Deep impact

In light of growing global hydrocarbon demands, pipelines represent some of the largest projects now being developed, both in geographical and financial terms. However, due to environmental and geopolitical issues, these projects are also some of the most controversial. Inextricably linked with these concerns, Environmental and Social Impact Assessments (ESIAs) are an increasingly valued instrument for oil and gas firms to integrate environmental and social considerations into all phases of major projects.

The concept of ESIAs has evolved over the years, but the seed was sown in the United States in the 1969 with the National Environmental Protection Act (NEPA), which required that agencies must consider environmental impacts prior to taking any significant action. This subsequently drove similar principles across the globe, initially throughout the Western world. “The Western planning process in the oil and gas industry has, since the time of the NEPA in the United States in the 70s right through to present day, progressively developed and become more exacting,” explains Peter Rowley, Director at international consulting firm Environmental Resource Management (ERM). “ESIAs come at a very early stage in planning and tend to be based on a principle of preserving as much ecological capital as possible, and minimising the impact due to that.”

More recently, ESIAs have evolved further, to encompass health issues. “One way to conceptualise ESIAs might be to think of a nesting doll,” adds Rita R. Hamm, Chief Executive Officer of the International Association for Impact Assessment (IAIA). “Impact assessment would be the big doll -- the umbrella covering all the tools of impact assessment, including environmental assessment. In some places, environmental assessment is defined broadly to include social impact assessment. In other places, it is not. So, in the nesting doll, then, let's make environmental assessment the second doll. Social impact assessment might be the third, health impact assessment the next, and on and on.”

In the last decade, oil and gas companies have increasingly acknowledged that their license to operate depends upon their relationship with the stakeholders that are involved – whether these are local, national or international. ESIA provides a platform for these stakeholders. But there are also operational benefits to be garnered from an effective ESIA. A preliminary ESIA early in a project can determine if there are potential environmental or social issues that would impede the development, thereby highlighting any potential issues before major expenditures or irreversible environmental actions are made. Executing a preliminary ESIA assessment can, for instance, be a critical, cost-saving step in determining exactly where a pipeline should be placed.

“ESIAs attempt to optimise the benefits of development projects and mitigate harmful side effects,” says Richard Fuggle, Environmental Advisor to the Caspian Development Advisory Panel and former President of the IAIA. “They are also particularly useful to proactively get proposers to consider unintended consequences and what they might have to address. ESIAs play a very significant role in the oil and gas industry at the present time. And whilst there is debate over whether the BTC pipelne from Baku to Ceyhan or Sakhalin is the biggest investment at present, there is no doubt that both projects have spent an awful lot of money on ESIAs.”

Funding agencies

Critically, international funding agencies and lending banks have also taken a keen interest in this area. Impact assessments are enshrined in the Equator Principles and safeguard standards of the International Finance Corporation, the private arm of the World Bank, whilst other bodies such as the European Development Bank all require that companies seeking funding from them should meet various safeguard policies on areas such as minority rights, environment and biodiversity. Similarly, there are now approaching 50 banks in the commercial sector that also subscribe to the Principles.

As such, oil and gas projects requesting funding now almost exclusively require ESIAs. “In this day and age, ESIA is a likely prerequisite -- part of the permitting process -- to any major new development activity, including refining facilities, transportation and pipelines,” says Hamm. “ESIA and its application by oil and gas companies is primarily a function of the legislation in the country where the project is planned, but also increasingly a function of donor requirements as well.” This has particular implications given present developments in the Russian oil and gas sector.

The past decade has seen Russia evolve into a major player in the global oil and gas market, but this has been accompanies by increasing scrutiny of the way it operates from the international community. In the past, Russia has funded its own oil and gas industry, and firms have therefore only had to comply with domestic rules and regulations relating to environmental and social issues. However, with an increasing number of projects requiring international finance, Russian firms are now finding themselves subject to the Equator Principles. This presents a dilemma for a national industry that has traditionally put less emphasis on preserving ecological capital and providing procedures for public involvement than their Western peers.

“As soon as a company such as Gazprom or LukOil decides to borrow money from the international finance markets, the bankers are going to ask to be shown how the project meets the Equator Principles, or else they won’t invest in it,” suggests Rowley. “That is a big issue and is one that is afoot at the moment with Shell and Sakhalin and the European Bank of Reconstruction and Development’s evaluation of whether it is going to invest in the project. As the level of investment escalates, this is going to become more and more of an issue.”

Slow progress

The Russian Government has announced ambitious plans to develop national champions in oil and gas from the likes of Gazprom, Transneft and Rosneft. And with all of these to boast truly global organisations, new principles in terms of environmental and social management will be required to capture financing and ensure the completion of new projects. As such, Russia is inevitably witnessing increasing momentum towards a convergence with the Western concept of ESIAs. But, as Rowley highlights, progress is likely to be slow.

“Russian firms are starting to realise that it is an issue because they can see it for themselves,” he suggests. “The big firms are using consultants to bridge the gap. They are hiring Western management to be part of their organisation and they are bringing in capabilities. And because some have joint ventures with Western companies, they are highlighting what they can and can’t do if they want financing. And so they are starting to agitate for change and it is slowly starting to happen. But nothing ever moves quickly from a legislative point of view.”

Fuggle agrees there are legislative issues to address as Russia’s oil and gas sector looks to expand. “ESIAs are playing a role in Russia at the present time and there have been extensive environmental assessments for both Sakhalin and Sakhalin-2 developments for instance,” he highlights. “For those projects where the major international oil companies are involved, there is certainly activity. But the concern arises over a lack of political will to actually enforce regulations or follow-up. If you do not follow-up or put into effect an environmental assessment if it suggests that there are going to be certain environmental consequences – for instance that a pipeline is adequately buried under a stream or that there is restitution of agricultural land so that farmers could continue using their land after the pipeline has been put in – then in fact there was really very little point in doing the environmental impact assessment in the first place. The money is spent but you don’t get the benefit from it.”

Nevertheless, it is generally agreed that the future will only see greater convergence between Russian and Western environmental and social impact policies – to the benefit of both oil and gas firms and stakeholders. With environmental and social impact assessments and major projects so closely linked in the modern oil and gas landscape, ESIAs look set to have a big impact on Russia’s enormous sector in the future.