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Oil in the Caspian

September 2001
Antonio Tricarico - Eyes on SACE Campaign

THE BLUE STREAM -BLACK SEA GAS PIPELINE PROJECT

Main sources: Press releases and communications from Independent Environmental Service of Northern Caucasus and Black Sea Socio-Ecological Centre; "Information on marine and seaside segments of gas pipeline Russia-Turkey" by expert committee of the Black Sea Socio-Ecological Centre, mainly supported by the Western Caucasus Socio-Ecological Union; financial fact-sheet from Projectware Database; articles from Lexis-Nexis Database; international press.

The project and its financing

The 3.2 bn $ Blue Stream - Black Sea Gas Pipeline Project entails the construction of a 1,250 km long gas pipeline from Russia (Izobilnoye) to Turkey (Ankara) partially under the Black Sea. It aims at connecting the Russian gas pipeline network in the Krasnodar region of southern Russia to the Turkish primary gas pipeline running from Ankara.
The project is developed by the Blue Stream Pipeline Company BV (BSPC), which is a joint venture established on an equal basis by the Russian state controlled oil and gas giant Gazprom and the Italian oil and gas group ENI - which is still under control of the Italian Treasury Ministry with a 37% share - with a view of capturing a large share of the Turkish market. ENI and Gazprom agreed to cooperate in marketing gas in Turkey. The pipeline's first shipments will consist entirely of Russian natural gas, but later ENI will gain access to 50 % of the pipeline, through which it is expected to transport gas produced in Kazakhstan's Karachaganak field, in which it is a shareholder.

Turkey already secures a hefty 80 per cent of its yearly natural gas needs (about 10 bn. cubic meter) from Russia through an existing grid crossing Ukraine, Romania and Bulgaria. On December 15th, 1997 Turkey signed agreement with Russia to import 360 bn. cubic meters of natural gas in 25 years by 2025 via the Black Sea in the Blue Stream project. As a matter of fact, the pipeline is to have a capacity of up to 16 bn cubic meters of gas a year after its completion scheduled for early 2002, with an initial capacity of 3 bn. cubic meters a year in 2001. Nevertheless, Turkey signed a different agreement with Russia for an additional 8 bn. cubic meters to be delivered by increasing the capacity of these existing onshore pipelines.
Last year the Russian government has approved the draft protocol of the Russian-Turkish agreement on natural gas supplies signed in 1997. Strongly supported by Russia's gas lobby, the protocol gives Gazprom and its Italian partner, ENI, tax breaks worth several tens of millions of dollars. Under the protocol, Blue Stream is exempt from property tax, VAT, road fund tax and other existing or future taxes and duties.

The BSPC is responsible for the offshore section of the project from the tract "Drovyanaya Schel" on the Russian shore to the Turkish city of Samsun. It consists of a compressor station and two sealines, each approximately 380 Km long, which will be laid at a maximum depth of 2,115 meter, making it the deepest gas pipeline in the world. ABN AMRO is financial advisor to BSPC which contributes to the 2 bn. $ project financing of the offshore section of the project with a 20% equity share (200 mil. $ Gazprom, 200 mil. $ ENI).
On November 23rd, 1999 the BSPC signed a 1.7 bn. USD contract in Moscow with the EPC consortium headed by Saipem S.p.A. - part of the Italian ENI Group; 1.1 bn. $ contract - and including Bouygues Offshore SA (France, 300 mil. $ contract), Katran-K (Russia, 100 $ contract), Mitsui&Co, Sumitomo Corp. and Itoshu Corp (Japan, 300$ contract) to build the underwater section of the Blue Stream project. It is mainly to be built by Saipem through the "Saipem 7000" giant lay barge with a 4,500 ton, 135 meter high laying tower and two cranes, with help from Nuovo Pignone and ILVA. Bouygues Offshore is to build a compression station at Beregovaya on the Russian coast under a turnkey contract. The station is designed to reach a service pressure of 25MPa (that means about 250 at) in order to transport the gas by sea.
Construction works started on February 11th, 2000.

The Russian onshore section is about 370 km long and is to be built and financed by Gazprom. In June 2001 more than two third of the Russian section was already completed.
Botas, which is Turkey's state pipeline authority responsible for constructing the 450 km long Turkish section from the Southern shore of the Black Sea to Ankara via the northern city of Corum, contracted out work to Turkish company Oztas and Russian company Stoitransgaz. Botas financed this section at a cost of 340 mil. $ and construction works should be nearly over.

On April 5th, 2000 JBIC/MITI offered Gazprom a 660 mil. $ guarantee on loans to the BSPC from a consortium of Japanese banks headed by Fuji Bank in order to allow supplies from Japanese companies.

