Project number:


Business sector:

Natural resources

Notice type:


Environmental category:


Approval date:

14 Jul 1998



PSD disclosed:

15 Jun 1998

Project Description

Development of a financing structure for the "early oil" phase of production in the Chirag oil field in Azerbaijan, which is being implemented by an international consortium.

In the short term, the project aims to increase Azerbaijan's production and export of crude oil and to promote its economic development. In the long term, the project intends to show that production sharing agreements (PSAs) can be implemented successfully and thus encourage further investment.

Transition Impact

The project will have an important demonstration effect in showing to oil and gas companies that PSAs can be successfully developed and financed in Azerbaijan, thus sending a positive signal to the oil and gas investor community. It will also have a positive impact on local infrastructure by demonstrating more technically sound operations and management control systems as well as Western accounting and cost control methods.

The Client

The borrowers are five special-purpose companies established and wholly owned ultimately by Amoco, Exxon, LUKoil JSC, Türkiye Petrolleri AO and Unocal Corporation, all of which are international oil and gas companies.

EBRD Finance

The Bank's commitment will comprise an A Loan totalling US$ 100 million (ECU 90.0 million) for the account of the Bank and a B Loan totalling US$ 100 million (ECU 90.0 million) for the account of participating banks.

The project involves the commercial development of 'early oil' from a part of the Chirag offshore oil field in the Caspian Sea, transmission of oil by a 185 km sub-sea pipeline to an onshore terminal at Sangachal, and transmission of gas 50 km to SOCAR, the state oil company of Azerbaijan at Oily Rocks (an offshore island/ facility near Baku). Export of oil from Sangachal will be via 12 km of new pipeline, connecting to 233 km of existing pipeline north to the Russian border (Northern Route Export Pipeline – NREP), a 481 km unfinished western pipeline across Azerbaijan and a 376 km pipeline across Georgia (Western Route Export Pipeline – WREP) to a new storage terminal at Supsa and an off-loading facility on the Black Sea.

The Chirag Platform, sub-sea pipelines, terminal at Sangachal and pipeline to Russia are currently operational. Remaining facilities are under construction. The operator for the project in Azerbaijan is the International Company (AIOC), and the operator for the project in Georgia is the Georgian Pipeline Company (GPC).

The Bank would be financing 5 of the 11 shareholders of AIOC and GPC: Amoco Caspian Sea Petroleum Limited, Exxon Azerbaijan Limited, LUKoil Overseas BVI Limited, Türkiye Petrolleri AO and Unocal Khazar, Ltd (together, the 'Related PSC Parties').

Project Cost

US$ 1,856 million (ECU 1,671 million).

Environmental Impact

The project was screened as A/1, requiring environmental impact assessments (EIAs) of the key project components, audits of existing infrastructure, disclosure of information and public consultation. A significant amount of information was reviewed by the Bank, including six EIAs on the key project components: Appraisal Drilling, Early Oil Production, Northern Route Export Pipeline (NREP), Western Route Export Pipeline (WREP) – Azerbaijan Section, Western Route Export Pipeline (WREP) – Georgian Section, and the Supsa Terminal and Offshore Loading Facility on the Black Sea. The EIAs had been completed and approved by the authorities prior to being sent to the Bank for review. In addition, the following documentation was reviewed: a 13-volume baseline study, environmental audits, coastline sensitivity studies in Azerbaijan, health and safety programmes, oil spill modelling in the Caspian and Black Seas, and oil spill response planning for Caspian Sea operations. An environmental management system is in place for project operations. In addition, the Related PSC Parties have agreed to an Environmental Action Plan (EAP).

The project is being developed in accordance with the standards set forth in the Production Sharing Contract (the PSC), dated 20 September 1994, in Azerbaijan and in the Pipeline Construction and Operating Agreement (the PCOA), dated 6 March 1996, in Georgia. The PSC was adopted into Azerbaijan law. The standards and programmes associated with the project conform to acceptable international practice as of the date of the PSC and are in accordance with current World Bank environmental guidelines for offshore oil, onshore oil and pipeline developments.

Environment, worker health and safety and public consultation

The Chirag production platform in the Caspian Sea was refurbished and was subject to a technical review. Emissions from the platform include an emergency flare and domestic effluent. The EIAs identified no significant impacts to benthic organisms, birds, fisheries or mammals. In particular, project aspects were found to have no significant impact on Caspian seals or sturgeon. In the two years since the EIAs were developed, numerous additional studies were conducted by AIOC and regional programmes undertaken to complete the baseline information. Furthermore, AIOC has been working with regional programmes in monitoring wildlife, such as the World Bank's monitoring programme on Caspian seals. Following additional oil spill modelling, more studies on coastal sensitivity to the north of Baku are currently being completed, and the Oil Spill Response Plan will be revised to reflect any changes necessary.

