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Kommersant – Moscow, Russia: Oil for Ecology

Western banks join environmental protection campaigns

Natural Resources

The oil and gas industry suffers a relenting pressure of environmental organizations in many countries. Yet, the influence of oil companies sometimes helps them get through the loopholes in the ecological regulation. Working in Russia is easier for oil companies as environmental legislation is only at its dawn, while the state enforcement of ecological norms is virtually non-existent. Nonprofit organizations and western credit institutions are left to monitor the environment protection at oil fields. They sometimes succeed at getting companies operating in Russia pay more heed to the environment.
World Experience

The U.S. environmental legislation is rather tough but lobbying enables oil companies achieve the decisions which are quite dubious in terms of ecology. This year, a 20-year long confrontation between corporations and environmentalists over the ban on economical activities in the National Arctic Reserve in Alaska ended up with the victory of oil giants. On March 17, 2005, the U.S. Congress voted 51-49 favoring the start of drilling at the reserve. Oil extraction in Alaska is not the only way to diversify energy sources in the United States but American companies find it far easier and more profitable to develop ground-based deposits in Alaska than to operate on the shelf offshore.

Oil majors are traditionally powerful lobbyists in the UK, the Netherlands and other countries as well where they repeatedly manage to bloc environmental initiatives of officials and ecologists. The oil and gas lobby disrupted, for instance, the introduction of the greenhouse emissions tax in the EU, the United States and Australia and vehemently opposed the ratification of the Kyoto Protocol to the UN Framework Convention on Climate Change in some countries.

Barrier to Lobbying

The Russian environmental legislation has also bended under the lobby pressure. In 1999, a governmental regulation permitted the dumping of drilling agents during the work on the shelf, which cut expenses for oil companies operating off Sakhalin. The Government repealed regulation in 2000 after the Russian Supreme Court had ruled it unlawful. Lawmakers, however, claim that oil lobby is no longer in power at the State Duma, or it is subject to the strict party discipline, to be more exact. “The lobbying period finished when the United Russia faction had been formed. Executives of oil companies are unlikely to negotiate the vote-through for their bills with the faction’s head Boris Gryzlov,” says Vyacheslav Timchenko, the deputy chairman of the State Duma’s Natural Resources Committee and the party’s member. None of the deputies from oil regions ventured to contest this opinion.

Oil companies look for other solutions, which is largely the cooperation with profile agencies of the Russian Government. This June, the LUKOIL oil company drafted and presented for the examination of the Natural Resources Ministry ecological requirements for geological prospecting and oil and gas extraction in the north of the Caspian Sea. As a matter of fact, the drilling job at the company’s licensed plots are due to start in 2007, under the contract. The governmental regulation 317 “On a Partial Change of the Legal Regime in the Reserved Zone of the Northern Section of the Caspian Sea” as of 1998 does not lay down, however, guidelines for oil extraction in the reserved zone. Therefore, the company submitted its draft for the ministry to examine it, so that the oil giant could win time and retain licenses for the plots. LUKOIL believes that the Russian section of the Caspian Sea is nearly ready for the commercial extraction.

The withdrawal of the oil lobby from the legislature made Russian state bodies pay closer attention to the environment. The Natural Resources Ministry, the Industry and Energy Ministry, the Emergency Situations Ministry and regional authorities are currently dealing with the issues. That is why, there is not point in hiding accidents, as oil companies claim. Hidings do occur, though, according to Georgy Rezchikov, the first deputy director of the oil, gas and natural resources department of Khanty-Mansi Autonomous Area, the territory accounting for 56 percent of the Russian oil extraction. The department’s statistics put Rosneft on the top of the accident list. “They come in first only become they inform of every minor accident,” Mr. Rezchikov explains. Environmental organizations also confirm that the lion’s share of accidents during the oil extraction and shipping to gas-mains are now underreported.

Metal Corrosion

Only three accidents were recorded last year in Khanty-Mansi Autonomous Area. All the failures at oil fields were caused by the human factor, i.e. poor control, errors in designing and violations of safety norms. For instance, a well burst out with an oil and gas blend to catch fire due to drilling safety violations at the Talnikovsky oil field operated by LUKOIL West Siberia in January. The damage totaled 11 million rubles. The region’s environmental prosecutor’s office ordered an examination of the accident with the Russian Academy of Sciences. The experts confirmed that the failure could not have prevented if all safety measures had been taken. Prosecutors opened a criminal case against the Urayneftegaz territorial-production enterprise (a subsidiary of LUKOIL West Siberia) under Article 247 of the Russian Criminal Code (“The Violation of Handling Rules of Ecologically Perilous Substances and Waste”).

On March 11, an oil emulsion spillage was recorded at the booster pump station following a metal corrosion at the Ust-Balyksky oil field of Rosneft. The work of 249 well sites of the Ust-Balyksky oil field and 20 wells of the Ombinsky oil fields was suspended. The oil pipeline blew out on the following day at the Ust-Balyksky field which put 92 more well sites at halt. The failure was also a result of metal corrosion.