On April 11th, 2000 SACE issued a 1,13 bn. USD guarantee on a commercial loan arranged by a consortium of Italian and German banks (Mediocredito Centrale S.p.A., Banca Commerciale Italiana S.p.A. and West Landes Bank) to project sponsors of the Blue Stream project with the aim of paying supplies of goods and services by Italian companies within the project. HSBC and Norton Rose are respectively financial and legal advisers to SACE.

A second 866 mil. $ loan to Gazprom from the consortium of banks for construction works on the Russian side is guaranteed by Snam, the division of ENI that supplies, transports and distributes natural gas.

On March 7th, 2001 the Blue Stream gas pipeline project was awarded the "European Oil & Gas Deal of the Year 2000" award promoted by the Project Finance magazine. SACE played a key role in project financing for the Blue Stream project by coordinating activities of other ECAs, relating directly to Russian authorities, technically assisting Italian companies involved in the project and finalising the first agreement of reinsurance with ECGD (what does this mean NICK?).

As a matter of fact, ECGD decided to participate in the project financing of the Blue Stream project in order to support UK companies involved in the project, like the UK Offshore Design Engineering Ltd, Sofreid and Doris Engineering recently acquired by the French Group Bouygues Offshore - 48,5% controlled by the French government - which is usually heavily involved in international projects.
According to ECGD Annual Report 1999/2000 (p.14), "Our involvement in Russia is currently confined to helping with the completion of projects underwritten previously and participating in debt restructuring. However, we have indicated our willingness to consider cover for projects where the payment risks can be externalised under our 'Good Projects in Difficult Markets' scheme. In October 2000 we announced that we would be supporting work by UK companies in the Blue Stream gas project which will supply Russian gas to Turkey under the Black Sea."
Furthermore, (p.17) "The 'Good Projects' initiative launched in 1998, designed to allow worthwhile business to be supported in markets where sufficient cover would not normally be available, has continued to attract considerable interest. Our efforts this year have largely concentrated on strengthening our risk appraisal procedures for approving such business. The first case under the initiative was signed in October 2000 (i.e. the 'Blue Stream' gas pipeline project connecting Russia and Turkey)".

Other lead managers include: ABN-AMRO (also acting as the financial adviser to the consortium), Bank of America, Barclays Bank, Royal Bank of Scotland, HSBC, BNP Paribas, Credit Lyonnais, Societe Generale, HypoVereinsbank, KfW, and ING Bank.

Technical risks associated to the project

Pipes and seals' corrosion due to high hydrogen sulphite contamination

Today the world experience of construction of deep water gas pipelines is limited to depths less than 1,600 meters. A record example is the 101 km long gas pipeline built in normal Atlantic Ocean waters of the Mexican Bay outside the zone of hydrosulphuric contamination. From the practise of underwater works in the Black Sea it is known that the alloy steel made ites, like pipes for gas transportation, are also subject to corrosive attack of dissolved hydrogen sulphide, which contaminates all waters deeper than 100-200 meters in the Black Sea (9-14mg/l).
Knowledge available today does not allow to describe in details the natural and anthropogenic factors which create a threat of disastrous effects for the environment as a result of their interaction with the gas compressed into pipeline in case of accident.
This scientific uncertainty in combination with world uniqueness and significance of the Black Sea and the technical uniqueness of the designed facility make the marine section of the Blue Stream gas pipeline an apparent and unpredictable large-scale threat for all Black Sea countries and the whole coastal population.

Unusual overpressures

During the first 80-90 km of the pipe the gas pressure will exceed the external hydrostatic pressure. The excess of internal pressure on the edge of the Russian shelf at about 11 km from the shore will be about 23 MPa (230 at), at the depth of 1,000 meters (16 km from the shore) will be 14 MPa and at the foot of the continental slope (about 50 km from the shore) will be 2 MPa.

Geological characteristics of the route and possible effects on the pipe

The bottom of the Black Sea along the route of the gas pipeline has a polysurface, steep gradients (up to 18) and is composed by non-steady geologic formation. It is stimulated by the latest neotectonic processes saturated with energy on the shelf and continental slope of the Caucasian part of the Black Sea. It takes place an intensive accumulation of young silts partially as a part if system of fissile submarine canyons, partially at sluggish creeps of large weights of nonlithified silts and also at activation of underwater landslides passing into nudrock and mud flows. Large density and high speed of these flow increase their energy which might be sufficient for destruction even of the high-strength heavy wall tubes of the gas pipeline.

Furthermore, the neotectonic motions of earth crust in the band of Caucasian continental slope generate here centres of earthquakes with force of 8-10 degrees in the epicentre, that is enough for direct destruction of the pipeline. However even weak seismic fluctuations which occur more frequently are capable to originate the mentioned above geological process. The seismic threat to the Turkish shelf and slope is confirmed by recent seismic events in Turkey.

