Nations Azerbaijan



Project number:


Business sector:

Natural resources

Notice type:


Environmental category:


Approval date:

27 Jun 2000



PSD disclosed:

26 May 2000

Project Description

The EBRD has made an equity investment and extended a medium-term revolving credit facility to support the rehabilitation and development of onshore oil fields in Azerbaijan under a production sharing agreement (PSA) relating to those properties.

The EBRD is financing the rehabilitation, development and production activity based on the PSA terms of onshore Mishovdag and Kelameddin oilfield blocks located in Kura Valley in Azerbaijan.

Transition Impact

The Project has made possible the first successful conversion of a joint venture into PSA. The project will contribute to the increase in oil production volumes in Azerbaijan. It will have a demonstration effect which is to show the market that production sharing agreements in Azerbaijan with smaller independent producers are reliable legal instruments upon which oil and gas financings can be structured. The Bank’s participation in this project will be consistent with its objective to bolster the PSA legislative framework in its countries of operations. The Bank’s involvement in the project will encourage the setting of higher standards of business conduct and environmental protection.

The Client

Karasu Development Company and Kura Valley Holding Company, which are owned by Central Asia Energy Company (the Project holding Company) owned by Nations Energy of Calgary, Canada (the Client) which acquired the assets and rights in 2001 and 2002 from the original EBRD client Moncrief Oil International, Texas, USA. The client is a party to a production sharing agreement (PSA) for the rehabilitation and development of onshore oil resources in Azerbaijan.

EBRD Finance

Borrowing Base Revolving Loan: up to US$ 40 million as determined by a proven reserve borrowing base.

Equity: US$ 5 million.

Project Cost

The EBRD will finance the rehabilitation, development and production activity based on the PSA terms of onshore Mishovdag and Kelameddin oilfield blocks located in Kura Valley in Azerbaijan.

Environmental Impact

The project involves the rehabilitation of two existing onshore oil fields in Azerbaijan. The Mishovdag and Kelameddin fields are located approximately 80 km south-southwest of Baku in desert and semi-arid area. The existing facilities include approximately 900 wells, gathering lines, 12 oil storage tanks, one three-phase separator. Water injection is done on the Mishovdag field. Oil and produced water are shipped from the Kelameddin field to Mishovdag for separation. The project includes a water separator and reinjection well on the Kelameddin field both to reduce pumping costs and corrosion in the pipelines. Associated facilities include the leased storage tanks at Ali Bayramli.

There are 720 wells on the Mishovdag field (200 producing) and 190 wells on the Kelamedin field (80-110 producing). The Mishovdag development dates to the 1960s and the Kelameddin field development dates to the 1980s. Both fields had abandoned infrastructure, such as pipelines, tanks, and reserve pits, which are subject to a remediation programme. The remediation programme consists of well repairs, recompletion of wells, and infill drilling. Two additional wells will be drilled on an extension area alongside existing wells and using existing facilities.

Environmental studies

An environmental audit and analysis were conducted by an independent consultancy in Baku. Specialist studies were also undertaken on archaeology and birds. In addition, the Bank reviewed worker health and safety programme, emergency and oil spill response plans, and has agreed a detailed Environmental Action Plan with the project sponsor. Bank environmental staff visited the project site during due diligence, met with the environmental authorities, project sponsor, and joint venture partners PetOil and SOCAR to identify key issues.

Original oilfield status

At due diligence, the project had typical issues associated with historic oil operations, including large numbers of oil wells with leaks, existing environmental damage and historic contamination reserve pits with waste oil, and corrosion in some of the gathering lines. An independent baseline study was conducted in accordance with the Rehabilitation Production Sharing Agreement (RPSA) in order to set the level of contamination. There were not originally adequate emergency response or oil spill response plans in place; and these were developed and reviewed by the Bank.

Nations Energy committed to strict environmental and health and safety programmes when they become operator, and continued to address existing contamination issues during the Rehabilitation Project. They have drafted emergency response and oil spill response plans according to international guidelines, and have established a response team and fire brigade.

Rehabilitation Work: Well workovers and repairs are a priority, and this will result in leaking equipment being repaired or replaced, and proper abandonment of those wells that are not being brought into service. As each well pad is worked on, the oil pit will be closed, oil waste will be disposed of according to the Waste Management Plan, and the area rehabilitated. This will result in significant improvements in lowering risk to the environment and to worker safety. It will also reduce the risk of animals from the local herds that graze in the oil fields. In-fill drilling will use low toxicity, water-based drilling muds, blow-out preventers, and follow the environmental and safety programmes.

Two Wells in Extension Area: Two wells will be drilled next to existing exploration wells in the extension area. No additional seismic work will be undertaken and they will be drilled on existing gravel pads and using low toxicity, water-based drilling muds, blow-out preventers, and in accordance with the environmental and safety programmes.

Produced Water Reinjection: The amount of water associated with the oil is approximately 85%. This water will be reinjected into the formation; therefore, no discharge of production water is associated with the project. A water treatment and a water separation facility are part of the project. The separation facility will allow water to be reinjected into the Kelameddin field which will significantly improve the current practice of transporting it with the oil through pipelines to the Mishovdag field. Removing water from the oil in the pipeline will decrease corrosion significantly, as well as reduce energy costs from pumping water.

