development projects include those being promoted by Exxon (partner in Sodeco), Amoco, Mobil, Conoco, McDermott and Marathon (USA), Shell (UK-Holland), Elf Aquitaine and Total (France), Mitsui & Co, Mitsubishi Corporation, SODECO (Sakhalin Oil Development Cooperation Co., a Japanese led company involving the government, Itochu corp. and other trading companies) (Japan), Ruhrgas and Wintershall (Germany) and Norsk Hydro (Norway). Over the next 20 years these projects are expected to lead to investments of more than US$120 billion. Most of the projects will directly affect taiga forest. The implementation of these projects will also cause significant emissions of "greenhouse gases" (CO2 and methane), which will negatively impact the fragile taiga forest ecosystem in the next century.

HOT SPOT: PRIOBSKOYE OIL FIELD, WESTERN SIBERIA

The major oil-producing region of Russia covers a very large part of the central and northern areas of Western Siberia: Tyumenskaya oblast, Khanty-Mansyisky and Yamalo-Nenetstky okrug. About 80 percent of the Russian oil and gas reserves are located here. The potential revenues of the mineral resources in the area have been estimated at more than US$1,500 billion.

Over the last five years, annual oil production in this area has declined from 400 to 200 million tonnes per year. Still, this accounts for two thirds of total Russian oil production. One of the biggest undeveloped oil fields in this area is Priobskoye. It has a proven reserve of 500 million tonnes. According to some assessments, the Priobskoye oil field contains 10 percent of the remaining Russian proved reserves of oil. Geological forecasts indicate, however, that this is only part of a much larger area (50-100 km wide and 300 km long) of large oil reserves.

SHELL AND AMOCO MOVING IN

Currently two foreign companies have received permission to operate in this region: Shell will operate in the southern part of the area while Amoco has won the right to start to exploit the Priobskoye oil field. The Russian counterpart of the Priobskoye oil field development project is Yukos, one of Russia's top five oil companies. Yukos produced 27 millions tonnes of oil and employed 100,000 people in 1994. The oil field is situated close to existing infrastructure, so exploitation can begin almost immediately. Currently, however, Yukos and Amoco are waiting for adoption of the Russian "Production Sharing Law" and "Oil and Gas Law". According to sources in Russia, the two corporate partners are also waiting for loan approvals from the World Bank and the European Bank for Reconstruction and Development. The first stage of project development of this oil field is estimated to require total investments of US$ 35 billion.

SOCIO-ECOLOGICAL PROBLEMS AND CONCERNS

There are several social and ecological problems connected with the restructuring of the energy sector and the exploitation of oil in Siberia. Some of the most severe problems are:

1. Lack of public information and debate. The World Bank Country Assistance Strategy (CAS), including the section on restructuring the energy sector, is not publicly available and is virtually unknown to the Russian public. It has never been publicly discussed, nor has it been debated or approved by the Russian Parliament. The Russian public has had no opportunity to discuss whether or not it is necessary to exploit the Priobskoye oil field. Publicly available information about the project and the agreements and contracts, related to its development, is very limited.

2. Implementation of unsustainable strategies. There has been no debate or discussion of the environmental consequences of the strategy or the implementation of the energy sector plan. However, based on the very limited information available, it seems obvious that the project is not based on an environmentally sustainable development strategy, but rather on a sharp increase in Russian oil extraction for export. According to some estimations, Russian oil reserves will be exhausted in 20 years at the present rate of extraction. If the attempts to restore lost levels of production succeed, this will happen even sooner.

3. Increase in greenhouse gas emissions. Ironically, the plan means that donor nations and their taxpaying citizens will invest money to promote greenhouse gas emissions. This direct investment in global warming will be much larger than the investments by the same donors and taxpayers to prevent global warming (for example in support of Global Environmental Facility (GEF) projects also managed by the World Bank).

4. Adverse impact on the development of renewable energy sources. An increase in Russian oil supply to the world market will decrease motivation for industrialized countries, mainly in Europe, to reduce their energy consumption and develop renewable sources of energy.