In case of affection of the pipeline by small-scale water-ground flows, hydraulic seal of tubes might be destroyed; this under conditions of high corrosivity of hydrosulphuric Black Sea water in short time will lead to destruction of the pipeline walls. Besides such flows are able to create vast holes under the pipeline or to bridge it over by ground thus increasing thermal and mechanical stress on the pipe.

Mud vulcano activities, softenings and fluctuations of base grounds because of their degasification and decomposition of gas hydrates, which can be contained into base grounds, might take place in the Caucasian continental slope and the Black sea abyssal plane, thus generating strong mechanical stress on the walls of the pipeline.
As a confirmation of the existence of above mentioned geologic phenomena, recently the hydrogeographic service of the Black Sea has captured powerful underwater movings of grounds in area of Cape Idokopas (approximately 30 km North-West of the marine segment of the pipeline) due to a breakaway of a submarine connection cable and formation of tsunami-like waves registered by tide gauges.

Impacts in case of destruction of the gas pipeline

Apart of natural processes, the destruction of the pipeline can also be caused by wars, military exercises, acts of terrorism and failure in the maintenance of the pipeline.

Gas breakthrough from the pipeline on the Russian shelf will lead to the emissions of estimated 50 million cubic meters of compressed gas into the water mass and then into the atmosphere. The spontaneous combustion of gas is very likely to take place due to electrostatic effects in a cloud of spray above the emission. The combustion of gas can have an explosive character. The high probability of such catastrophic event is confirmed by numerous cases of spontaneous combustion and detonations of gas which followed eruptions of mud volcanos (including underwater ones) in Azerbaijan, on Kerch and Taman peninsulas. Rise of water strata by gas will carry away friable silty precipitations from the sea floor. It is admitted even by project developers that water contamination will have negative impacts on a large scale, like the destruction of all biota on the shelf band since it cannot stand powerful mud loads.

Destruction of the pipeline on the Caucasian continental slope at depth of 1,000 meter would cause a gas breakthrough of 30 million cubic meters into the water strata and then into the atmosphere. Rising to the sea surface, the gas will carry away about 600 thousand cubic meters of water due to the air-lift effect, contaminated with hydrogen sulphite, and huge quantities of silty precipitation as well. On part of this chemical composite will be degassed into the atmosphere, and another part will destroy all biota in the inhabited 200-meter-deep layer around the catastrophe epicentre.

A spontaneous combustion of mixed gas and explosive processes at gas burst into the atmosphere can take place.

Geologic characteristics of Turkish shelf and continental slope make it possible the destruction of the pipeline and gas burst also in this section of the Blue Stream project.

The destruction of the pipeline within the Black Sea abyssal plane would not lead to gas burst because of the very high external pressure of water. These extreme conditions and the presence of large amounts of compressed gas would allow the creation within the pipeline of powerful gas-hydrate plugs, whose removal is a rather complicated technical problem.

In case that mass gas breakthrough raises hydrogen-sulphite contaminated water and sediments, these might reach the Russian resort coast and further Crimea in Ukraine. Similarly, accidents on the Turkish part of the project might lead to contamination on the Turkish and Georgian coast. Meteorological conditions of the catastrophe can aggravate its effects as well. Besides, effects of gas breakthrough from the pipe are dangerous for navigation, especially for passenger and touristic routes located between 10 and 50 km away from the shore.

Inadequacy of the EIA

Illegality of the agreement on Russian gas supply to Turkey

The agreement, concluded in 1997 on gas export from Russia to Turkey, is not legal to a full extent as it is obliged to undergo the state ecological review as per art. 11.7 of the Federal Law of the Russian Federation "About the ecological review". Notwithstanding, the agreement did not undergo the State ecological review, in spite of obvious and serious impact of the quoted project implementation on the Black Sea ecological system. The same law (art. 18.5) provides that "The failure to satisfy the requirement of the obligatory state ecological review of an international contract project entails declaring its invalidity". Since the realisation of the Blue Stream gas pipeline project has been based upon this contract and the contract has not undergone the obligatory ecological review, all the subsequent decisions concerning Blue Stream are also illegal.

Need for an international EIA for the Blue Stream Project involving all 6 Black Sea countries

A large part of the route of the gas pipeline is designed in the international waters. Except the segments of the Russian and Turkish 12-mile territorial waters, the segment of the international waters is 340 km long or 87% of the entire marine segment.

