Global Policy Forum

The World Bank and Russian Oil

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by Ellen Schmidt

published June 1996 by
WEED -- World Economy, Ecology, and Development Association
Berliner Platz 1, 53111 Bonn, Germany
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"In the end, we will guage the success of transition not merely by statistical measures of national wealth, investment or productivity, but also by the quality of life of the people who live in these countries."
James D. Wolfensohn
President of the World Bank
from his introduction to the 1996 World Development Report

Table of Contents


Executive Summary

1. The Background: Money, Money, Money

2. The New World Bank Loan: Facts and Figures

3. Oil Production in Western Siberia: Exploitation at Any Price

4. Siberia's Indigenous Peoples in an "Ecocultural" Crisis

5. The World Bank's Answer: Amoco Will Fix It

6. What is Amoco?

7. Trampling on Climate Policy

8. Alternative Strategies

9. Demands of WEED and WWF-Germany

Bibliography


Executive Summary


Background

Russia, 1996: Never in the history of multilateral funding has so much money been pumped into one country within such a short period of time. Working in close conjunction with the IMF, the World Bank is in charge of developing structural and sector programs for transforming Russia into a capitalist market economy. It also coordinates overall aid. From the World Bank's point of view, the oil and gas sector plays a key role in Russia's overall transformation process. The World Bank, together with the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD), presses Russia to increase its crude oil production with billions of dollars.

A New World Bank Loan for Oil Production

In 1993 and 1994, two large US $600 million and US $500 million World Bank loans were approved for the rehabilitation of old fields and idle wells in Western Siberia. So far, the modernization projects have not been successful. In spite of the ongoing difficulties, the Bank is currently appraising another US $500 million credit for the development of the large North Priobskoye (North Priob) oil reserves in Western Siberia. The reserves are to be exploited by a Joint Venture between US-based oil multinational Amoco and Russia's Yuganskneftegaz (YNG). West Siberia is Russia's most important oil province, accounting for about 70% of the country's production.

North Priobskoye's underground oil deposits are gigantic even by international standards. They are estimated to harbor 2,5 to 2,7 billion tons of oil, with 500 to 700 million tons being considered commercially recoverable. Plans foresee annual output reaching 20 million tons between the years 2000 and 2020. Given that the Russian Federation produced a total of 316 million tons of oil in 1994, this would constitute approximately 6 percent of the country's overall production. Even on the basis of the lowest estimates, North Priob is one of the largest pending investment projects in Russia today.

Catalytic Effect Not Considered

An investment project of this size will have an impact on Russia's entire oil infrastructure. The World Bank views North Priob as a "catalyst project" that will trigger a large number of similar joint ventures between Russian and Western companies to develop new oil fields. The area's export pipeline network will also be expanded with World Bank assistance in conjunction with the North Priob project. Beyond the actual project, the possibility of enlarging existing harbor facilities on the Arctic Ocean or building new facilities is also under consideration, as are plans to expand the northern marine route for tanker use. The expansion and construction of oil refineries would also be a result such a catalytic effect. It appears that the social and ecological consequences of this effect will not be considered.

Furthermore, given the circumstances, it seems almost impossible that the World Bank could monitor and control potential project-related social and environmental requirements. In Russia, there is a tradition of wasteful oil production with no regard to social or environmental consequences, and labor standards are almost non-existent. Moreover, the US project partner Amoco has a mixed environmental record which requires greater scrutiny.

Environmental Problems

The North Priob oil deposits are located in a relatively untouched part of Western Siberia extending to the north and south of the Ob River. A large part of these underground oil reserves is located under the Ob River floodplain. The Ob is the main river flowing through Western Siberia into the Arctic Sea. Any oil accident could have severe consequences, potentially reaching downstream areas and the Arctic Sea.

Western Siberia is already a region marked by environmental and social "scandal" and "disaster". There is heavy air and water pollution. Natural drainage systems, vital to the ecosystems of both wetlands and forests of the plain, are severely disrupted by raised roads and other oil infrastructure. Vast areas of reindeer grazing lands and spawning grounds are polluted. This situation is compounded with the annual release of millions of tons of oil leaked from a dilapidated pipeline system. As a consequence, the World Bank should impose a moratorium on all new oil field development until a comprehensive environmental clean-up effort is underway.

Indigenous Peoples Left Behind

Since the 1960s, oil and gas development has lead to the almost total eradication of Western Siberian traditional ethnic groups. The new oil Joint Venture will not fundamentally change the situation of the indigenous people there. To the contrary, as part of an ongoing oil expansion strategy, the project will protract their social, economic, and environmental problems that come with the great dependency upon the revenue generated by oil and natural gas production.

Instead, pertinent literature suggests that the most elementary means of improving the situation of indigenous peoples in Russia is granting indigenous groups genuine rights over their traditional territories and their resources. In fact, a successful Russian energy sector reform will be impossible without granting political and property rights to indigenous people. The World Bank hesitates to push for such reforms. There is no investment program for the enhancement of traditional economic activities, such as fishing, reindeer herding, fur farming, and production of northern clothing.

