Dragon Oil

Location:

Turkmenistan

Project number:

4287

Business sector:

Natural resources

Notice type:

Private

Environmental category:

A

Approval date:

14 Dec 1999

Status:

Completed

PSD disclosed:

12 Nov 1999

Project Description

The borrowing base loan facility to support commercial development of offshore hydrocarbon reserves in the Cheleken Contract Area in the Turkmenistan section of the Caspian Sea under the Production Sharing Agreement (PSA). EBRD financing will allow, under the terms of the Cheleken PSA, commercial development of offshore hydrocarbon reserves included in the Block II concession area located to the west of the Cheleken peninsula, in the Turkmenistan section of the Caspian Sea.

Transition Impact

The project will support foreign investment into the most important sector of Turkmenistan's economy. This investment will increase the production volumes and foster use of the PSA legislative framework to allow for further investments in the country's developing oil and gas sector.

The Client

The client, Dragon Oil (Turkmenistan) Ltd, is the foreign party in the Cheleken PSA and a fully owned subsidiary of Dragon Oil PLC. Under the PSA, Dragon Oil (Turkmenistan) Ltd has the right to develop oil and gas reserves contained in Block II in the Turkmenistan section of the Caspian Sea. Dragon Oil PLC is an oil and gas exploration company, with around 70 per cent of its equity owned by Emirates National Oil Company Ltd (ENOC). ENOC, based in Dubai and fully owned by the Emirates Government, has its main interests in refining and marketing of petroleum products.

EBRD Finance

Loan facility of up to US$ 60 million (€ 68 million) A-loan and US$ 15 million (€ 17 million) B-loan. The financing is structured on the borrowing base principle with 8 years maturity of the loan.

Project Cost

 

Environmental Impact

The project involves the phased commercial upgrade of the Lam and Zhdanov oilfields under a production sharing agreement (PSA) between the Government of Turkmenistan and Dragon Oil. The oilfields are located about 20-40 km west of the Cheleken peninsula in a shallow water depth of about 10-30 metres in the south-east Caspian Sea. Currently, the fields comprise 56 platforms and 116 wells, only some of which are producing. Oil and gas is currently transferred via sub-sea pipelines to an oil gas separation plant (OGS) and, subsequently, to an oil water separation plant (OWSP), the latter being operated by Turkmeneft. The oil is transferred via a newly refurbished jetty and sold to the highest bidder. The oil is shipped using ‘Caspian Class’ oil tankers (about 5,000 dwt). The existing oilfield infrastructure requires substantial upgrade and currently there are inadequacies in terms of health, safety and environment, presenting higher risks than faced by similar operations in the North Sea or the Gulf of Mexico, for example. The project area lies within a seismically active area (of approximately 6-7 on the Richter scale). In accordance with the former Soviet standard BCH 51.3-85, all infrastructure was required to be constructed to withstand likely seismic events. Similarly, all new infrastructure will be required to meet national and International Petroleum Association (IPA) standards in this respect.

Dragon Oil has requested EBRD funding for the first phase of an Integrated Development Plan. Key elements of Phase I include the improvement of structural stability of selected existing platforms, further appraisal and development drilling from these existing platforms, seismic surveys, implementation of an oil-spill preparedness and response plan, and the introduction of a health, safety and environmental (HSE) management system. Phase II, the Full Field Development Plan, depends on the outcome of Phase I and includes additional drilling and work-over activities, additional onshore and offshore refurbishment, and the construction of a new OWSP and a tank farm. The EIA has covered both phases although more detailed site-specific studies will have to be undertaken for each major project component, in accordance with Turkmeni requirements.

EBRD requirements: The project was screened as ‘A/1’, requiring an environmental impact assessment (EIA) of the project and an audit of existing infrastructure, disclosure of information and public consultation. The EIA considers the potential project impacts for the entire Integrated Development Plan. The project will be developed in accordance with the requirements set forth in the PSA, and applicable environmental standards of Turkmenistan and the World Bank. In response to permitting requirements, individual project components will be subject to separate EIA/OVOS and approval by the competent Turkmeni authorities.