Russia participates in international conventions and agreements on ecological safety of water areas and all the Black Sea basin. In Bucarest, in 1972 the Convention of the Six Black Sea Countries - including Russia - about the Protection of the Black Sea against Contamination was developed and signed. Russia also participates to the Black Sea Environmental Program which adopted the "Black Sea Transboundary Diagnostic Analyses" and the "Strategic Action Plan on Environmental Sanitation and Protection of the Black Sea". These agreements underline the transboundary character of ecological processes and threats in the Black Sea basin, in which any environmental negative event, process or risk might affect all Black sea countries and their population. Therefore, possible negative and disastrous environmental effects due to the Black Sea project might affect not only countries participating in the project but all Black Sea countries.

The need for a more detailed assessment of consequences of possible damages or destruction of the pipe in international waters has been recognised by experts contributing to the State environmental review of the project in 1998 too. These studies have not been carried out to date.

Alternatives not adequately considered in project design

Alternative versions for delivering Russian gas to Turkey were also considered but not reflected in project designing. The eastern route envisioned the construction of a gas pipeline through the territory of Georgia and (or) Armenia. The western route required the extension of the already operational pipeline system crossing territories of Ukraine, Moldova, Romania and Bulgaria with an output on the European part of Turkey. Both versions are feasible with the help of conventional, tested and reliable technologies. Furthermore, they would provide long-term strengthening of Russia's position vis a vis neighbouring countries.

Over-estimated projections of Turkish gas demand should be reviewed

Most analysts agree that Botas' projections of booming gas demand in Turkey over the next 10 years - from 10 bn. cubic meter in 2000 to 55.2 bn cm by 2010 and 82.7 bn cm in 2020 - are too bullish. Turkish demand actually fell in 1999 and Turkey faced a new financial crises at the end of 2000. Nevertheless, apart of recent agreements with Russia Turkey has already signed an agreement with Nigeria for the delivery of 1,2 bn. cubic meter a year of natural gas equivalent LNG (liquified natural gas), an agreement with Iran for the delivery of 10 bn. cubic meter a year of natural gas for a period of 23 years, an agreement with Iraq for the delivery of 10 bn. cubic meter a year of natural gas, starting with the development of gas fields in Iraq, an agreement with Turkmenistan for the delivery of 16 bn. cubic meter a year of natural gas for a period of 30 years, and an agrement with Qatar for the delivery of LNG. Basically, the Turkish government is willing to become an energy gateway to the west in 21st century and it will easily find customers for re-export of any gas Turkey does not itself consume.
Before any evaluation of what is the best and most sustainable option to deliver more gas to Turkey, a thorough review of estimates of internal gas demand should be carried out to identify real energy needs within the country.

Lack of compensation for population and tourist activities

The marine segment of the gas pipeline starts from the tract "Drovyanaya Schel" located 5 km south-east from the resort settlement Arkhipo-Osipovka and 2 km northwest from the health resort Inal in the territory of the Gelendzhik resort city. Project implementation will damage the only subtropical resort region in Russia, whose population is directly or indirectly dependant on tourist resort activities. Investments in tourist resort business is already decreased in the last years, since the industrialisation of the Russian Black Sea coast increased risks of investments into easily vulnerable resorts.

Local communities requested without any success to project authorities documents - which have not been included in any case in the EIA - regarding compensation procedure those running tourist resorts in the region and the population facing the risk of losses in case of accidents in the pipeline construction and operation.

Lack of consultation

Whereas the feasibility study of the gas pipeline was not discussed with local communities, the local public organisation "Public Enviornmental Review" was refused to organise a review of the seaside section of the project route and any request from local organisations to meet project authorities had no reply from ENI and GAZPROM.

The obligatory public hearings procedure had not been held while the Blue Stream project was developed. As a matter of fact, none of currently functioning public environmental organisations concerned about project impacts was involved into public hearings on the project.

According to the Russian Federal Law on Environmental Protection from 1991, all documents about project related environmental impacts should be made public and discussed during consultations with local communities. Furthermore, documents on compensation to the Black Sea resort region of Russia and its population of all losses, damages and threats which might occur in connection with designing, construction and operation of the gas pipeline should be prepared and made public within a public consultation process.