No Sustainable Development Strategy

Even if they were to be actually put into action, none of Amoco's or the World Bank's honorable, well-intended promises would be able to do anything more than treat the symptoms of what is, taken as a whole, a strategy for unsustainable development. In addition, accelerated production of Russian oil will provide the global market an impetus to increase rather than throttle oil consumption and will concomitantly obstruct efforts to replace fossil fuel consumption with energy conservation measures and renewable energies. Furthermore, the targeted expansion of oil operations into even more remote, environmentally sensitive areas with the concomitant expansion of the oil infrastructure helps neither the people nor the environment of Western Siberia on a long-term basis. The project is a typical example of an "enclave strategy" where international environmental and living standards apply within a specific project while the surrounding region flounders all the more in poverty and social disintegration.

No Climate Protection

Russia ranks third in the world in CO2 emissions, generating approximately 1.7 billion tons of CO2 emissions a year, nearly ten percent of total global CO2 emissions. Russia is consequently one of the key countries to counter the threat of global climate change. The Russian Federation is member of the UN Framework Commission on Climate Change (FCCC). So far, the Russian government has done little to implement energy conservation and efficiency plans, even though the reform process in the industrial and electricity sectors is at a stage which would favor such action. A strategy for sustainable energy development also entails integrating climate protection measures into plans and making them a part of concrete projects.

Officially, the World Bank has emphasized its commitment to promote 'climate friendly' investment programs. However, the World Bank's involvement in Western Siberia raises serious doubts of this commitment. In Russia, the World Bank's investments in projects harmful to the global climate far outweigh its investments in mitigation or reduction of greenhouse gases.

Wanted: Energy Strategy for the Future

Research shows that the Russian Federation could cut its energy consumption by between 37 and 45 percent, based on primary energy consumption levels in 1990. This amount corresponds to Germany's total primary energy consumption. A consistently applied energy efficiency policy would lead to a drop in domestic primary fossil fuel consumption; lower domestic consumption levels in turn would greatly enlarge the potential for oil and gas exports while simultaneously conserving underground resources and nature. Which is precisely what the central goal of a sustainable World Bank strategy for the Russian energy sector should be.

Laws requiring the rational use of energy (precise rules and regulations for the provision and use of energy) are just as important as any reform of legislation regulating the oil sector. Raising prices is not enough to achieve energy efficiency. Rather, the "key to success" for any energy conservation policy is a set of measures that simultaneously eliminates the several, often coexistent obstacles in a target group. This means measures not only on the supply side, but also on the demand and consumer sides. Furthermore, the development of a renewable energy strategy should play an important role in any sustainable energy and climate strategy for Russia. One of the most important prerequisites for increasing renewable energy production is the existence of a corresponding legal framework which would allow independent energy producers onto the market. Moreover, detailed studies on the technical and economic potential of renewable energy production in the Russian Federation are badly needed.

Oil Production

In light of the enormous losses that oil and natural gas production in Russia continues to generate, it should be emphasized once more how important it is that both operating and abandoned production sites be systematically repaired and modernized. Little progress is apparent in this area despite two relatively large World Bank projects.

A more effective approach for the World Bank would be, for example, to systematically register the technical, bureaucratic, financial and human problems involved in implementing the modernization projects and then make this information available to the public. Doing this would increase the pressure on the political sector. Together with its Russian partners, the World Bank should continue to work toward rehabilitating the oil fields, incorporating the experience and insights gained during this learning process. Environmental considerations must be viewed as an integral part of any modernization measure. Furthermore, the pipeline network is in urgent need of repair and steps must be taken to remedy this situation. Action must be taken and it must be taken before any subsidized development of gigantic new oil fields.

Public Participation A Prerequisite

The lack of information and adequate training in regard to the technical and economic possibilities offered by efficiency strategies are the main impediments for successful energy efficiency projects. The human factor – in other words, motivation and abilities – plays a decisive role in the success of any efforts in the fields of energy efficiency and renewable energies. In the past, little consideration has been given to the fact that enabling public involvement and participation is particularly important for effecting any changes in general conditions. Public participation in energy policy design is crucial. It will help to develop sustainable energy programs and will also strengthen democratic institutions in Russia.

"Perhaps never has so vast a territory been so despoiled so rapidly. Now the question is whether the capitalism of the new Russia will save Siberia and its reeling eco- systems or finish them off." - (Eugene Linden, Time, September 1995)


1. The Background: Money, Money, Money


Government Funds From the West

Russia, 1996: Financial aid from the West is definitely not in short supply here. Never in the history of multilateral funding has so much money been pumped into one country within such a short period of time. The cornucopia of the various international finance institutions (IFIs) are virtually overflowing in their bounty: Nearly US$ 9.3 billion flowed into Russian coffers in 1995 to finance a multitude of projects and to get Russia's national budget out of the red and into the black (an increase of nearly US$ 3.3 billion over the previous year). This sum has been augmented by bilateral advisory and project assistance from the G-7 nations (some US$ 370 million from 1993 to 1995) and funding provided by the European Union's Technical Assistance for the Commonwealth of Independent States (TACIS) program which brought approximately US$ 208 million into Russia in 1995. The Federal Republic of Germany – Russia's second largest bilateral donor following the USA – offered Russia some US$ 75 million through its Transform Program in 1994 and 1995. In the spring of 1996, the International Monetary Fund (IMF) pledged once again to allocate US$ 10 billion for Russia (SZ, 26 Feb. 1996). The private West-East capital transfer is several times larger than this. In 1994, credit guarantees issued by the German government for private export transactions with Russia totaled some DM 2.84 billion (approximately US$ 1.9 billion). As a result, Russia ranked second only to the People's Republic of China as Germany's leading partner in government-assisted export trade.