Key environmental/health and safety issues

Offshore activities

Drilling activities

Drilling activities will be carried out using ‘low toxicity’ water-based drilling mud systems (as opposed to oil-based mud systems). Drill cuttings will be collected and transported to shore for treatment and disposal in shallow small landfills with no significant environmental impact. Other options for disposal of cuttings, which will be explored with the authorities and would be subject to technical assessments, may include cleaning of collected cuttings to an acceptable standard for potential offshore disposal.

Produced water

Produced water is currently transferred for disposal to evaporation ponds onshore (see below). Dragon will commission a study to review a variety of disposal options (possibly including re-injection) and their feasibility and environmental implications. The stricter of Turkmeni, World Bank and US federal discharge standards for oil content and mineralisation would be applied should produced water discharge to the Caspian Sea be proposed.

Onshore activities

Construction activities

Construction activities, such as laying of new pipelines, will avoid communities and other cultural or archaeological areas. Pipelines will be trenched and buried and, thus, minimise any severance impacts. The EIA does not indicate that there will be significant impacts on the flora and fauna of the area, which includes several species listed in the Red Book for Turkmenistan. Existing coastal erosion and sea-level changes require a re-routing and, later, a replacement of the pipeline landfall to reduce environmental safety concerns of the current conditions.

Oil gas separation (OGS) and oil water separation plants (OWSP)

The oil, produced water and associated gas is delivered via pipeline to the Dragon Oil operated OGS Plant (see also section on Gas Utilisation below). Then, the degassed mixture is transferred to the OWSP operated by NGDU Chelekenneft. Produced water is discharged to an evaporation pond (see below). Part of the project involves construction of a new OWSP, starting in 2001.

Evaporation ponds for produced water

The groundwater resources in the Cheleken area are not suitable for consumption due to their natural salinity. Historically and currently, an unlined evaporation pond, recently supplemented by a second unlined pond, has been used at NGDU Chelekenneft facilities for the disposal of produced waters. No additional significant environmental impacts are expected to arise from future project activities.

Tank farm

Dragon currently leases a single 3,000 cubic metre (cbm) tank at the OWSP around which it has constructed a protective bund. The water and gas-free crude oil is piped approximately 10 km to Neftebasa tank farm, where Dragon has leased two 5,000 cbm storage tanks. These tanks were refurbished in 1994 and 1995 and have containment bunds. Dragon expects to start the construction of a new tank farm in 2001, which will be built to international standards.

Harbour area, Aladja jetty and marine fleet

Dragon’s oil is sold and transhipped via ‘Caspian Class’ tankers (about 5,000 dwt). Only tankers with separated ballast water are serviced by Dragon at the Aladja loading terminal (jetty), which was refurbished in 1992. Due to its shallow depth, a narrow dredged channel has to be maintained for tanker access.

Gas utilisation

The most significant continuous air emission source associated with the project is the ground flare where about 550,000 cbm of natural gas is burned daily. Similar amounts of associated gas are currently delivered to the Cheleken Carbon Black plant, with remaining smaller amounts being provided to the town of Cheleken. The anticipated increase in oil production is expected to result in an increased natural gas production, a part of which may be routinely flared at the platform. Dragon’s preferred gas utilisation strategy is to sell the gas to third parties. Any remaining unsold unutilised gas will be flared. The EBRD and Dragon will monitor and review means of gas utilisation on an annual basis. It should be noted that the EBRD is currently preparing a technical cooperation project which includes a review of gas utilisation options in Turkmenistan.

Decommissioning and abandonment (D&A)

The PSA requires that the company conduct a survey of the status of all structures within its contract area and develop an Abandonment Plan for all facilities to be abandoned by Dragon during the first five years of its operations. This plan has to be satisfactory to the Government of Turkmenistan’s competent body. The plan is to be financed through the establishment of an Abandonment Fund and implemented in accordance with good oilfield practice and standard environmental practice.

Public consultation activities

Environmental scoping, comprising a series of focused meetings with NGOs and governmental agencies and a public meeting in Cheleken, was conducted during the period 24 August to 3 September 1999. The public meeting was advertised beforehand in the local media. A briefing paper indicating the nature of the project, its potential impacts and the proposed scope of the EIA was circulated in advance of all meetings to facilitate meaningful dialogue.