Environmental impacts on the Russian coast

The State environmental review in its first conclusions dated March 23rd ,1998 (section 5.7.1) has paid special attention to the uniqueness of forests of Mediterranean type of the Black Sea coast in the Gelendzhik region and the availability of valuable flora including endemic and relict species recorded the IUCN(?) Red Data Book of the Russian Federation. Furthermore, in the State environmental review (p.106-107) it is recognised as optimal route the detour around territories of protected areas, water-protection zones most endangered natural complexes.
On the contrary, at the stage of route selection and feasibility study a seaside section on the territory of the natural monument "Arkhipo-Osipovskoe coniferous forest of Crimean pine", protected by the Decree #488 of February 14th, 1983 of the Krasnodar Region Executive Committee, has been chosen in clear violation of the law.
In particular, the "Conclusion of an experts commission of the state environmental review under the feasibility study of construction of the gas pipeline Russia-Turkey (maritime version)" from April 20th, 1998, approved by the Order #302 of the State Environmental Committee of the Russian Federation from May 18th, 1998, the fact that the construction of the gas pipeline was going to affect protected areas was not reflected. Therefore a problem of the legality of the review arises and its resolution might be disputed in court.
In July 2001, after appeals of Socio-ecological Union of Western Caucasus, the Department of natural resources of Southern Federal region has checked the observance of legislation at the gas pipeline construction sites on the coast and ordered ZAO Pitergas, Gazprom local branch, to submit to the Committee of Natural Resources of Krasnodar Territory changes to project design under legislation into force by August 25th, 2001. On August 16th, 2001 in breach of this request 1,300 Crimean and Pityisa pines - species which are listed in the Red Data Book of Russia - in the quarter #236 of the Arkhipo-Osipovskoe Forest started to be cut.
This unique tract of forest is also protected as a reserve and forms part of the Russian Federation Natural Reserve Fund. Thus, according to the Russian Land Code and the Russian law "On protection of nature" it cannot be confiscated and cutting of trees is illegal and is to be considered an environmental crime under the Criminal Code (art. 246 on environmental offences by industrial process; art. 259 on destruction of living beings included in the Red Data Book of Russian Federation; art. 262 on infringement of a mode of protected areas and natural objects). On August 16th the Committee of Natural Resources of Krasnodar Territory informed that a Decree by the Administration of Krasnodar Territory had withdrawn this forest tract from the natural monument and therefore tree-cutting had become legal. In any case, NGOs found no decree concerning that at the Protocol Department of Administration of Krasnodar Territory.
Taking into consideration the supremacy of the Federal Laws over any other acts, all the decision on withdrawing the lands for the construction of the gas pipeline within these protected areas remain absolutely illegal.

Construction works on the marine section of the pipeline are also illegal because they were planned for in a water basin having a protected status which does not allow to build such infrastructure there. The water basin situated opposite of the Drovyanaya Schel - a narrow seaside canyon which hosts Red Data Book vegetation and was kept untouched due to its inaccessibility - as far as 2,000 meters from the coast forms part of the 1st and 2nd zones of sanitary protection of Gelendzhik resort-city. The sanitary protection zone of the resort Gelendzhik was ratified by the decision #484 of the Council of Ministers of the Russian Federation of December 12th, 1987. The whole district of sanitary protection of the Gelendzhik group of health resort has a protected status of federal level also under the Order #591-p of the Government of the Russian Federation of April 12th, 1996. Surprisingly this area has been excluded from the protected area of the Gelendzhik rsort of federal significance by the Ordinance #412-p of the Government of Russian Federation of March 23rd, 2001.
However, as admitted in the State environmental review itself, the construction of the compression station of Beregovaya and of the outside segment of the pipeline contradicts the Law of Krasnodar Krai (region) and the Law of Russian Federation #26-f of February 23rd, 1995 "about natural medical resources, health-improving terrains and health resorts".

Corruption scandals in Turkey and Russia and financial instability of project sponsors

A corruption scandal that has engulfed top Turkish officials - including Deputy Prime Minister Mesut Yilmaz - last May, is threatening the Blue Stream project. Charges being levelled against Yilmaz range from Lobbying for Blue Stream in order to help his construction magante cronies secure delas in Russia, to awarding the contract to build the pipeline's Turkish section to associates in the centre-right Motherland Party. The allegation are being investigated by a special Ankara state security court. The most serious charge involves a 50 mil. $ payment made to the Turkish-Russian consortium in charge of constructing the Turkish portion of the pipeline. That payment reportedly circumvented established vetting procedures. Trying to offer additional evidence of corruption, Turkish media have published photographs showing Yilmaz on a September 1999 visit to Moscow, hobnobbing with Viktor Chernomyrdin, the former Russian prime minister and erstwhile boss of state oil and gas giant, Gazprom. Already, Cumhur Ersumer, the former energy minister and a close Yilmaz ally, was forced to step down in April 2000. On May 24th, Cengiz Koksal, the chief prosecutor of Ankara's State Security Court staged a late night raid together with special gendarmerie forces on the headquarters of Botas. According to Turkish press reports, the gendarmerie seized 17 sacks full of documents including copies of the agreement signed between Gazprom and Botas pertaining to Blue Stream. Yilmaz has sought to paint the campaign against him as a conspiracy hatched by Turkey's influential military, which effectively control gendarmerie. Russian officials from Gazprom has soon rushed to the defense of Yilmaz in a press conference staged in Ankara on May 16th, 2001, while complaining that the controversy had been stirred by baseless propaganda spread by opponents of Blue Stream.

