Project number:


Business sector:

Natural resources

Notice type:


Environmental category:


Approval date:

10 Apr 2001



PSD disclosed:

14 Feb 2001

Project Description

Proposed corporate loan to support the corporate strategy of Rosneft - Sakhalinmorneftegaz.
The Bank’s objective is to provide financing that would enable the company to (I) continue production drilling at Odoptu-More field, (ii) modernise existing production, storage and associated facilities, (iii) implement the Environmental Action Plan; (iv) satisfy working capital needs, and (v) enhance the company’s liquidity.

Transition Impact

The project is expected to enhance the corporate governance standards of both SMNG and Rosneft, in particular their financial and organisational transparency, and to improve SMNG’s environmental protection. The institutional strengthening of these companies will indirectly also facilitate efficient Russian participation in production sharing agreements.

The Client

The borrower, Rosneft - Sakhalinmorneftegaz (SMNG), is a Russian oil and gas company engaged in exploration, production and marketing of oil and gas deposits on Sakhalin Island in the Russian Far East. It is also a shareholder in projects off-shore. SMNG is majority controlled by Rosneft, a Russian vertically integrated oil and gas company owned by the Russian state.

EBRD Finance

Up to $90 million (EUR95.9 million) corporate loan to support SMNG’s investment programme aimed at maintaining stable production and enhancing its financial position. Part of the loan is intended to be syndicated to commercial banks.

Project Cost

Up to $90 million (EUR95.9 million).

