Lukoil Overseas: Shah Deniz Gas Condensate Field Development

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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 development of the off-shore Shah Deniz gas and gas condensate field (“SD”) in Azerbaijan. Lukoil holds a 10% interest in SD field via its subsidiary, Lukoil Overseas Shah Deniz Ltd (“LSD”). Financing is sought for stage 1 of a 4-stage SD field development (volume target is 11.9 Tcf gas-in-place). Initially 9 wells will be drilled at the SD field from a fixed offshore platform. After processing onshore, gas will be sold to Azerbaijan at the gates of the Sangachal terminal and via the South Caucasus Pipeline (SCP) exported to Georgia and Turkey. Condensate will be exported to the world market via the BTC pipeline. The key source of transition impact potential of the Shah Deniz 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 and future oil & 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, the 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. LSD 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 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. US$ 110 million, senior loan (partially syndicated). Total SD Stage 1 project cost estimate is US$ 2,777 million. LSD stage 1 project cost estimate is US$ 277.7 million. LSD project: The projects have been screened C/1. Although the Shah Deniz project per se is an A/1 project, all requirements for A/1 project 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 Shah Deniz project has carried out an extensive Environmental and Social Impact Assessment (ESIA), which includes a review of alternatives, avoidance of adverse impacts and enhancement of potential benefits. Where it has not been possible to avoid adverse impacts, a sequential process of impact reduction, minimization and mitigation has been followed. This has been achieved through, among other things, an iterative engineering design programme, environmental risk assessment and extensive public consultation. Monitoring on this project to date has confirmed compliance with ESAP commitments and good international practice. 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