Lukoil Overseas : South Caucasus Gas Pipeline

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The proposed financing is to fund a portion of the Lukoil Overseas Holding Limited (“Lukoil”) share of cash calls relating to the construction of the South Caucasus Pipeline (“SCP”). Lukoil holds a 10% interest in SCP via its subsidiary Lukoil Overseas Shah Deniz Midstream Ltd. (“LOSDM”) Financing is sought for the completion of the SCP pipeline. The pipeline is approximately 690 kilometer long, 42 inch diameter gas pipeline, and originates at the Sangachal terminal near Baku, Azerbaijan, crossing Azerbaijan and Georgia and terminating at the Turkish border. SCP will be used for the transportation of gas produced from the Shah Deniz gas and gas condensate field and have an ultimate annual capacity of approximately 20 billion cubic metres per annum. The key sources of transition impact potential of the SCP project is expected to be: Setting standards of governance and business conduct: The Government of Azerbaijan has recently endorsed the Extractive Industries Transparency Initiative (“EITI”), with which the Bank is also co-operating closely, in particular in Azerbaijan and in Kyrgyzstan. As part of this transaction, appropriate covenants will be put in place to require Lukoil to comply with the revenues and payments disclosure in accordance with the EITI principles, not only for the Shah Deniz field, but also for Lukoil’s other oil and future gas properties in Azerbaijan (including the Yalama property). This transition-related covenant is important also because –given the early stages of EITI implementation- there does not yet appear to be clear sanctions for oil companies refusing to comply with EITI-related disclosure requirements in Azerbaijan. Also, as project participants, LOSD and LOSDM will be required to adhere to the highest international technical, health and safety and environmental standards as determined by BP, being the SCP Operator. In addition, all contractors used by the consortium will be required to adhere to BP’s corporate code. Greater competition in destination gas markets By virtue of the lack of a destination clause, Shah Deniz gas may be on-sold in other South Eastern European markets, in direct competition with other gas producers. Market expansion The SCP and SD project will increase business development and competition among the local suppliers that will be sub-contracted by SCPC and the Shah Deniz consortium members. This should also serve to increase business standards among these local enterprises. LSCP is Lukoil Overseas's 100% subsidiary. Lukoil Overseas is a holding company that manages Lukoil’s participation in exploration and production projects outside Russia. In Azerbaijan the Lukoil group has various oil and gas activities, and is also project operator in the D222 (Yalama) structure (owning 80% of rights in the PSA), and of a network of petrol stations. BP of the UK is the operator for the upstream development of SD, while Statoil of Norway is the operator of the SCP system. USD 70 million, senior loan (partially syndicated). Total SCP Stage 1 project cost estimate is USD 1,199 million. LSCP stage 1 project cost estimate is USD 119.9 million. LSCP Project: Screened C/1. Although the South Caucasus Pipeline project per se is an A/1 project, all requirements for A/1 projects have been fully met within the related Bank transaction - loan to SOCAR (please refer to relevant PSD on this same website). The Operator of the SCP Project has carried out an extensive Environmental and Social Impact Assessment (ESIA). The ESIA contains a detailed discussion of the development and evaluation of project alternatives, rationale for selecting mode of transportation, process of route selection, design process and construction planning, identification of environmental and social impacts and selection of mitigation and management measures with respect to the SCP project’s design, construction and operation. The ESIA demonstrates that the project has been structured to meet the most stringent environmental, health and safety standards. The Operator’s key approach to mitigating risks has been avoidance, where possible, of sensitive environmental, cultural or social areas through careful design and route selection. Final decision on the route has been taken on the basis of thorough consideration and analysis of environmental and social issues, terrain and geohazard assessment, constructability and long-term integrity of the pipeline, and security and safety issues. Mitigation measures have been developed to avoid or reduce impacts and Environmental and Community Investment Plans have been developed to offset any unavoidable residual impacts. Quarterly monitoring of this project to date has confirmed material compliance with the ESAP commitments and good environmental practices. Further, an international oil spill consultant has confirmed that the oil spill response plans for the project are consistent with best international practice. While this pipeline will be installed using identified methods and parallel to BTC pipeline, there has been no opposition to this project. The EBRD has received the right to sit on the Board of Directors (as a non-voting observer) to ensure that LOSD abides by its environmental undertakings as outlined in the Term Sheet and detailed in the Environmental and Social Action Plan which has formed part of the environmental documentation available to the public for review and comment. EBRD has worked with the sponsor to develop a rigorous monitoring program using in house staff and independent environmental consultants to ensure adequate implementation of the measures. The ESIA, ESAP and other related documents can be viewed here or on the EBRD website. None. Sergey Kamyshenko Lukoil Overseas Holding Ltd. 1, ul. Bolshaya Ordynka, Moscow, 115035, Russia Email: mail@lukoil-overseas.ru or Mr. Enrico Grassi Principal Banker EBRD Tel.: +44-20-73386000