Pipelines: Nations has been replacing gathering pipelines as a priority. They have committed to an environmental management programme for the pipeline system, which will include inspections, cleaning and maintenance.

Two areas of the main pipeline route are sensitive. There is one crossing of a streambed which is dry most of the year, and there will be valves installed on each side of the bed to minimise the amount of oil released in the event of a break in the line. The second sensitive area is 3.3 km of the main pipeline route to Ali Bayramli, which goes near a marshland at the edge of Lake Adjikubul. This area will be studied in more detail in the monitoring programmes and will be a priority for the oil spill response programme to identify potential impacts to the lake and wetland impacts and develop appropriate mitigation measures. If there is a spill near the Lake area, the incident will escalate automatically to a ‘Tier II’ event and Briggs Marine, a regional response organisation with significant resources located in Baku, will be called out. Nations has a contract in place with Briggs Marine, and involves them in training programmes.

Archaeology: The environmental audit identified 43 sites of archaeological interest in the large contract area (448 square km). These sites date from 500 BC to the 20th century and include minor finds of pottery shards and more significant finds of mediaeval settlements and 15 cemeteries. Three cemeteries include designation as a ‘sacred place’. None of the finds are located near oil facilities, nor will they be affected by the rehabilitation project. The previous operator Moncrief, worked with the Institute of Archaeology and Ethnography to develop an Archaeological Management Programme which will include sensitivity training on this issue for staff, with specific requirements for stop work and notification in the event any artefacts are uncovered during project works.

Birds: The contract area is a migratory path for significant species of birds, including some on the Azerbaijan and/or IUCN Red Book of rare or vulnerable species, such as Lesser kestrel, Pallid harrier, Golden eagle, and Purple gallinule. The Mishovdag field is located adjacent to Adjikubul Lake, which is a resting place for migrating birds and a wintering area. Nesting areas that are sensitive include the Pirsagat water reserve and river valleys, which are over 5 km away from the Rehabilitation Project with a natural hill as a barrier. The Kelameddin field has substantially lower diversity of species. The main concern regarding birds, as identified in the pipeline section above, would be a break in the section of the existing pipeline that runs along near Lake Adjikubul. This will be mitigated through improvements to the pipeline, regular monitoring, inspection, and implementation of an oil spill response plan, which will take account of the sensitivity of the Lake area.

Oil storage: Oil storage tanks are above ground and surrounded by earthen walls to contain spills. Some have clay floors, others a mixture of clay and sand — and need to be made impermeable in the event of a spill. The company has developed a Tank Management Programme to upgrade the tank storage areas to an appropriate standard with impermeable floors.

Rail Loading Facility at Ali Bayramli: Oil will be sent to the regional rail loading facility at Ali Bayramli for transport to Georgia. The rail facility is not owned by the company.

Oil Spill Response Planning: The existing well heads were associated with leaks and one of the benefits of the project was to upgrade the facilities and stop the release of oil to the environment. The existing sites have been prioritised according to environmental risk and Nations is working on a rehabilitation programme, beginning with high priority sites first. Most of the well pads will have been rehabilitated and oil pits closed within three years of the project.

Nations has put in place an oil spill response plan (OSRP) according to international guidelines. Tier 1 equipment has been identified and a contract will be in place with Briggs Marine for Tier 2 response. Briggs Marine is likely to be able to handle any potential spill incident on this project and it is unlikely that the project is capable of a Tier 3 event due to its size and facilities; however, the company will use Oil Spill Response Limited of Southampton UK if needed for Tier 3 response.

Gas utilisation: The project will maximise use of associated gas for power. Any excess gas is being given to the community of Qazi Mammad near the Mishovdag field and the village of Udulu. This will continue to be part of the Nations Community Programme. Gas will not be flared.

Worker health and safety: Nations has implemented an international standard worker health and safety programme. The manual for worker health and safety, incorporating the company’s commitments, has been reviewed by the Bank. The EAP includes commitments to address all of the issues raised in the environmental audit.

Public consultation

There are 12 settlements located within the oil field areas, which include oil workers and herding (sheep and cows). There are also some agricultural activities, such as bee-keeping. The environmental consultants met with a number of the herders and discussed potential impacts of the project and Bank staff have met with people from some of the settlements of herders. The largest concern was having access to excess gas and prevention of damage to roads from heavy vehicles. The company will continue to communicate with people in the project area and build specific actions into the Rehabilitation Programme and company training programme for employees, such as drivers (e.g., speed limits, sensitivity training).

Increased information on the project will be communicated to local villages and herders, as well as in Baku. Nations has implemented a Community Programme following a series of meetings with identified stakeholders, to include supply of gas, road repair, and humanitarian initiatives with the region of Ali Bayramli. The community initiatives are reported to the Bank on a routine basis.

Environmental Action Plan

Nations has been implementing an Environmental Action Plan, which outlines specific standards. They have established Environmental Protection Plans and monitoring programmes for rehabilitation of well pads, monitoring, archaeology protection and management, tank management, waste management, and pipeline management. The company is implementing a Community Programme with the local herders and communities.

In addition to the above programmes and plans, the Bank is receiving 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 3-5 years. It will implement good industry standards in an area that has historically had very poor standards. In addition, Nations has increased communication with those who may be affected by the project.

Technical Cooperation



Business opportunities

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