The multilateral cash injections are of course made contingent upon structural adjustment measures. The International Monetary Fund's primary goal is to reduce Russia's runaway inflation. All government spending is to be brought into line with this objective. Consequently, the IMF has demanded rigorous measures to limit government lending, particularly on the part of the central bank. It has also called for steps to cut subsidies and measures to liberalize the export of energy-related resources and other raw materials – all with highly varying degrees of success.

Working in close conjunction with the IMF, the World Bank is in charge of developing structural and sector programs for transforming Russia into a capitalist market economy. It also coordinates overall aid. The World Bank's main goal is to bolster efforts to raise the prices of marketable goods to world market levels as the most important step in this transition. These price reforms not only help generate more export revenue but also make it possible to reduce the country's extensive subsidies and central bank loans to state-owned enterprises. The World Bank is also working toward reforms in the financial sector. The World Bank has assigned special priority to liberalizing foreign trade – í  la classic macroeconomics. The government apparatus in the former Soviet Union controlled not only domestic prices but set the prices and volumes of import and export goods as well. Its goal was to exercise complete control over the domestic economy. This stance however runs totally counter to the liberal economic strategy pursued by the IMF and World Bank. Now, existing trade barriers – export controls such as quotas and customs in particular – are to be dismantled and special steps taken to promote export trade. As a matter of fact, World Bank data shows that customs duties in Russia presently average only about 12 percent despite the strong political pressure exerted by industrial lobbies. Import subsidies, which still accounted for 25 percent of the gross national product in 1992, were almost completely eliminated by 1994. The World Bank supports Russia's efforts to join the World Trade Organization (WTO). When granting loans, the World Bank is particularly insistent upon establishing favorable legal and fiscal conditions for joint ventures with foreign companies, particularly in the energy sector.

Neither the World Bank nor the International Monetary Fund develop their transformation strategies on the basis of the principles of sustainable development established at the 1992 Earth Summit in Rio. The strategy papers of these multilateral institutions scarcely touch on the foresighted, environmentally compatible and efficient use of limited, non-renewable resources. Their credit policy for the Russian energy sector – which is directed predominantly toward increasing oil exports – is a good example of this.

The IMF and World Bank Shape Russia's Energy Policy

From the World Bank's point of view, the oil and gas sector plays a key role in Russia's overall transformation process. Oil, natural gas and petroleum products generate the lion's share of Russia's export income. And it is export income that provides urgently needed foreign exchange earnings. The IMF and World Bank press Russia to increase its crude oil production, if for no other reason than their own self-interest – after all, they want the country to pay back the billions they have lent it. And foreign debt has to be paid in hard currency. But the World Bank has given priority to marketing fossil fuels out of budgetary considerations as well. Oil and natural gas exports constitute a 'quick supply' of income which promises fast tax revenue, is more likely to attract more foreign investment than other sectors and should offer a strong incentive for stimulating the Russian economy.

Although it does not directly grant loans for projects, the International Monetary Fund, together with the World Bank, does call the tune when it comes to Russia's oil policy. Their billion-dollar loan commitments for Russia are always granted under the provision that Russian legislation governing the oil and gas sector be amended to allow foreign companies to export the oil they produce without restriction. Under the three-year, US$ 10.2 billion credit for Russia that the IMF announced in late February 1996, Moscow is required to eliminate customs on oil and gas exports. Export quotas were already abolished in 1995 in response to IMF and World Bank pressure. Together with the World Bank, the IMF is pushing for another hike in domestic oil and gas prices to bring them in line with world market levels and for a sweeping tax reform. Together, all these measures are supposed to help potential foreign investors – in other words, multinational oil corporations – reap stable profits.

The European Bank for Reconstruction and Development (EBRD) has participated in some of the World Bank projects in the Russian oil sector, contributing several hundred million US dollars. It has also granted loans for its own oil and natural gas projects. The EBRD authorized loans for seven Russian oil and gas programs prior to 1995 (EBRD 95, 26)1.