Significant amounts of formation water, which is produced along with crude oil, will not be generated for five or six years. The formation water will be separated at the production platform and the PSC expresses a preference that it be reinjected into the geologic formation unless it can be shown that the water stream is not compatible with the formation. If produced water cannot be reinjected, it will be discharged into the Caspian Sea according to a set of standards set forth in the PSC, which are in accordance with World Bank guidelines. The oil/water separation equipment incorporated in the project is designed to meet the more stringent performance criteria of a daily mean of 42 mg/l and a monthly mean of 29 mg/l for oil/grease discharge limits.

The Sangachal Terminal is already constructed and operating. Monitoring will be undertaken on seagrass beds which are located immediately offshore to study any potential long-term impacts of effluent discharges to the Caspian. A public information meeting was held in the nearby community of Sangachal and no significant issues were raised.

The NREP is an existing pipeline which crosses a number of rivers, including the water supply canal for Baku, as well as several archaeological sites and an existing, degraded oil field. The pipeline has been integrity tested and will be inspected regularly from the air and on the ground. A pipeline emergency response system and spill response plan have been implemented. Manual shutoff valves are installed at the major river crossings, and an additional sensitivity study is being undertaken on downstream areas that would need to be protected in an emergency.

AIOC chose to make maximum use of existing routes to reduce construction costs and time and to minimise environmental impacts for the WREP. Specific studies on nature reserve areas near the pipeline route focused on protection of water resources, including rivers and groundwater. A pipeline emergency response system and spill response plan have been implemented. Manual shutoff valves are installed at the major river crossings and a similar inspection and emergency response system will be installed. Substantial portions of the existing pipeline will be replaced in the same pipeline corridor with new pipe. Test remediation on existing polluted areas is being conducted. All existing above-ground river crossings will be replaced with below-ground crossings to prevent illegal tapping and to reduce the risk of release of oil into watercourses. The pipeline was rerouted to avoid the major archaeological sites in the area. Hazards to the pipeline from geological processes, such as seismic activity and soil movements, have been considered in the design.

Siting alternatives for the Supsa Terminal on the Black Sea and the onshore pipeline were evaluated, including site location, ecological habitats, the visual landscape, noise impacts on the surrounding dwellings, and pollution of groundwater and local drinking water supplies. Archaeological sites were identified during preparatory work at the terminal site, funding was provided for excavations conducted by the local cultural and historical authorities and an archaeological management plan has been implemented.

Both Azerbaijan and Georgia are active seismic areas. The construction programme for the Chirag platform and offshore facilities included a major seismic strengthening programme involving the installation of seismic isolators. Oil spill prevention measures have been built into the design of the project; for example, in the event of a significant seismic event at the Chirag Platform, automatic valves at the sea floor would stop oil flow to the platform, minimising the risk of release of oil to the Caspian Sea. The pipelines have been designed to West Coast of California standard for seismicity, which requires higher design standards than those for the Caspian region.

The Chirag Platform is designed in such a way that the risk of a major oil spill is extremely low. The Chirag Platform and other facilities have been constructed with state-of-the-art automatic shut-off valves, which will shut down the oil flow from each well in the event of an emergency or pressure loss. In addition to the shut-off valves, the pipeline from the platform to the Sangachal Terminal contains periodic shut-off valves, which would close upon loss of pressure, such as in the event of a break in the line. AIOC has established an Exclusion Zone around the platform and subsea pipelines so that fishing vessels will not be in direct proximity to the facilities. AIOC has developed an Oil Spill Response Plan (OSRP) based on conservative assumptions. Oil spill modelling has been completed based on an international model to assist in the development of contingency plans. Tier I and II responses to incidents under 1,000 tonnes would be handled by AIOC and Briggs Marine, the regional response capacity in Baku, which AIOC has helped develop. A Tier 3 spill (over 1,000 tonnes) would require the assistance of international responders, and Oil Spill Response Limited of Southampton UK has been contracted for this purpose. AIOC's Oil Spill Response Plan for the Caspian Sea operations meets international standards with regard to minimising potential impact in the Caspian and to the coastline of southern Azerbaijan. Coastal sensitivity studies are being conducted on the northern coast of Azerbaijan, based on recent oil spill modelling, and the Oil Spill Response Plan will be revised based on their findings. No studies were undertaken by AIOC on coastlines in other countries.

The unlikely worst case event (a pipeline rupture), without mitigation, shows potential impact primarily to the coast of Azerbaijan, but potentially to other littoral states. As mentioned above, the Oil Spill Response Plan has been developed to mitigate such an occurrence. Representatives of the littoral states have received the AIOC Update and Executive Summary describing the unlikely potential transboundary impact at the April 1998 meeting of the CEP in Tehran, which focused on transboundary environmental issues.

