Extractive Industries (EI)
Oil revenues may have the benefit of ensuring large investments and rapid growth, but these funds carry economic, political, and social ramifications. IFI lending in the extractive sector is particularly significant. Over the last decade, 40% of the EBRD’s total project financing for Azerbaijan has been directed toward the oil and gas sector. The IFC has consistently invested a greater portion, 58% as of early 2008.
The 2005 discussion paper, “Azerbaijan’s Continued Struggle with Poverty and Oil Dependence,” explores the results of a decade of IFI lending to Azerbaijan. In particular, it questions whether the necessary conditions were put in place to foster economic diversification, a specific goal of Azerbaijan’s Poverty Reduction Strategy, and also asks what role the IFIs played in the country’s dependency on oil.
Azerbaijan Poverty Oil Dependence Discussion Paper (Acrobat pdf, 154 KB)
Azerbaijan Poverty Oil Dependence Discussion Paper, Russian (Русский) (Acrobat pdf, 511 KB)
The destruction from oil development in Azerbaijan is displayed by the necessity for a $324.5 million oil clean-up project. The project, divided into three parts, will attempt to correct damage to polluted land and mitigate environmental degradation in the Absheron Peninsula on the Caspian Sea. The World Bank will finance $164 million for the effort to improve ecological and health conditions in the long-time oil-producing area.
ARP/ I-Contaminated Sites Rehabilitation (WB website)
ARP/II-Integrated Solid Waste Management (WB website)
ARP/ III-Large Scale Oil Polluted Land Clean up (WB website)
World Bank OKs $164 mln for Azerbaijan oil cleanup, Reuters, June 17, 2008 (Reuters website)
EI Transparency Issues
Azerbaijan has taken leadership in the Extractive Industries Transparency Initiative (EITI). Notably, Azerbaijan piloted EITI in 2003 and became the first country to produce an audited report that met all EITI criteria. Its third report, released in January 2006, included all oil companies operating in the country. Reports are issued annually and semi annually and posted on the State Oil Fund website. In February of 2008, Azerbaijan’s government proposed a United Nations General Assembly Resolution in support of EITI.
Despite these achievements, Azerbaijan can improve its transparency policies. Only a portion of oil companies have agreed to release data on a disaggregated basis, and EITI does not include extra-budgetary payments or payments at the sub-national level. Inconsistencies and delays in reports have caused concern among civil society actors and signs of corruption remain. Azerbaijan is still a candidate country and will likely continue the validation process this year.
For more information, see the links below:
Revenue Watch Institute website
EITI website
Public Finance Monitoring Center website
NGO Coalition ITEI website
Azerbaijan’s State Oil Fund website (publishes EITI reports)
EI and Project Developments
Besides its own natural resources, Azerbaijan is a major transport center for oil and gas. As a result, the country faces the social and ecological effects of both oil development and pipeline construction. BIC carefully monitors IFI involvement in the extractive sector, including ancillary industries and projects, such as pipelines and transport routes. BIC identifies projects posing significant risks and eliciting local concern as “problem projects.” A complete list of these projects, not only in the extractive industries, can be found in BIC's Problem Projects section. A few projects are summarized below.
Selected Problem Projects
Baku-Tbilisi-Ceyhan (BTC) Pipeline
Bank: IFC, EBRD
Project Description: The $3.6 billion project for the construction of the BTC pipeline received $500 million in funding from the IFIs. Opened in 2005, the pipeline runs through Azerbaijan, Georgia, and Turkey and carries oil from Azerbaijan’s Chirag and Gunashli fields, which have also received IFI funding.
Civil Society Concerns: The extensive pipeline has caused considerable concern among civil society actors. By early 2008, the Compliance Advisor/Ombudsman of the IFC had received 34 complaints about the BTC project. As of February, two of these complaints were under assessment. For more information, see BIC’s BTC Pipeline Project page.
Lukoil Overseas – South Caucasus Pipeline
Bank: EBRD
Project Description: EBRD has provided a $70 million senior loan to Lukoil for the construction of the South Caucasus Pipeline through Azerbaijan and Georgia. It carries gas from Azerbaijan’s Shah Deniz field, which has also received substantial funding from EBRD.
Civil Society Concerns: Like the BTC pipeline, this project entails resettlement of local populations and the disturbance of natural habitats. More information is available on BIC’s South Caucasus Pipeline Project page.