Modernizing Oil Production: Overnight Success is Still Just Wishful Thinking

The World Bank's project policy revolves around using large amounts of money to get fast results. Over the last three years, it has allocated more than US$ 1.3 billion in project funding for the Russian oil sector. These funds were earmarked primarily for rehabilitating oil fields in Western Siberia that were already developed but no longer producing at peak capacity. Rehabilitation consists of making closed-down wells serviceable again and drilling new wells on already existing oil fields. At the same time, old pipelines are to be repaired or replaced in their entirety, and new technologies implemented that will make it unnecessary to continue the widespread practice of flaring natural gas. The beneficiaries of such rehabilitation measures are three major, recently privatized Russian oil companies, all of which operate in Western Siberia. One of them is Yuganskneftegas (YNG) which also stands to profit from a new World Bank project. In keeping with the World Bank's strategy of providing extensive support for the Russian oil sector, a major new oil field in Western Siberia is to be developed on the heels of the rehabilitation loans.

However, it is still unclear whether modernization efforts in the Russian oil sector have already had any decisive success because the two rehabilitation loans have run for only two and three years. To all intents and purposes, the scale and costs of these projects have been entirely inadequate compared to their goals. According to OECD information, it would take an investment of US$ 6 billion over a period of several years to rehabilitate just one "supergigantic" oil field in Western Siberia (OECD/IEA 95, 113). Russia's Ministry for Fuels and Energy has estimated that it would cost US$ 10 billion alone to rehabilitate the country's 32,000 currently non-producing oil wells (DIW 95, 237). To quote a report by the German Institute for Economic Research, "estimates of the rehabilitation costs – for the production sites only – could increase by up to a power of 10, if extensive environmental clean-up measures become mandatory" (DIW 95, 237, author's italics).

In addition to this, only some 28 percent of the 1993 US$ 605 million World Bank modernization loan had been disbursed by early 1996, and virtually none of the US$ 500 million loan granted in 1994 has gone to concrete rehabilitation projects to date (May 1996) (World Bank 96,13). Accordingly, it is impossible to speak of any far-reaching economic success 2.

Wariness is advised in regard to the environmental aspects of these loans. They neither stipulate time frames for implementing specific measures the World Bank requires for reducing environmental stress nor do they contain mention of how the respective measures are to be monitored or how, if necessary, their implementation is to be enforced. Instead of paying close attention to environmental aspects, the World Bank's rehabilitation loans focus primarily on increasing production by modernizing and reconditioning abandoned wells. And now the World Bank is planning yet another multimillion-dollar credit, this time to develop a new large-scale oil field.

2. The New World Bank Loan: Facts And Figures


A Top-level "Deal"

When US Vice-President Al Gore and Russian Prime Minister Viktor Chernomyrdin – the former director of Gazprom, Russia's natural gas monopoly – reached a secret agreement in the Kremlin's chambers in mid-December 1994, one of the top items on the agenda was an economic project involving the American oil corporation Amoco and its plans to develop a gigantic new oil field in Western Siberia (Oil Daily, 12 Dec. 1994, 1). Amoco had won the bid to exploit the virtually untouched North Priobskoye field (North Priob) in 1993 in what could be considered a kind of international auction (tender). Yuganskneftegas (YNG), a recently privatized Siberian oil company, will also be involved on a fifty-fifty basis. A couple of environmental protection agreements were probably also discussed at the meeting, but the talks revolved primarily around huge oil and wood deals for US companies (PERC 95a).

It was no coincidence that World Bank president James Wolfensohn met with the president of Yukos, YNG's parent company, during the first half of 1995. Wolfensohn wanted a top-level meeting to put the huge oil production project in Western Siberia under lock and key. The World Bank was willing to provide YNG US$ 500 million to finance the agreement with Amoco (Kommersant Daily, 9 June 1995). It is not clear yet if all of the US$ 500 million will be infused in cash. The World Bank is pondering to provide risk-guarantees as a new financial instrument to support the Joint Venture.

Yukos and Russia's other oil companies are not doing as well today as during the "golden" seventies and eighties when oil production in Russia was at its peak. But since the World Bank feels that oil will be a reliable source of income in the future, it is more than happy to advance the money. As it happens, approximately US$ 1 billion in investment capital will be needed for the project's initial phase.

The pending loan should also be seen as part of the World Bank's new strategy of privatizing the public sector and supporting the private sector. The joint venture between the recently privatized Russian oil company YNG and the privately owned Amoco corporation is supposed to serve as a model for future loans and guarantees to the private sector. In the final analysis, this means that multilateral institutions are openly subsidizing certain areas of the private sector. In the case at hand, it is the oil sector that is being given corresponding advantages over other parts of the economy.

Furthermore, particularly in the case of the Russian oil sector, forced privatization has not led to real privatization or to the kind of "healthy" competition that would develop out of an expanded marketplace populated by a number of companies. As one World Bank analyst even noted, the "foundation for a more productive, efficient and competitive sector has not been put in place." (Gray 95, 43). On the contrary, this 'privatization' "has facilitated increased control and ownership by managers, while allowing them to avoid oversight and control," as energy expert Dale Gray points out (ibid.).

North Priobskoye, the Largest Investment Project in Russia

The World Bank's prospective loan covers "only" the first phase of the joint venture to develop the North Priobskoye oil field, according to the World Bank itself. North Priob's underground oil deposits are gigantic even by international standards. They are estimated to harbor 2.5 to 2.7 billion tons of oil, with the extraction of 500 million to 700 million tons being considered financially worthwhile. Plans foresee annual output reaching 20 million tons between the years 2000 and 2020. Given that the Russian Federation produced a total of 316 million tons of oil in 1994, this would constitute approximately 6 percent of the country's overall production.