5. Environmental destruction. A major part of the Priobskoye oil field is located below the flood plain of the Ob River. A main reason why the field has remained unexploited thus far is because of environmental considerations related to this situation. Any large oil spill will most likely affect down stream areas of this important river. There is also an obvious risk that oil pollution will impact the sea and shores of the Arctic. The official response to such concerns is that Amoco is using environmentally safe technologies for operations under these conditions.

The Russian people are already aware of the value of such promises. In the fall of 1994, a major oil spill occurred in the Komi area in European Russia. The latest official announcements indicate a spill in the range of 70-80 thousand tonnes. To a large extent, the spill was a result of operations by the Komy Arctic Oil Company. The foreign partners of the joint venture were Gulf Canada and British Gas. These corporations also promised to protect Russia's environment, natural resources and natural assets when they were negotiating the contracts to develop Russian oil fields. This clearly indicates that Russia's nature - like nature in many other parts of the world - will be a victim of the double standard approach used by transnational oil companies. American oil companies can be very responsible and environmentally friendly within their own borders while abroad their operations are often quite different and adopt poorer environmental standards. One example is the negative environmental impacts of Texaco operations in the tropical forests of Equador where they are using completely different (and lower) environmental standards than those required in the United States.

ALTERNATIVE STRATEGIES - ENVIRONMENTAL NGO DEMANDS

The Russian energy sector, like Russian society as a whole, has great potential to save energy and decrease the emissions of greenhouse gases. Instead of investing taxpayer money in the promotion of global warming and destruction of the taiga, funds should be put into environmentally friendly ventures whose goals are increasing the sustainability of both the Russian and global economies. Among the most obvious candidates for such investments are the public transportation sector, the natural gas transportation and distribution systems, energy generation capacities and industrial technologies and improved insulation and heating of buildings. The real challenge for foreign experts and financial institutions is to commit themselves to identify or create projects in these areas and help to organize and coordinate "environmental friendly" investments.

We call upon US Vice-President Al Gore to not just speak about the importance of addressing environmental problems and signing agreements like the Arctic Nature Protection Treaties, but to actively pursue implementation of the constructive ideas he had prior to becoming the US vice president. We understand the interest of American oil companies and their role in the American political and economic world. However, utilization development of the taiga and northern polar regions has generally been destructive in the past and is unlikely to prove beneficial over the long-term in the future.

Russian environmentalists ask the citizens of europe to think not only about short term profits and convenience from increased Russian oil exports, but also to carefully consider the globalization of environmental problems. What kind of world do they wish for their children to inherit? These are not merely words. It is a choice that Russians and Europeans must confront.

This time Russians are not asking for money. We ask everyone to help us to prevent an environmental nightmare by terminating these projects while they are still in the preparatory phase. We ask you not to allow the use of your tax dollars, marks or kronor to facilitate further destruction of the environment, not only in Russia, but globally. Global warming will not distinguish between nations or peoples.

ENVIRONMENTAL IMPACTS OF THE RUSSIAN OIL AND GAS INDUSTRY

In many cases, non-forestry industrial sectors In Russia cause even greater damage to boreal forests than logging operations. In huge areas of the central and northern taiga in Siberia and the Far East, the impacts of these enterprises in combination with forest fires are the biggest threat to the forests. Among non- forestry sectors, the oil and gas industry is the leading destroyer of the Russian taiga.

The visible effects of the oil and gas industry expansion in northern Siberia has attracted a lot of media attention. Journalists have painted two types of pictures of this development. One presents the prosperity resulting from industrial development in formerly inaccessible areas. The other shows the horrible and barbaric destruction of pristine taiga. Perhaps both are true.

TWO PICTURES OF OIL EXPLOITATION

For example, the growing oil and gas industry creates a large number of well-paid jobs. The average salary in the oil industry is three times higher than in most other sectors of the Russian economy. Also, the oil industry improves infrastructure and the social welfare system, such as medical services. Housing standards are also improved for many people. New cities are created in formerly very sparsely populated taiga areas, and communication systems are developed.