Projects Under Watch
Besides problem projects, BIC also follows IFI activities or possible activities, which concern civil society actors but either have not been officially endorsed by an IFI or whose risks have not been adequately explored. These projects are listed below.
Trans-Caspian Pipelines
Azerbaijan, as a major transit hub for oil and gas, would likely be connected with any trans-Caspian oil or gas pipeline plans. Kazakhstan is already actively considering a trans-Caspian transport option and signed into law an agreement with Azerbaijan for the export of Kazakhstan’s oil through the Baku-Tbilisi-Ceyhan (BTC) pipeline. Although the oil will initially be sent to Baku via tankers, Kazakhstan reportedly plans to connect its oil directly to the BTC pipeline through a $3 billion pipeline construction program, which is expected to include an undersea pipeline that would send oil across the Caspian Sea to Azerbaijan and the BTC pipeline.
More tentative discussions have taken place between Turkmenistan and Azerbaijan over a possible trans-Caspian gas pipeline. The two nations met for the first time in 12 years on May 19, 2008. The European Union (EU) is particularly interested in such developments. On June 25, EU and Turkmen officials discussed energy possibilities, following earlier delegations that led to an agreement for 10 billion cubic meters of Turkmen gas to be sent to Europe starting in 2009 and discussions of an impact assessment for a trans-Caspian pipeline. Turkmen gas is sought for the proposed Nabucco pipeline, to be built in 2010, which would run from Turkey to Austria.
Azerbaijan is integral to European oil and gas routes that bypass Russia and Iran. Trans-Caspian oil and gas lines and the Nabucco pipeline depend on connections to both the BTC and South Caucasus pipelines. However, a trans-Caspian pipeline is of particular concern to civil society actors in the region. Civil society groups have already documented serious environmental risks and social problems associated with the BTC and South Caucasus pipelines and an undersea line would pose more risks to the fragile Caspian environment.
This type of project would likely require IFI assistance. Although no formal plans have been made with the IFIs, BIC is currently monitoring the situation for any new developments.
EU secures Turkmenistan gas deal, BBC, April 14, 2008 (BBC website)
EU and Turkmenistan talk energy and trade, Reuters, June 26, 2008 (Reuters website)
Azeri, Turkmen heads meet for first time in 12 years, by Lada Yevgrashina, May 19, 2008 (Reuters website)
Turkmenistan: Gas-Export Offer Seen As 'Breakthrough' By EU, by Ahto Lobjakas, April 15, 2008 (RadioFreeEurope/RadioLiberty website)
EU bets on Turkmenistan for Trans-Caspian pipeline, by Kostis Geropoulos, June 2, 2008 (New Europe website)
Kazakhstan signs BTC agreement into law, plans new pipelines (BIC website)
Country Strategies
The MDBs require that the government of each borrowing country develops a strategy for lending in the country. The Government of Azerbaijan has worked with the World Bank Group, EBRD, and ADB to create the following strategies.
World Bank Group
The most recent World Bank Country Partnership Strategy (CPS) was developed for 2007-2010 and comprises four central pillars: transparency in public sector governance, non-oil economic growth, improved social services, and environmental management. As such, the CPS is heavily geared toward the extractive industries with three of the four pillars being explicitly directed toward oil development issues. Corporate governance, the state oil fund, EITI, and civil society oversight are just a few of the targets for support named in the CPS. The strategy details ecological and economic challenges facing Azerbaijan’s oil industry and oil-polluted areas.
Country Partnership Strategy 2007-2010, World Bank Group, December 6, 2006 (WB website, Acrobat pdf, 880 KB)
European Bank for reconstruction and development
The EBRD Country Strategy for Azerbaijan was approved September 18, 2007. The main objectives are concentrated on the enterprise, fiscal, energy, and infrastructure sectors.
Strategy for Azerbaijan, EBRD, September 18, 2007 (EBRD website, Acrobat pdf 0.5 MB)
Asian development bank
The ADB Country Strategy and Program (CSP) is usually prepared once every five years. A CSP update is prepared every year to reflect any important country developments and adjustments to the program. The CSP for Azerbaijan was approved in July 2001 and updated four times since. The last update is available from January 2006.
Country Strategy and Program Update, ADB, January 2006 (ADB website, Acrobat pdf 309 KB)
For more information and timetable of upcoming revisions of country strategies for the ECA region, including Azerbaijan, please see the document below:
IFI Country Strategies for Europe, Caucasus, and Central Asia: Overview, Schedule, and Contacts Bank Information Center, February 2007 (Acrobat pdf, 129 KB)