Interestingly enough, the estimates and information that are available regarding the project's duration and total costs vary considerably. The World Bank speaks of US$ 22 billion over a period of 45 years, other sources quote sums of US$ 25 - 35 billion over 20 to 50 years. Factoring in inflation, Amoco calculates that the project will cost US$ 60 billion over a period of 50 years. Even on the basis of the lowest estimates, North Priob is one of the largest pending investment projects in Russia today.

The first phase, which is being cofinanced by the World Bank, will require an investment of approximately US$ 3.2 billion. YNG and Amoco will each bear 50 percent of these costs. Amoco will invest US$ 600 million during this phase. Its Russian partner YNG will provide US$ 100 million and is supposed to receive a US$ 500 million loan at the usual terms or a mix of loan and risk guarantee from the World Bank. The EBRD is expected to contribute more than US$ 200 million. As a rule, bilateral cofinancing generally materializes once these agreements have been finalized. Accordingly, it is expected that the International Finance Corporation (IFC) and the US Export-Import Bank will provide piggy-back loans and guarantees at a later date (Kommersant Daily, 21 Sept. 1994). Private banks also tend to be more interested in granting loans once the World Bank and/or governments indicate their willingness to provide funding. Amoco in particular should benefit from this in the form of low-interest loans by commercial banks.

The estimated US$ 2 billion net capital transfer should start in the project's fourth or fifth year. The Russian Federation is to receive approximately 59 percent (ca. US$ 28.5 billion) of the profits that the project is expected to generate over the course of its life span. YNG and Amoco are to receive about 20.5 percent (almost US$ 10 billion) each. The project should be self-financing once the start-up phase has been completed.

An investment project of this size will have an impact on Russia's entire oil infrastructure. The World Bank views North Priob as a "catalyst project" that will trigger a large number of similar joint ventures between Russian and Western companies to develop new oil fields with, so the World Bank hopes, little or no World Bank assistance. The area's export pipeline network will also be expanded with World Bank assistance in conjunction with the North Priob project. According to a report in Time magazine, the possibility of enlarging existing harbor facilities on the Arctic Ocean or building new facilities is also under consideration among Russian authorities, as are plans to expand the northern marine route for tanker use (Linden 95). The expansion and construction of oil refineries would also be a result such a catalytic effect.

Project in a Fragile Environment

The North Priob oil deposits are located in a relatively untouched part of Western Siberia extending to the north and south of the Ob River. This area is 65 kilometers east of Khanti-Monsisk, 1,000 kilometers west of Nefteyugansk and 62 degrees north of the equator. A large part of these underground oil reserves is located under the Ob River floodplain. Swamplands, lakes and diverse vegetation are characteristic of this region. The rest of the area is covered by a virgin mixed forest of cedar, pine, birch and spruce trees. Frost covers the soil for most of the year. The weather warms up only during the short summer. The floodplain is flooded almost completely every summer. Due to these conditions, the pipelines are to be placed underground, using a new, scarcely tested method.

Plants grow very slowly in the Taiga. For example, trees take four times longer than tropical species to reach their full height (Pearce 93b, 30). Although more than 1,000 kilometers separate Siberia's major urban centers and North Priob, the next oil field is only 50 kilometers away. The catastrophic pollution around existing nearby oil fields bears witness to the possibility of a truly "black" future for North Priobskoye and its surroundings.

"Besides the environmental damage which cannot be expressed in numbers, the oil [that leaks out every year] is estimated to be worth 72 billion rubles. This amount is enough to cover Russia's budget deficit this year." - (Neue Züricher Zeitung, 20 March 1995)

3. Oil Production in Western Siberia: Exploitation at any Price


Western Siberia, a Region in a State of Environmental Emergency

Western Siberia is a region marked by environmental and social scandal and disaster (Pearce 93b, 28; Kaliakine 92, 16; Golovnev 92, 7). According to a Russian parliamentary commission, some five million tons of oil and gas escape into the environment every year through leaky, antiquated pipelines or as the result of negligence (NZZ, 20 March 1995). Although Western Siberia is incredibly vast (it is almost the size of the Amazon River basin and its wooded area is three times larger than Great Britain), a scientist already felt moved in 1991 to say that "Western Siberia is a region that is on its way to totally destroying its life-supporting resources. A comprehensive investigation of how these resources are being used is absolutely necessary if the country [Russia] does not want to lose this region forever. Today, nature would need 500 years to heal the injuries it has already suffered" (Kaliakine 92, 19).

The West knew little of the extent of the environmental destruction in Western Siberia until just a few years ago. It is likely that the damage to ecosystems, soil contamination and air pollution have not been systematically registered to date. The same can be said of the expulsion and annihilation of Siberia's native nomadic cultures. How could such a critical situation have ever developed? The following observations outline the context in which the World Bank is pushing through an oil project which is even supposed to produce in a very fragile environment.