Furthermore, the appointment last January of Pricewaterhouse Coopers (PwC), the leading accounting firm, to investigate the relationship between Gazprom and Itera, the fast growing Russian gas company, has provoked harsh reactions in investors community. Under pressure from the Russian government and minority shareholders, Gazprom has been forced to launch an inquiry into suspected links between the company's executives and Itera, and into transactions between the two companies allegedly at below-market prices. The problem is that PwC is already Gazprom's auditor and, in the course of its assignment, it will be asked to examine its own work. Successive annual reports that the firm prepared in line with International Accounting Standards failed to identify Itera as a Gazprom "related party". The only mention in Gazprom's 1999 audited accounts of Itera is a footnote mentioning it as a "third party user" of its pipeline. The "related party" footnote makes no mention either of Itera or of other companies, such as Stoitransgaz, a Russian construction company that abenefited from substantial contracts from Gazprom - as in the case of the Turkish section of Blue Stream - and which publicly available records show is majority is controlled by people close to top Gazprom executives. Some industry sources suggest that PwC's accumulated fees on Gazprom may be 15 mil. $.

Finally, financial analysts have raised concerns about Gazprom's capacity to successfully face possible cost over-runs associated to the technically complicated Blue Stream project.

Gas geopolitics in the region

SACE itself recognised deep geopolitical implications of the Blue Stream project. The scandal over Blue Stream extends well beyond Turkey's internal political squabbles, and strikes at the heart of the geopolitical struggle centred on Caspian basin fossil fuels resources. According to Shell's analyses, in a best case scenario the Caspian region could export up to 200 bn. cubic meters a year.
That would depend in part on establishing markets also outside Turkey.

Blue Stream would aid Russia in its efforts to retain a controlling interest over the export of regional energy supplies. Conversely, Blue Stream threatens a US-led effort to build alternative energy export routes that would permit oil-and-gas rich Caspian basin states to cut Russia out of export process. The United States remains bitterly opposed - also through several public statements from top US officials - to Blue Stream in large part because it endangers prospects for the Trans-Caspian gas Pipeline (TCP), one of the main pillars of the "East-West Energy Corridor" touted by US officials and proposed the joint venture PSG International between Bechtel, the GE Capital unit of General Electric and Shell (lead sponsor), which was awarded a $ 2 bn. contract for the TCP in 1999. Financial advisors to the consortium include Credit Suisse First Boston, although Citibank, Chase Manhattan, and Dresdner banks all at one time were involved in the deal.

The 1,650 km long TCP - which would cost 2,5 bn. $ - would carry 30 bn. cubic meters a year of Turkmenistan's vast reserves of natural gas in Turkmenia via the Caspian Sea from Azerbaijan (Baku) via Georgia (Tiblisi) to Turkey (Erzrum) on the Western markets (about half of total gas import from Turkmenistan). Today some of these gas reserves (20 bn. cubic meter a year) are exported via Russia to western countries and Ukraine, although Turkmenistan has been complaining with high fees imposed from Russian government to the transit of its gas through the Russian pipeline system and once suspended gas supply in order to get a reduction of Russian price mark-up to which Russia resold Turkmen gas to the west. Nevertheless Russia is willing to negotiate a new agreement to import 50 bn. cubic meter a year.
A parallel line to TCP would transport Kazakhstani and Azerbaijani oil via Georgia to Turkey and beyond (the so called "Baku-Tiblisi- Cheyan oil pipeline" which would cost 2.5-3 bn. $ and might be financed by EIB, IFC and the Turkish government). US officials have long argued that construction of both lines would ensure economies of scale and therefore render the multi-billion-dollar project commercially viable. Turkmen authorities claim that Turkey would have paid only 75$ per cubic meter of their gas compared with the 120$ per cubic meter Turkey would be paying for Russian gas.

The TCP would concurrently undermine a competing scheme to export Turkmen gas through a swap deal with northern Iran to Turkey - it has to be noted that 3-4 bn. cubic meters a year of gas are already exported to northern Iran from Turkmenistan through an existing pipeline and that in the last months Iran tried to look for a new partnership with Russia in order to keep a strong control on Caspian Sea natural reserves against US interests in the region aimed at supporting the new Republics which originated from the split of former USSR. Delivery of gas from southern Iran to Turkey should also start late 2001, against US interests. Iran insists that construction of a line west through Iran would be much cheaper than the 2.2 bn. $ TCP project. In any case, Iran, as one of the five littoral states surrounding the Black Sea, has legal objections to TCP.