Environmental pressure groups are apprehensive not only about oil extraction and transportation but also about temporarily abandoned wells. The danger is that cement bridging there are coming to ruin and metal parts of wells are subject to corrosion because of the long downtime, which leads to a weakening containment fraught with open gas-oil blowouts, oil spillages, fires as as well as the soil and fresh water salinization. These were the causes of a major ecological accident at the North Alaska area of the Khanty-Mansi region in 1975. Well 35 was drilled in 1958 on an island in the Ob River, near the village of Berezovo. It gradually found itself at the mouth of the river due to the offshore motion of sediments. As a result, the drifting of ice damaged the well head causing gas blowout which was extinguished only six months later. Expert estimate the gas emission at over 180 million cu. meters. However, suspended wells are under the jurisdiction of federal authorities, and oil companies are not responsible for them.

Burden of the Past

Environmental NGOs demanded in 2001 that TNK replace inter-field pipelines since they are the reason for large oil spillages. The Russian branch of Greenpeace states that some 1.5 million metric tons of oil got onto the surface in 2000 in the area of Samotlor, TNK’s main oil field.

Ecologists failed to make TNK meet the demand directly but after the consolidation of the company’s oil assets with the Russian assets of the British BP in 2003, the joint company’s environmental policy changed drastically. Environmentalists call it their victory since TNK-BP is paying closer attention to the environment than TNK used to.

Ivan Gogolev, the spokesman for TNK-BP, mentioned, however, that TNK had also promoted high standards of environmental safety. “Long before TNK-BP was formed, the Russian company announced plans to invest $900 in environmental programs. The sum grew to $1.7 billion after the new holding was set up,” Mr. Gogolev recounted. The ecological program is scheduled for five years, up to 2009, the spokesman said. Some $1 billion will be spent to replace pipes, and not only in Samotlor.

Ivan Gogolev also stated that TNK-BP is of opinion that “it is always cheaper and more profitable to prevent a problem than to reap the consequences”. Yet, the company also has to “correct mistakes of the burden of the past”. “Buying oil fields, the company also got 5,000 hectares of contaminated area. We restored 400 hectares last year and we are set to increase the amount of reclamation every year,” TNK-BP spokesman concluded.

Burning Our Money

The percentage of the utilization of associated gas in Russia is widely underreported, compared to licensing agreements. Oil companies, however, burn the gas not out of sheer malice. The gas is burn in the places where gathering, using or transportation of it is pointless because the oil fields are hundred miles away from gas-processing plants. Oil companies officially burn up to 15 billion cu. meters of associated gas every year, according to the head of the Federal Energy Agency, Sergey Oganesyan. Both environmentalists and officials admit that oil companies burn out much more.

The companies plead that it is technically difficult to stretch pipelines to oil fields and install the gas treatment system so that it has the appropriate quality for consumers. On top of it, Gazprom imposes tough demands on oil companies for the access to its system of associated gas. Still, authorities are determined to make oil companies tackle this problem. Requirements for the utilization of associated gas should be toughened, according to Mr. Oganesyan. Oil companies are offered to abstract all useful elements at the gas-processing settings, after which they could pump it back to the deposit, instead of burning. The creation of integrated plants to process associated gas of oil extraction and oil refining is a point of the Industry and Energy Ministry’s strategy for the industry. As a part of it, the Khanty-Mansi Autonomous Area announced the construction of a gas-processing plant in the area. Investor did not show interest to it, though, and the local authorities decided to bankroll the implementation of the project on their own.

Banks Stand the Guard over Environment

The most efficient way to make oil giants follow environmental requirements is now laying credit conditions, which major credit institutions do not hesitate to do. The European Bank for Reconstruction and Development (EBRD), for one, credits many Russian oil and gas projects imposing quite strict conditions on its clients. Besides that, a great number of large private banks have been following the “Equator Principles” since 2003, which is a set of social and ecological requirements for the projects to be financed.

It is mostly thanks to creditors that the eco-friendliness of oil companies has increased in Russia greatly. For instance, the Sakhalin Energy operator faced the threat of the EBRD for further crediting Sakhalin-2 and agreed to alter the route of the underwater pipeline to by-pas the zone of the fatting of grey whales. We should remind our readers that Sakhalin Energy is set to attract $5 billion to carry out the second stage of the Sakhalin-2 project to launch the project into the commercial operation. Sakhalin Energy attracted credits worth of $348 million, the third of the sum belongs the EBRD, at the first stage of the project, which required $1.5 billion. The bank’s spokesman Geoffrey Hydie earlier announced that the bank was considering a new $100 million investment in Sakhalin-2. “But we must evaluate the project’s impact on the environment and hold consultations before making the decision on our participation,” he said.

World Wildlife Fund released a statement on December 16 urging Shell (the main shareholder of Sakhalin Energy) to suspend all maritime job until the next annual registration report on whales is released. The environmentalist also called on the EBRD to give up the financing of the project. “Shell failed to fulfill even its own environmental standards,” Paul Still, a coordinator of the WWF, said. “We are trying to convince the bank to suspend the financing until Shell carries out its obligations properly,” he summed up. The EBRD, however, examined the documents, which Shell had presented, and decided to hold public hearings with the company within next three months to convince the environmental community in the safety of the project.

Requirements of creditors and environmental pressure groups have also contributed to better technical solutions in Transneft’s designing the Easter Siberia – Pacific Ocean oil pipeline. Yet, environmentalists still disfavor the pipeline route which, as they claim, is too close to Baikal (the start of the route) and reserved zones (the outlet to the sea).

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