Diminishing Output and Outdated Production Methods

Western Siberia produces more than 70 percent of Russia's crude oil, making it the country's most important oil-producing province by far. However, its primary oil fields have reached an advanced stage of depletion. Production dropped 44 percent between 1988 and 1993 – from 420 million tons to 235 million tons a year – causing a concomitant drop in revenue levels (OECD/IEA 95, 110f). Production continues to fall although not at the drastic rate seen in previous years.

The World Bank makes use of this situation to propagate expanded production as being the only alternative. The peak production levels of the late 1980s are used as a yardstick for all comparisons. What is not generally mentioned can however be found in the OECD 1995 report on Russia's energy policy: "The peak levels of output achieved in the late 1980s were essentially unsustainable" (OECD/IEA 95, 107). And: "Extreme pressures under the old Soviet system to accelerate production almost at any cost during the preceding decades led to over production at the large, high productivity fields" (108, author's emphasis). The Soviet strategy was focused on moving from one gigantic pool of easily extracted oil to the next while ignoring the more inaccessible fields.

A number of dubious methods have been used to raise output to an absolute maximum. Underground nuclear explosions have been used to increase oil pressure (OECD/IEA 95, 115). It has also been common practice to pump huge amounts of water into underground oil deposits even during early production phases to increase the pressure forcing the oil upwards. In other countries, this method is used only when an underground deposit is near depletion. As a result, the water used to rapidly flood these huge oil fields is now penetrating into areas where it is not desired. Contaminated ground water has become the order of the day.

Water is not the only substance being injected into the soil. A "two-percent solution of hydrochloric acid" is added (Kaliakine 92, 17). This blend of petroleum, water and hydrochloric acid also ends up in the pipelines where it causes corrosion and shortens the life of the pipes by another three or four years (ibid.). Besides reconditioning the pipelines, it will be necessary to drill considerably more wells to produce what would have been considered a small increase just a few years ago. Old, shut-down wells will also have to be modernized. All these factors – plus inflation – contribute to today's higher production costs for stagnating output.

Deteriorating Pipelines

Much of the pipeline system in Western Siberia and throughout Russia is completely dilapidated. Siberia's oil industry is only 20 years old and in these 20 years virtually nothing has been spent on modernizing the system. It is correspondingly likely that the large number of pipeline-related oil catastrophes will increase rather than decrease. In just one single district – Noyabr'sk – none of the district's 7,000 kilometers of pipeline are equipped with leak detectors, although some of these pipelines have an average life of only five or six years. Asked which pipelines would be used to transport oil from the YNG-Amoco project, the World Bank was unable to provide a clear answer (World Bank 1996). Those in charge pointed out that the national and export pipelines are in better condition than other pipelines. But in the last five years even these pipelines have been involved in accidents in which thousands of tons of oil have poured out onto fields and into rivers (Kalinichenko et al. 1991; OECD/IEA 95, 129). In the case of the Komi catastrophe which has drawn worldwide attention, the Western oil corporations whose oil flowed through the pipeline assumed absolutely no responsibility for the accidents (Greenpeace 1994, 1). The World Bank should take steps to ensure that this scenario does not repeat itself in the future, particularly with the YNG-Amoco project. Accordingly, it is urgently necessary to establish fair and clear provisions to this end.

Noyabr'sk: A Typical Example

Western scientists were allowed to systematically record the magnitude of the environmental damage caused by oil production for the first time in 1993 in a corner of Northwestern Siberia. An expedition of more than 30 experts from East and West was invited to evaluate conditions at the Noyabr'sk oil fields and to make recommendations on how to stem devastation of this magnitude. Western specialists from the oil industry also took part in the mission at the invitation of the European Commission and the World Bank. The object of this mission was (similarly to what the World Bank is intending to do today with North Priobskoye) to explore new oil fields in the north and to attract Western capital (Pearce 93a, 4). The region under study is just somewhat northeast of North Priob.

The mission's findings were devastating: The scientists sharply condemned the completely obsolete production methods being used and the irresponsible way the pristine countryside was being handled. A British journalist who was along on the expedition reported:

"From helicopters, western scientists for the first time saw how hundreds of thousands of square kilometers of swamp and virgin pine and birch forests have been carved into small fragments by oil pipelines, roads, pylons and seismic survey lines. Russia data seen by the team provided evidence of extensive oil pollution of lakes, marshes, groundwaters and rivers that flow north to the Arctic Ocean. In places, gas flares dotted the skyline and black smoke billowed across ancient sphagnum bogs." - (Pearce 93a, 4)

The above is not the description of an accident but, rather, everyday life in the Russian oil sector. Members of the expedition criticized the haphazard excavation and movement of huge amounts of sand to be used in the construction of elevated roads and drilling pads. The arbitrary construction of roads and railway embankments led to the flooding of forested areas and cut off natural runoff. Legal provisions requiring the removal of drilling pads, roads or pipelines once production has ceased do not exist. The commission was not allowed into more southern parts of the region to evaluate conditions in other oil fields. Russian ecologists point out that the situation further south is considerably worse than in the areas the commission saw. In fact, they say oil production around Noyabr'sk could be considered exemplary in comparison (Pearce 93b, 30). As a final point, the team of experts advocated a ten-year moratorium on expanding oil production in any way, to win time for systematically exploring the area's ecosystems.