However, the TCP project is facing more problems than expected concerning finalisation of agreements between different countries. Turkmenistan wants Azerbaijan to pay gas debts from early 1990s, although these were probably incurred by Azeri private companies and has recently closed its embassy in Baku as a sign of its displeasure. On the other hand, since Azerbaijan proposes to limit the volume of gas from Turkmenistan that can flow through the TCP across its territory in order to channel its own gas into the pipeline (between 20 and 50% of the pipeline capacity), it could conceivably kill the project by making the financial parameters uninteresting to investors.
In the meantime, in April 2000 BP Amoco announced it had discovered gas much closer to Turkey, in Azerbaijan and could slash both construction by refurbishing part of an existing gas pipeline delivering gas from its enormous offshore Shakh Deniz field - estimated 700-1,000 bn. cm reserves, the second largest in volume and size that the company has ever developed. In order to transport gas from Shah Deniz fields into the Turkish market, Azerbaijan and Georgia are currently negotiating to heal a disagreement that is holding up a 1 bn. $ gas pipeline from Baku through Georgia to Erzrum in Turkey (more or less the onshore part of the TCP project). At the end of July 2001 the two countries were nearly there to sign an agreement when the World Bank country director for Georgia seemed to have pursuade Tiblisi's authorities to hold out for a higher price for Azeri gas to be sold to Turkey.
However, Georgia is willing to break Russia's monopoly as its single-gas provider, especially after Russia stopped for a few days gas supplies to Georgia in order to show its unhappiness at the prospect of Caspian basin energy being piped through Georgia.

Inputs for possible joint campaigning on the Blue Stream project in the short term

The project is already under implementation and there are few chances to stop it definitely, but good opportunities to mitigate the project since there is a strong opposition on the field on the Russian side. Russian NGOs are having demonstrations and rallies in construction areas and managed to block construction works a few times. Last August an Environmental Peace Caravan in Norhern Caucasus was organised by Russian NGOs to inform local communities. Russian NGOs call for an halt to construction work - we could add a suspension of ECAs guarantees - until a new route for the pipeline is designed and compensations and new studies are considered. Local NGOs are also trying to campaign directly on companies, writing letters and trying to meet them in Russia, although usuccessfully to date.
Campaigning on the Blue Stream might create in the short term, even before decisive November OECD meeting, a strong case to affect international negotiations on export credits at OECD.
Then a possible fact-finding on the field, not only in the Russian part of the project, would allow to develop contacts in the near future in order to campaign on new oil projects in the Caspian area which see a strong interest from MDBs and ECAs (see note on oil projects in the Caspian area). It is important to be remarked that the route of Blue Stream in Turkey should not cross Kurdish areas. In any case, further information are needed to better understand ECGD's involvement in the project, in particular as concerns Bouygues Offshore's presence in UK.

Specific entry points for campaigning

1. After protests by local NGOs and communities, the EIA of the Blue Stream project should be review by an independent commission and by ECAs involved in the project according to their new environmental guidelines. By the way, JBIC and MITI recently adopted very advanced environmental guidelines - FoE Japan might be more involved in the ECA Campaign through this case as well. Specific and detailed studies on compensation in case of accidents and impacts on population and ecosystems should be produced and submitted to public consultation. Alternatives (different routes for Blue Stream and different projects) should be fully assessed, including a thorough review of estimates for Turkey's future gas demand. Local and international NGOs should be consulted about the review of the EIA following the Ilisu case experience and compensation. If ECAs would allow to review the EIA of Blue Stream this would set a precedent for considering retroactive the OECD agreement which is likely to be adopted by November - or this might be a request from NGOs regarding projects currently in progress even if approved before 2001.
2. Host country standard in Russia has been watered down - although in a very unclear and confused manner. This represents a good precedent to prove how the host country standard consideration within the benchmarking approach might be misleading and inadequate to create a level playing field for ECAs regarding environmental approaches. In any case it needs to be clarified with NGO whether the EIA itself violated Russian procedural standards.
On May 8th, 2001 the Chief of Environmental Department of the Russian Ministry of natural resources informed Russian NGOs (IES) from the Prosecutor's office that a commission on their concerns about the natural monument had been established and Andrey from IES is a member of it. I am waiting for more information from IES about that.
3. It is likely that corruption took place widely both in Russia and Turkey. Gazprom has a very bad record on corruption. ECAs adopted last April within the OECD negotiations an Action Statement on corruption aimed at implementing the OECD Convention against bribery - quite an advanced tool of international law. Under their statement, ECAs should request companies and investors applying for export credit and credit guarantees to formally sign a commitment against corruption and in case corruption might take place with ECA-backed operations ECAs have to inform competent judicial authorities. Therefore, considering also that Gazprom and ENI are still somehow state-controlled and in any case set up the BSPC joint venture - Gazprom is not from an OECD country - this might be a good test case for ECAs' real commitment to fight corruption. Transparency International, which took already a good stand in the Lesotho case regarding ECAs' involvement as well, might be a good ally in this campaigning target - not yet contacted, but there are already contacts on that. Finally, TUAC recently launched a new programme on corruption and might be interested to get a good test case to be pushed in the short term, also within the ECG negotiations.
KHRP might help in digging out more about the Turkish scandal, trying to understand western investors responsibilities - it is still unclear whether Botas puts its own money in the Turkish section of the pipeline or whether foreign investments backs it.
4. Due to project's geopolitical implications and transboundary impacts in case of accidents, an international EIA is needed. This would somehow strengthen and broaden our request for a cumulative impact assessment in the case of Ilisu, trying to set a precedent or at least trying to push this issue in the negotiations within OECD. More generally, the Blue Stream case could also help to prove how ECAs play a key role in opening new markets and their operations respond to foreign policy directions - for instance, consider how EU, although a string US ally, is looking for a leadership in gas supply from Eastern Europe even against US interest in the Caspian region. A different attitude is followed when dealing with oil supply in the same region.
5. In Italy and Japan, the case would be quite interesting to tackle also private investors responsibility in project financing. In UK, it still needs to be clarified the exact role of ECGD in the project (it seems that originally also Austrian and German ECAs had to be involved). In particular, some detailed analyses about Bouyges Offshore UK and its need to enter eastern Europe market supporting the role of British Gas in the region might be quite key in understanding UK's interest regarding oil and internal contradictions (for instance, BP has not been supported in its idea to develop gas field in Azeri waters in the Caspian Sea to date, maybe because of high military tension between Azerbaijan and Iran in the last days and UK interest in good relation with Iran for different reasons).

