Pipeline Dreams: The World Bank, Oil Development and Environmental Protection in Georgia

by Manana Kochladze

Tbilisi, Georgia — “This is not just another pipeline; it is a strategic framework that advances America’s national security interests. It is a strategic vision for the future of the Caspian region.” So said Bill Richardson, energy secretary during the Clinton administration, about oil and gas pipeline construction from the oil-rich Caspian Sea through Georgia and Turkey.

Caspian Sea oil reserves are believed to be at least as large as those in the North Sea, which currently supply about 8 percent of the world’s oil, and the West has taken an enormous interest in this valuable resource of the old Eastern bloc.

The Bush-Cheney U.S. National Energy Policy calls for supporting the development of new oil exploration around the Caspian region, with emphasis on a Georgia-Turkey pipeline.

But this is no unilateral U.S. pipeline dream. The World Bank and other international financial institutions have worked intensely since 1994 to insure private investments and provide political risk mitigation for the oil sector in the South Caucasus through institutional, policy and legal reforms. According to a World Bank policy paper, “the involvement of public sector agencies can give a unique degree of protection to private investors — a so-called ‘halo effect’ that should have particular value ... in the Caspian region, where capital market access is fragile and relations with foreign governments highly important for geo-strategic reasons.”

Oil development will boost Georgia’s economy, according to the Bank. “Development of the region’s oil and gas resources has the potential to deliver significant and sustained economic benefits to Georgia,” explained Judy O’Connor, country director for Georgia at the World Bank, in a July 2001 letter.

The Bank’s International Finance Corporation and the European Bank for Reconstruction and Development helped fund the Early Oil pipeline project, with a new oil terminal on the Black Sea. This $2 billion project involves development of oil from a Caspian Sea offshore field; the construction of related production facilities in Sangachal, Azerbaijan; and construction of two pipelines from Sangachal terminal, one which connects to the existing pipeline near the Russian border (the Northern Route Export Pipeline), the other a new western pipeline through Azerbaijan and Georgia (the Western Route Export Pipeline); this latter pipeline connects to a new storage terminal at Supsa, Georgia and an offloading facility on the Black Sea. The pipeline is operated by the Azerbaijan International Oil Company consortium, which is headed by British Petroleum.

The Bank argues it can facilitate oil development in a socially and environmentally sustainable manner. In March 2002, the World Bank began implementation of a new Energy Transit Institution Building project that is intended to enhance the country’s capacity to negotiate and implement oil and gas transit agreements, while minimizing social and environmental harms. With the Bank’s International Development Association providing more than three quarters of the $12.26 million budget, the project will fund consulting services and technical assistance related to environmental assessments, contract negotiation, financial audits and oil spill prevention.

The Bank, along with the Global Environmental Facility (an intergovernmental funder of environmental projects, administered by the World Bank) and the European Union, has also funded an Integrated Coastal Zone Management Program and the establishment of Kolkhety National Park. The Kolkhety Lowland portion of the Georgian Black Sea Coast is a highly valuable and ecologically sensitive hotspot of biodiversity with intact wetlands and the unique Kolkhety Forests.

But East European environmentalists says the Bank is merely paying lip service to environmental protection, and that its small environmental loans are dwarfed by — and in direct conflict with — its large-scale, long-term support for oil development.

“The World Bank has tried to pave the way for public support of a massive pipeline and other oil transit projects which will pump oil from developments funded in the Caspian,” says Merab Barbakadze of the Georgian Environmental Law Club. And “the Georgian government is supporting all oil-related projects without calculating the cumulative economic and social impacts.”

Risky Ventures

Now the government is seeking — without direct Bank encouragement — to intensify oil development with a growing number of new ports and controversial projects within the Kolkhety Lowland, either directly in or near by the territories designated to receive protection under the Ramsar Convention on wetland protection.

Several controversial projects have already begun in the area of Kolkhety Lowland, including plans for off-shore oil exploration, expansion and rehabilitation of existing ports and construction of new ones.

A September 1999 presidential decree authorized the construction of an oil terminal in the village of Kulevi by Argomar Oil Limited, a Cyprus-registered company. The construction site is located in the middle of the Ramsar site and the marine part of the World Bank-funded Kolkheti National Park. The government permitted construction of the terminal despite numerous violations of environmental regulations by Argomar, including violations of the Ramsar Convention, failure to complete an environmental impact assessment and failure to obtain required environmental and construction permits.