A Moratorium for Western Siberia

In yet another region – Nizhnevartovsk – which is even closer to the North Priob area, some 80 percent of all catch basins leak and contaminate the groundwater (Kaliakine 92, 18). These artificial reservoirs are constructed to collect extracted oil at a central location. The air pollution in this area has increased enormously because the natural gas produced as a by-product when oil is extracted is flared. This is also the case in areas where YNG pumps oil, as the World Bank itself notes (World Bank 94, 128). This World Bank study also reports that in the Khanty-Mansijski Autonomous District where YNG operates, "about 100,000 tons of oil and oil products have been spilled over 200,000 hectares of fishing grounds. In the process, 17,700 hectares of fish spawning grounds have been polluted, spoiling 28 spawning rivers. The immense and vitally important Ob' River is badly polluted, with concentrations of some harmful substances being 25 to 30 times in excess of admissible levels. During summer months in the district, over 300 fires per month are commonly recorded. These fires, often caused by flared gas or burning oil spills, destroy woodland and grazing areas of lichens and mosses which are vital to successful reindeer rearing. Over 11 million hectares of reindeer grazing lands (out of an original 22 million hectares) have been withdrawn in Western Siberia for oil and gas production. Over 17 million hectares of hunting lands have been seriously compromised through oil and gas production. The three Producer Associations are located in the traditional hunting and fishing areas." - (World Bank 94, 130) This is a real crisis. And it is further aggravated by the fact that the people working on the oil fields poach game, using helicopters and rifles for the sheer pleasure of killing animals. These activities are leading to the collapse of what was until now a strict licensing system (Pearce 93b, 32). For this reason, it is urgently necessary that a systematic investigation be conducted to determine the extent of the destruction throughout the entire area of Western Siberia. The moratorium for Noyabr'sk must be extended to include all of Western Siberia.

"Is it still possible to stop this barbarism? Of course not. It creeps like a cumbersome machine over the land and the lives of its people." - (Yeremei Aipin, a Khanty, in Die Zeit, 22 September 1989)

4. Siberia's Indigenous Peoples in an "Ecocultural" Crisis


A Deplorable Balance

Scientists have called it an "incredible environmental and cultural shock" (Golovnev 92, 11). They are referring to what Siberia's last remaining native ethnic groups are facing. The Nenets, Khanty, Mansy and Selkups live in Northwestern Siberia, the primary area that feeds the major corporations' hunger for oil. The Nenets live on the tundra to the north, the Khanty and Mansy inhabit the Taiga that stretches across the expanses of the Irkutsk and Ob river basins. At the start of this century, nomadic reindeer herding, hunting, fishing and other agricultural activities comprised the basis for economic and cultural life in this area, particularly in the north (Golovnev 92, 11). Forced resettlement and industrialization during the Stalin era pushed indigenous ethnic groups ever further toward the margins of the "new" Soviet society.

However, the above described development and exploitation of huge oil and natural gas resources in Northwestern Siberia in the years since the 1960s has led to the almost total eradication of the area's traditional ethnic groups which now comprise not quite one percent of the region's entire population. The oil bosses stepped up their forced resettlement and disrupted the local economy which is dependent upon many of the region's natural resources such as its fishing grounds, pastures for reindeer, wild animals and wild plants. Land has been confiscated and huge areas have been contaminated with oil (Osherenko 95a, 2).

The World Bank comes to a similar conclusion in its mandatory environmental impact assessment of the preceding oil rehabilitation projects." The past is a sad and sorrowful tale of exploitation" (World Bank 94, Annex 6-10). In this report, the oil industry is held responsible for many of the local population's social miseries such as the occurrence of hitherto unknown diseases, alcoholism, exodus from the area's towns and the destruction of natural habitats and resources. And although it recognizes these problems, the world's most powerful multilateral finance institution continues investing billions of dollars to subsidize this destruction.

A Reform of Property Rights is Key

The World Bank's commitment to Western Siberia's indigenous peoples is superfluous, the renowned environmental activist Gail Osherenko notes (Osherenko 94). But regulations require the institution to deal with them if it wants to push through large-scale loans for oil projects. For the World Bank, having to produce a documentational paper on the status of the area's indigenous peoples is simply a bothersome step in the process, according to Osherenko, who points out that confining the scope of these papers to simply ascertaining the status quo – as is World Bank practice – acts to prevent an urgently needed reform of property and use rights.

Golovnev also directs attention to the fact that no attention is being paid to the most elementary means of improving the situation of indigenous peoples in Russia: Granting indigenous groups genuine rights over their traditional territories and their resources (Golovnev 92, 15). Unfortunately, Osherenko says, the approach used by the World Bank and other international finance institutions does not start with the revitalization of local economies. It is unlikely that projects such as the North Priob joint venture will lead to real structural reforms which could produce major improvements in the environment or the lives of the indigenous peoples living there:

First, the prevailing theory of development continues to focus on national energy production rather than national energy conservation.