NGO contacts on the field

Main NGO in construction areas is the Black Sea Socio-Ecological Centre, gathering activists and experts. The Independent Environmental Service of Northern Caucasus is the main information source on Blue Stream and local activists's actions - main contact: Andrey Rudomakha (not fluent in English) ies@mail.ru . They run a specific mailing list on Blue Stream and TCP - I understand together with SEU (see later): information from owner-caspnews_bin@cci.glasnet.ru

The International Socio-Ecological Union, through its Western Caucasus branch, is very active as well, although more active in the past on the Caspian oil Pipeline Consortium (CPC) project. Main contacts are: Olga Berlova seupress@glasnet.ru; Sviatoslav Zabelin svet@glasnet.ru.
They run printed newsletter.

Main contact in Russia on fossil fuels and IFIs issues is: Andrey Knijnkov at ISAR (Initiative for Social Action and Renewal) in Moscow, running the e-newsletter "Caspinfo". His contact: clearh@online.ru, www.ecoline.ru/caspinfo

Main contact in Georgia on fossil fuels and IFIs issues (as part of the Georgian Greens and the CEE Bankwatch network) is: Manana Kochladze, manana@wanex.net Long experience on IFIs work and organised already a field mission for CEE Bankwatch in Azerbaijan in 2000.

Finally, the Caucasus Environmental NGO Network (CENN) moderates an e-mail discussion at ceen@post.net.ge. List manager contact is: levan@post.net.ge

Regarding NGO contacts in Turkey KHRP and Reform the World Bank Campaign might help on that.

Potential international allies for campaigning

A strong interest of ECA campaigners in the Caspian area might allow to link up more with large international environmental NGOs and other groups campaigning mostly on oil companies and projects - as partially did by Eyes on SACE Campaign in its recent work on the G8 Renewables Task Force and ECA-related issues. Although the Blue Stream project deals with gas development - which might be considered somehow a transition fossil fuel in the short term due to its limited environmental impacts when it is burned to produce electricity and heating - it is clear that the pattern to develop international gas fields and transportation projects is quite similar to the case of oil in the last decades. Furthermore, companies involved in Blue Stream also work in the oil sector. Such a campaigning exercise would allow to gather more information also on oil projects and companies operating in the same area. A strategic partnership might be set up with the FoE international network which launched in October 2000 its Oil, Mining and Gas platform calling for a phase out of fossil fuel and extraction projects by MDBs and ECAs.
The international debate around FoE proposal is slowly getting more and more interesting since the World Bank Group, following up on President's Wolfensohn proposal in October 2000, recently presented the terms of reference for its Extractive Industry review along the line of the experience of the World Commission on Dams.
Analytic and campaigning work about WB proposal available from FoE US and SEEN.

Finally the CEE Bankwatch network, close partner of Reform the World Bank Campaign in the EIB campaign, has been actively involved in campaigning on oil projects in the Region - see fact sheet on oil projects in the Caspian area. Recently, Manana Kochladze from the Georgian Greens urged Bank watchers and cmpaigners to campaign on the Blue Stream case, relaunching the SEU's requests on the project.