The terminal includes 22 reservoirs with 100,000 tons of storage capacity each. Oil will be transported by rail through the Kolkheti National Park. According to Argomar, initial annual shipments of oil products will be 6 million tons, gradually rising to 10 million tons. Argomar is seeking to rely heavily on debt to finance the $115 million to $120 million project, but even the World Bank questions the project’s viability. “Currently the company has certain committed volumes of somewhere between 1 and 2 million tons,” concluded a September 2001 World Bank mission. “The Kulevi oil terminal cost a reported $115 million, of which at least $60-70 million is debt. This means, assuming a 10 percent interest rate, the company must earn at least $7 million annually, after operating costs, just to pay interest. A tariff of $7.5 on volume of 1 million tons would leave little for operating costs. Thus on the face of it, the Kulevi Oil Terminal investment seems an exceedingly risky venture with little chance payback unless, as the project sponsor hopes, they can achieve a volume of 10 million.”

The government is pursuing several other projects that have generated environmentalist protests. The unique biodiversity of Kolkhety lowland now faces other threats from the Baku-Supsa Oil Pipeline, drainage of Kolkhety Wetlands, oil exploration plans by Anadarko and other oil development schemes.

The Bank is not supporting, and has even criticized, these initiatives. In a September 2001 mission report, the World Bank states that the economic justification for the oil terminal and rail system is unclear and seems “an exceedingly risky venture with little chance of payback” unless the maximum capacity can be achieved. “Given the number of competing transit routes and export terminals for Caspian oil, there is a real possibility that Argomar will not be successful in obtaining funds sufficient to complete the investment,” the September 2001 World Bank mission concluded — raising the prospect of construction harming the Kolkhety National Park without the project becoming operational and providing any return to Georgia at all.

The potential damage from the oil terminal and related projects could be severe, according to the Bank. “The recent developments in the Georgian Black Sea coastline — the construction of Kulevi Oil Terminal, the proposed railway link and marine access channel, the de-listing of 90 hectares of land from the Ramsar-designated Kolkheti Lowland without proper notification, and the establishment of a new State Agency for the Protection of the Black Sea and its Utilization/Exploitation of its Resources are putting the overall [Georgia Integrated Coastal Management] project development objective at risk,” states the Bank’s mission report.

The Bank mission acknowledged that the “potential for conflicts of interest between conservation aims for Kolkheti National Park and the business aims of private companies will remain. The entire marine area of the Kolkheti National Park lies within areas licensed out to oil and gas companies and exploration is ongoing. Additional port development projects are also being considered. These possible developments point to the relevance of the Georgia Integrated Coastal Management Project and the need for the government to demonstrate greater commitment to making it work.”

Area environmentalists say the government is committed not to environmental preservation, but to turning the entire marine reserve into an oil extraction and transit zone. Further evidence of the government’s disregard for protecting the area, they say, is its de-listing of five hectares from Ramsar sites in Kulevi for the construction of a fish factory and harbors. A July 2001 presidential decree gave rights to five hectares of non-agricultural land in a village called Kulevi to Argo, a Georgian fishery company.

The World Bank’s Energy Shortage

For all its hand-wringing about the imminent harm the Georgian oil development projects are soon to inflict on the environment — and even to the Bank’s own environmental projects — World Bank officials have done little to force a change in government policy. The Bank’s high-level September 2001 mission to Georgia actually praised the oil terminal’s technical quality and noted the “importance to Georgia of private sector investments, particularly those that require no explicit state guarantees and seem to promise economic benefits.”

The Bank’s lackluster effort to effect change in government policy to protect the environment contrasts with its aggressive advocacy of trade liberalization measures. In a July 2001 letter to the Georgian parliament, for example, the Bank insisted that the government act to remove trade barriers. Demanding the free export of metal scrap and timber from the country, the Bank threatened that failure to reverse the timber export ban could have “an implication on our ability to provide financing” and “it will certainly delay if not jeopardize financing for a forestry project.”

The Bank has threatened to cancel the Kolkhety National Park environmental project, but that is a small project — and evidently of little concern to the Georgian government, which is following the Bank example in prioritizing commercial development over ecological concerns.

Manana Kochladze works with Association Green Alternative in Georgia. She is Georgian National Coordinator with CEE Bankwatch Network.