Second, investors and lenders target large scale extractive industry rather than seeking sustainable development projects likely to be more localized and smaller in scale. Thus, there is no program for investment in and capacity building assistance to widespread local economic activities of indigenous and traditional peoples (fishing, reindeer herding, fur farming, production of northern clothing).

Third, environmental and social concerns are treated as externalities or secondary effects of development to be minimized through mitigation. But most significantly, western aid and investment advisors have not understood the need to restructure political and property rights in order to achieve real reform of the Russian energy industry. - (Osherenko 95a, 3, author's emphasis)

The World Bank bases its assumptions on statements made by Amoco and YNG that they will respect the rights of the indigenous population as much as possible. As a matter of fact, Amoco has already held several meetings in the village in the middle of the territory covered by the project. It also plans to produce a paper on indigenous peoples as part of the mandatory environmental impact assessment. An improvement in the status of indigenous peoples in Russia is generally cited by the World Bank as a positive collateral feature of oil projects.

But in Russia, it is virtually impossible to ensure such rights through legal action. The legal system does not grant any fundamental protection against arbitrary acts on the part of officials who are not answerable to anyone. Property rights have been granted to some people. This in turn has led to aggressive and unethical bargaining practices on the part of the oil companies. The payment YNG made to an indigenous family living in the North Priob area is an example of this. YNG "bought" access and drilling rights from an illiterate alcoholic. Although the man made his "X" on the dotted line of the contract, he did not understand what the deal was about – namely, that he was surrendering all his rights to the land. However, another family in the area also claims it holds the rights to the land in question (Osherenko 95a, 4).

Piling up Petrodollars – Until the House of Cards Collapses

Not only individual families but also local and regional authorities are completely dependent upon the revenue generated by oil and natural gas production. The World Bank even says, "It is clear that the past, present and future well-being of the Khanty and Mansi peoples are intimately intertwined with development of the oil sector" (World Bank 94, Annex 6-10). The consequences of this relationship are disastrous. The peoples of the region have fallen into a new dependence upon oil production and this situation works against any fundamental reforms that would force the oil industry to pay the actual costs for swallowing up publicly-owned land. Large-scale pollution is not the only consequence of this amalgamation of industry and government. This combination is also the reason why socially acceptable investments aimed at ensuring a sustainable future for these towns fail to materialize. "Without international investment this house of cards might collapse," Osherenko explains. "However, the World Bank and other international investors are likely to come to the rescue. Unfortunately, their remedies are not likely to produce sufficient structural change to protect their long-term investment" (Osherenko 95a, 14).

The World Bank and other international players hesitate to push for a fundamental reform of Russia's property laws. This could, the World Bank has said, be interpreted as interference in the country's internal affairs (Osherenko 95a, 15). But the World Bank is speaking with a "forked tongue" here: Together with the IMF, it interferes extensively in Russia's energy policy, forcing the country to rescind protectionist measures, ordering sectoral reform measures; Amoco is even financing a group of American lawyers to see to it that Russia's oil and gas laws are changed to match their taste (ITP 96a). It is "interference" any time Western money would be involved. At the moment, stepped-up oil and gas production is politically convenient for the Russian government. Real structural reform seems a long way off – which is not surprising considering the "powerful position of the Russian energy industry in the Russian government and particularly the power of Prime Minister Chernormyrdin, the former head of Gazprom [...]" (Osherenko 95a, 14).

It Can be Done Differently: Alternative Development Strategies

Despite countervailing political trends, there are – (still) rather modest – local alternatives and initiatives for developing new ways of safeguarding and maintaining sources of income. For example, the authorities in Yakutia, Eastern Siberia, initially refrained from permitting any further development of the oil fields in the Lena River delta. The local environment minister was quoted as saying, "Since there is no truly clean technology to extract those reserves, we felt it better to create the Lena Delta Biosphere Reserve and protect the area" (Linden 95, 52). The deputy governor of Kamchatka peninsula in the far eastern part of Russia views the fishing industry, tourism and "some mining in tightly controlled circumstances" (Linden 95, 53) as promising growth sectors. Vladimir Sedykh of the Russian Academy of Sciences and head of the 1993 expedition to the Noyabr'sk region advised the local authorities to develop new sources of revenue such as an expanded forestry industry and educative tourism, and urged establishing a new national park in the area (Pearce 93, 33). Also to be mentioned is a small joint initiative launched by two non-governmental organizations (NGO) – one from Eastern Siberia and the other from the USA – to develop export trade with products made from local medicinal plants and herbs. The initiative is supported by the US Agency for International Development (PERC 95b).

"Life expectancies for people living around the deltas of such industrial sewers as the Ob and Yenisei rivers have fallen by 16 years since 1961 and are 25 years below the Russian average". - (Die Zeit, 11 November 1994)


For part 2 of the article, click here



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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C ß 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.