Following release of the EIA for public review on 15 October 1999, follow-up meetings were carried out in Turkmenistan in advance of the submission of the project to the EBRD’s Board of Directors on 14 December 1999. The EIA is available for review in the EBRD’s offices in London and Ashgabat, and in Dragon Oil’s offices in Ashgabat and in the Mayoral Building in Cheleken town.

Major oil spills and response plans

The rehabilitation of the company’s infrastructure is expected to reduce risk levels to as low as reasonably practicable (ALARP). Using hazard and risk assessment methodologies, different potential major oil-spill scenarios were developed for the project. The scenarios include a major blow-out (oil release of 50,000 tonnes), pipeline failure (oil release of 700 tonnes), and a release of 50 tonnes of diesel from topside (platform). The fate of potential oil releases was modelled using the oil-spill information system (OSIS). Based on the scenarios and the results of the model runs, a tiered oil-spill contingency plan was developed to international standards and will be implemented by the sponsor.

Under adverse conditions, potential major oil spills show a probability of creating transboundary impacts, primarily by reaching the coast of Iran and Azerbaijan (see also section on Potential Transboundary Impacts, below). In addition to Dragon’s oil-spill prevention measures, its oil-spill response programmes, and expected contracts with international ‘Tier 3’ responders, the sponsor will maintain appropriate insurance coverage.

Sensitive receptors

Sensitive receptors in the project area comprise the fauna and flora of the Caspian Sea (including sturgeon which summer in the contract area, and the endemic Caspian Seal), subsistence fishing communities, particularly around the Cheleken coast, and the Krasnovodovsk Nature Reserve (which supports migratory birds). Protection of the latter will be treated as a priority in the event of an oil spill.

Potential transboundary impacts

Under the requirements of the UN Convention for Environmental Impact Assessment in a Transboundary Context (the Espoo Convention), the potential for transboundary impacts requires notification by the signatory governments in which the project originates to the potentially impacted neighbouring countries to invite their participation in the EIA process. Turkmenistan is not a signatory to the Convention; however, the EBRD and Dragon Oil requested that the Turkmeni authorities release the EIA to littoral states either directly to the Espoo focal points or indirectly via the Caspian Environment Programme. The Ministry of Environment has complied with this request and has verified that it has sent a letter regarding the project and potential transboundary impacts and a copy of the Executive Summary of the EIA to their environmental counterparts in each of the littoral states.

Worker health and safety

The rehabilitation and upgrading of existing onshore and offshore infrastructure are expected to improve worker health and safety such that risk levels are as low as is reasonably practicable (ALARP). Design criteria will also ensure that infrastructure can withstand likely seismic events. In addition, the introduction of a health, safety and environmental (HSE) management system in line with good international practice forms part of the Phase I project to be funded by the EBRD.

Summary of environmental action plan (EAP)

An environmental action plan (EAP) has been developed which addresses key health, safety and environmental issues identified by the EIA. This EAP has been designed to meet national and appropriate international standards such as those of the World Bank and IPA. Each element of the EAP will be developed into a fully implementable component, satisfactory to the EBRD as the project develops.

Environmental additionality

The environmental additionality of the project falls into several categories:

  • conducting ‘Western-style’ EIA and related scoping, and public consultation activities;
  • agreement to introduce international environmental and health and safety management systems, including training and awareness raising;
  • upgrading existing infrastructure and facilities and thus reducing related environmental and safety concerns;
  • introduction of modern international oil industry practices, including oil spill prevention and response programmes.

In addition, the EBRD is currently executing a technical cooperation programme to provide institutional capacity-building in Turkmenistan for oil-spill preparedness and response.

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

Technical Cooperation

A TC project has been launched to support oil spill preparedness and response capacity building in Turkmenistan. Funding for this TC is being provided by the Japan-Europe Co-operation Fund.

 

Business opportunities

For business opportunities or procurement, contact the client company.

For state-sector projects, visit EBRD Procurement: Tel: +44 20 7338 6794
Email: procurement@ebrd.com

General enquiries

EBRD project enquiries not related to procurement:
Tel: +44 20 7338 7168
Email: projectenquiries@ebrd.com

Public Information Policy (PIP)

The PIP sets out how the EBRD discloses information and consults with its stakeholders so as to promote better awareness and understanding of its strategies, policies and operations. Please visit the Public Information Policy page below to find out how to request a Public Sector Board Report.
Text of the PIP

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