There is another side to this as well. The forest is under pressure from an industry acting according to the principle that "time is money". It is often cheaper to pay penalties than to waste time and money caring for the environment. Heavy machinery like bulldozers are clearing large areas of pristine forests for the construction of industrial infrastructure. Vast areas of swampy lowlands are flooded due to poor road construction standards. Forest land and wetlands are flooded by oil from broken pipelines. Oil and gas industry workers are leaving trash everywhere: concrete, chemicals, rusting drilling equipment, tractors, trucks, empty barrels and abandoned cabins. Still, things like this - as horrible as they may look - are only a minor part of the total environmental impact of expanding oil and gas exploitation. Tens of millions of hectares of taiga forest are being damaged by indirect and sometimes more or less invisible environmental effects.

FOREST FIRES

According to scientific assessments the frequency of forest fires in old growth forest areas has increased two to three times due to penetration of the oil and gas industry. In many cases the Russian Forest Service is unable to control the situation, since they lack funding and transportation equipment.

Attempts have been made to prosecute industry representatives for causing forest fires. Most of these attempts have failed since development of the oil and gas industry is the number one priority for the Russian government, as it was for the former USSR. The need to protect and citizens' demands to conserve the forest are simply ignored. As a result, hundreds of thousands of hectares of taiga have been destroyed by forest fires that have not been investigated or even registered.

The oil and gas industry itself pays some attention to the problem, but only when fires threaten to affect their own facilities or infrastructure. In such cases they defend their own property from the fires, but not the forest.

ROAD CONSTRUCTION AND FOREST FRAGMENTATION

Since the oil and gas industry is generating huge export incomes, it is supported when creating the necessary infrastructure. Profits from forestry would never have been able to support the creation of the network of railways, roads and river ports put in place by the oil and gas industry. Once these facilities are in place, however, they can be used by the timber industry. Industrial logging develops along railways and roads and around oil and gas industry communities.

WILDLIFE DISTURBANCE AND POACHING

One of the most important impacts on the forest ecosystems is poaching. People associated with oil, gas and related branches of industry generally look upon the wealth of nature as an endless source of additional income, food or pleasure. In combination with frequent problems in food supply, this attitude creates the basis for poaching on an industrial scale. Oil and gas industry officials and workers use company equipment, such as helicopters and all-terrain vehicles to hunt animals for sport and for food. Geologists are often on the front line of this type of poaching attack since they are among the first to enter areas targeted for exploitation.

Local hunters and rangers are too poorly equipped to compete with poachers or apprehend them. Even in the rare cases when poachers are discovered and identified, the cases are seldom brought to court. The implementation and enforcement of environmental laws in Russia are very "flexible" and depend upon who the violator is.

DETRUCTION OF TRADITIONAL LIFESTYLES

The forest areas now being penetrated by the oil and gas industry have always been very sparsely populated. Population density is less than one person per square kilometer. The indigenous peoples in this region - the Komi, Khanty, Mansy, Evenki and some other smaller tribes - maintain a traditional lifestyle. They herd reindeers, hunt and fish. The ancestors of the present Russian residents settled in the taiga area hundreds of years ago. Today, the settlers have adopted many features of the lifestyle from indigenous peoples. They have also developed small-scale agriculture in the river valleys.

The impacts of industrial development upon these peoples, indigenous and non-indigenous, have been severe. Many local people have lost their traditional sources of life support because ecological disturbances and poaching have destroyed animal, bird and fish populations. In addition, the possibility of getting a well-paid job has attracted a motley crowd, including criminals, to the areas in question. There is no evidence that prisoners are being used for development of the oil and gas fields in Western Siberia. However, when visiting the area one discovers an apparently "criminal atmosphere". In some oil and gas communities one out of three or four adult males has prison experience.