Environmental Impact

Environmental summary
Part of the proceeds of the loan will go towards capital expenditure, drilling operations at Odoptu, and the implementation of an Environmental Action Plan. The rest of the proceeds will go towards working capital and balance sheet restructuring. SMNG has subsidiary companies, which manage pipeline operations (UMNG), oil production (Okhaneftegas and Katanglineftegas), drilling operations (NUBR), technical supplies and railroad operations (UPTOIK), and oil storage facilities (e.g., Korsakov Tank Farm). Most of the operations are located on Sakhalin Island in the Russian Far East, but include a sub-sea pipeline to the mainland, a pipeline to the Komsomolsk-na-Amure refinery, and the De Kastri port loading facility. This project involves only the existing, shore-based operations of SMNG.
There are 23 operating oil fields of varying sizes, with approximately 2,300 producing wells and 433 injection wells. Sakhalin Island has a long history of oil operations, and some of the fields (and associated environmental problems) date back to the 1930s.
Environmental studies
The project was screened ‘B/1’, requiring an analysis of the impact of the proposed use of EBRD funds and an audit of the main company facilities. Independent Russian and international environmental, health and safety consultants conducted an audit at the corporate level of SMNG, as well as the subsidiary companies’ facilities, on behalf of the EBRD. The resulting information was used to develop a detailed Environmental Action Plan (EAP), which is being agreed with the company. The following information outlines the main issues and mitigation measures.
Oil fields
The oil field operations have issues typically associated with historic oil operations, including large numbers of oil wells with leaks, historic contamination, unlined reserve pits with liquid oil wastes, and external corrosion of pipelines. In some locations, significant improvements are needed in oil spill response equipment, fire safety equipment, and housekeeping.
SMNG has committed itself to implement a significant number of measures for oil field operations. A survey of reserve pits will be undertaken to prioritise pits for closure and rehabilitation. Any new pits will have appropriate liners and monitoring. Abandoned equipment will be collected and disposed of appropriately. Existing wells will be surveyed and prioritised for upgrading, if appropriate, or closure. Significant attention has been given to upgrading oil spill response equipment and fire safety equipment.
Odoptu drilling
The oil wells that service the Odoptu Reservoir are 5 km on-shore, but are directionally drilled to the off-shore field. The location of the wells was designed to reduce the environmental impact potential that off-shore drilling would have had. Although the rest of SMNG’s operations use water-based drilling muds, oil-based muds are necessary for wells at this depth, and the reserve pit for Odoptu is lined to protect the environment from migrating sludges. Currently, associated gas is flared.
The EAP includes provisions for a number of investments associated with drilling four additional wells. Gas compression equipment and a gas pipeline will enable the associated gas to be available for the city of Okha instead of being flared. Once this infrastructure is in place, SMNG’s gas utilisation level will increase from 88 per cent to over 97 per cent.
SMNG’s oil and gas pipeline system includes infrastructure dating back to 1930s-40s when SMNG started its operations. The company has a pipeline management programme, which has an objective of replacing over 600 km of pipeline between 2000 and 2005. A total of 147 km has been replaced during the last seven years. The EAP will supplement the pipeline management programme with funding for the replacement by 2002 of a section of pipeline which is over 40 years old and includes installation of cathodic protection for critical sections of pipeline near the Nevelsky Strait, including the sub-sea pipeline to the mainland. In addition, improvements in pipeline spill response equipment and training have been included in the EAP as well as the development of a pipeline corrosion monitoring programme and setting up relevant laboratory facilities for corrosion monitoring.
Materials storage 
SMNG operates large oil storage facilities, such as the Western Tank Farm and the recently acquired Korsakov Tank Farm. Significant improvements are needed to the storage facilities to either upgrade tanks to an acceptable level or to decommission and close tanks, to install secondary containment where needed, and to rehabilitate contaminated areas. Over US$3 million in the EAP is committed to the first phase upgrade of the Korsakov Tank Farm. A feasibility study will be undertaken of other key storage facilities during 2001 and similar upgrade or closure plans will be developed.
The environmental management programme that is being agreed with the company will include materials management, including storage of chemicals, labelling, and safety information.
Rail facilities 
Some hazardous materials, such as methanol, are transported via SMNG’s railroad facilities. The narrow gauge railroad has not been modernised and the route crosses many surface water bodies and sensitive areas. Upgrades are needed to sections of the railroad track, rolling stock, parts and maintenance to improve safety of rail transport. Provisions have been included in the EAP for upgrades to the railroad, including development of an emergency response plan specific for rail transport.
Waste management 
Management and disposal of waste is a very significant environmental problem in the region. SMNG has established new company guidelines prohibiting burying, burning, or otherwise disposing of wastes. Sites where these practices have occurred in the past are being prioritised and a number were rehabilitated in 1999-2000. A survey of other sites and inventory of abandoned equipment will be undertaken in 2001 to prioritise reclamation and remediation needs. Priorities will take into account potential impact to ground and surface water.
In addition, the EBRD will be discussing issues such as waste disposal with SMNG and other companies in the region at the strategic level beginning in summer 2001.
Response planning
SMNG is active in the emergency response planning for Sakhalin Island and the Russian Far East together with the Ministry of Emergencies. Current oil spill and emergency response planning need improvement to meet Russian and international standards. SMNG has committed itself to improvements in oil spill prevention and response, emergency prevention and response, and training. Provisions for equipment have been included in the EAP. A separate response plan will be developed for railroad operations.
Occupational health and safety
The occupational health and safety performance of SMNG is comparable to other Russian oil companies. The company has not had a significant number of accidents in the past five years, but improvements are needed in areas such as personal protective equipment, hearing protection, sanitary and general services, and training. SMNG has agreed to develop an environmental and occupational health and safety management system to bring it in line with international standard practice over a number of years. The programme will also take into account the Rosneft corporate programme, which it is extending to its subsidiaries.
Public interaction
In the past, SMNG’s operations have had considerable exposure in the press, but has not had a strong communication programme with the public. SMNG formed a Public Relations department in late 2000. During the environmental audit, the SMNG environmental manager met with NGOs and agreed to establish routine communication. The Bank is currently working with SMNG to define commitments to a more proactive approach to communication, including communication on routine operations, in the event of emergencies, and with regard to future projects. More structure will be given to communications and to documenting programmes with various communities near company facilities. The company has agreed to release information to the public about the key projects for 2001-2002, including summaries of environmental and health and safety improvements.
Community zoning
New Russian Sanitary Norms and Rules (SNiP) were approved in 1996 which enlarged sanitary protection zones around industrial facilities. While these rules have not been registered yet by the Ministry of Justice, they are widely applied by authorities as if they were in force. The widening of sanitary protection zones would have an impact on a number of SMNG facilities which are less than the proposed distance from residential areas. In this event, the company will need to work with authorities to determine 1) if technological changes or relocation of emission sources are necessary, 2) if a number of households need to be resettled, or 3) if a risk assessment should be done to determine the safe distance from the facilities.
The current sanitary protection zone distance applies to one facility at Katanglineftegaz and the company is working with authorities to determine which facilities should be closed or if new accommodation will need to be provided. A survey will need to be undertaken in 2001 to determine how many people live in these flats.
Environmental payments
Part of the proposed loan is for debt restructuring. The balance sheet restructuring and/or EAP will include provisions for agreed outstanding environmental payments which are applicable to its operations.
Environmental Action Plan (EAP)
SMNG has committed itself to implement an EAP which outlines specific actions, schedules, and costs. The commitments include the upgrade of the Korsakov Tank Farm (Phase 1), repair and replacement of key sections of pipeline, cathodic protection of key sections of pipeline, improved oil spill response and emergency response equipment and training, railroad safety upgrades, a programme of improvements to environmental and occupational health and safety management, improved gas utilisation, fire safety, and improved communications. The environmental management programme will take into account both the Rosneft corporate environmental policy commitments and international practice.
In addition to the above programmes and plans, the Bank will receive routine reports on the project, undertake monitoring site visits, and require routine independent audits of the implementation of the Environmental Action Plan. The project will enable a significant amount of contamination to be cleaned up within a time frame of two to four years, and help to shift SMNG’s focus to preventing environmental problems. It will move the company towards good industry practice in an area that has historically had very poor standards. In addition, the company will provide more information in the public domain and increase communication with those who may be affected by the operations.

Technical Cooperation


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