In the Black Sea, results of modelling an unlikely worst case event, such as an oil tanker accident or loading accident, without mitigation, show that oil would primarily end up in Georgia, but could reach south along the coast of Turkey or north towards Russia. The Oil Spill Response Plan (OSRP) for the Black Sea operations, based on similar modelling and contingency planning activities, will be completed by winter 1998-99, prior to the first oil entering the pipeline, and will also be reviewed by the lenders and submitted to the Georgian authorities. The Black Sea ecosystem has already been impacted significantly by introduction of foreign marine organisms, which entered the Black Sea either as part of the fouling organisms attached to the hulls of ships or in ballast water tanks, subsequently discharged into the sea. AIOC is developing procedures for tankers loading oil at its facility that will follow international guidelines.

The PSC specifies that all of the associated gas produced by AIOC belongs to the State Oil Company of the Azerbaijan Republic (SOCAR). The gas associated with the Early Oil project will reach some 800 million cubic metres/year at peak production. AIOC is obliged to deliver the gas to the SOCAR facility at 'Oily Rocks' via a sub-sea gas pipeline and has constructed the facilities necessary to meet this obligation. Azerbaijan is experiencing a deficit in natural gas and is eager to become self-sufficient. The Government of Azerbaijan has indicated that it is not its policy to flare gas, except on an emergency basis, and the Government has signed and ratified the Climate Change Convention. A technical study was completed on SOCAR's ability to handle the volume of gas generated as part of due diligence, and the EBRD continues to discuss investment opportunities to remove bottlenecks in the storage and handling facilities to prevent flaring of usable gas. A gas utilisation programme is in place at the Sangachal terminal to maximise the use of gas received (consisting of gas entrained with the oil), with the remaining gas being flared. All air emissions at Sangachal will be within applicable Azeri limits.

Near the end of the life of the Chirag Platform, the Environmental Sub-Committee that sets requirements for the project in Azerbaijan will determine the specific decommissioning and closure requirements. The project currently plans to remove the top 55m of its platform and leave the remaining jacket in place, in accordance with IMO requirements. Provisions have been made to set up a Closure Fund when 70 per cent of full field reserve depletion is reached to cover the costs of closure and decommissioning.

AIOC has developed a sophisticated worker health and safety programme based on Azerbaijani, Georgian and international industry standards. Blow-out preventers will be used to ensure safety of workers on the platform. A detailed helicopter safety programme is in effect for the transport of workers to and from the platform.

An EAP is being finalised by the Related PSC Parties, which contains details of standards, programmes, studies and required reports relating to the Early Oil Project. Monitoring by the Bank will include routine reporting, site visits and biannual independent audits. In accordance with the environmental requirements of the PSC, detailed monitoring plans are developed annually by the Environmental Sub-Committee, in which the authorities and the company participate. These plans will be submitted annually to the Bank, along with an annual report and the programme for the following year's monitoring programme and work plans. The EAP will also provide commitments to a health and safety programme and a Health, Safety and Environment Awareness Programme.

The environmental additionality of the project falls into several categories: Western standard EIAs, environmental and health and safety training and awareness raising, public availability of EIAs in libraries across Azerbaijan and Georgia, and support to national and regional programmes. In addition, the project will introduce modern international oil industry practices and oil spill prevention and response programmes that will set a standard for the region. AIOC currently chairs the HSE Forum, which is a petroleum industry group established to promote health, safety and environmental issues in Azerbaijan, share information and pool resources for mutual programmes, such as research and monitoring.

The project has met the requirements of the EBRD for public consultation during due diligence. The preparatory work on the EIAs in both Georgia and Azerbaijan included the public in scoping meetings. The EIAs and literature review have been made public along the pipeline routes in both countries, and in both capitals since July 1997, in a total of 26 libraries. Numerous media announcements (newspaper, radio and television) have advertised availability of the documents. Four public meetings were held in Azerbaijan and two in Georgia during EIA preparation in 1997, and additional meetings were conducted in Baku and Sangachal on the Early Oil project and Western Pipeline routes in January and February 1998. AIOC participates in the Caspian Environment Programme and GPC is in routine communication with the Black Sea Environment Programme. The revised Executive Summary with the results of the latest oil spill modelling was put into the public domain in English on 23 February 1998. Russian language and Georgian language versions were put into the public domain on 10 April 1998. Notification was made via newspaper articles and radio announcements. During the first 10 months of information in the public domain, AIOC has not received written comment from the public. NGOs have recently commented on a number of the environmental topics noted above, and the Related PSC Parties are taking them into account.

There is an Environmental and Social Impact Assessment available for this project.

Technical Cooperation


Company Contact


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