Financed ProjectsShah Deniz Stage 2

Identification Code:

OP/14/0042

Total Operation Cost:

2.843.000.000

Maturity:

144 months

Operation Status:

Description and Purpose of the Operation:

Provision of a long-term debt to Lukoil Overseas Shah Deniz Ltd (LOSD, Borrower, Company) for the Borrower's share in the second stage of the exploration and production project aiming to further develop the Shah Deniz offshore gas and condensate field in Azerbaijan (Project). The Shah Deniz offshore gas and condensate field (Shah Deniz or SD) is situated in the South Caspian Sea. It is the largest natural gas field in Azerbaijan and one of the largest gas fields in the world. It commenced the production in 2006 (Shah Deniz Stage 1). The proposed investment is a continued field development of the Shah Deniz that will add a further 16.0 billion cubic meters of gas production per annum (bcma) to the existing capacity of around 10.0 bcma currently available under the Shah Deniz Stage 1.

Countries of Operation:

Azerbaijan (100,00 %)

Financial Product:

Loans

Sector:

Energy

Domain:

Private

Borrower/Client:

The Borrower shall be Lukoil Overseas Shah Deniz Ltd, a business entity established in 2005 to participate in the exploration and development of the Shah Deniz area in Azerbaijan sector of the Caspian Sea.

Co-Financiers/Participants:

BSTDB, EBRD and ADB will provide loans up to USD 1.0 billion in total a portion of which will be syndicated under the A/B loan programs of each EBRD and ADB.

Guarantors/Sponsors:

Sponsor Guarantor: OAO Lukoil, an open joint stock company organized and existing under the laws of the Russian Federation.

Developmental and Regional Cooperation Impact:

The Shah Deniz Project is one of the largest off-shore gas development projects in Azerbaijan, seeking to nearly triple gas production in the country and provide a boost to economic growth, which has flagged in recent years as previous oil and gas fields have peaked or matured. Notwithstanding the increased dependency upon energy production which the project will surely bring, it should have positive development impact on the Azerbaijani economy, increasing inflows of revenues and helping to improve living standards. Energy receipts are a particularly important source of revenue to the state budget, thus it will also have a positive fiscal impact. The regional cooperation impact of the operation is strongly positive, as it involves foreign direct investment from an entity in one BSEC member country (Russia) in another (Azerbaijan). Moreover, there are considerable downstream cooperation benefits for Georgia, Turkey, Albania, Bulgaria and Greece.

Environmental Classification and Impact (summary):

Category A operation. The ESIA has been carried out by the Operator and completed in Nov 2013. The ESIA report has been disclosed by BSTDB on its website on May 20, 2015 thus meeting the 30 calendar day disclosure requirement before the Operation was submitted to its BoD for approval. The E&S Assessment concludes that the ESIA carried out by the Operator is comprehensive, high standard, and consistent with good international practice for offshore hydrocarbons exploitation and transfer onshore. The ESIA provides a systematic and detailed assessment of the significant E&S aspects of the Project. Baseline E&S data are comprehensive and were developed from monitoring programs of Shah Deniz I and improved over a 10 year period. At the same time some limitations of social baseline have been identified for the onshore components of the Project, which are located away from the Sangachal terminal and surrounding area. The main E&S risks and impacts were identified to be generated by the early infrastructure works; drilling and completion; construction, installation, and hook-up and commissioning (HUC); and operation. The environmental impacts in this respect were predicted overall to be of minor to moderate negative significance. The assessment of socio- economic impacts were predicted to be predominantly positive in terms of employment, training and skills development, and procurement of goods and service. At the same time the increased use of the regional road infrastructure, and disruption of fishing and shipping will likely to result in negative impacts. In this respect a Livelihood Restoration Plan, through a Small Scale Fishing Management Plan is yet to be established by the Operator for the Project. This will apply during the construction period from February 2015 for approximately 9 months, after which access will be reinstated. With respect to compliance of the ESIA with the Lenders' E&S requirements the E&SDD concludes that the main material non-compliance is the absence of an ESAP, as well as disclosure of information which did not include all of the proposed mitigation measures and implementation issues, specifically the E&S management plan. The deficiencies identified were recognized as being largely due to the existing differences between the E&S performance criteria applied by the Lenders, and the compliance requirements and standards applied in the Project by the Operator.

Operation Leader:

Energy & Infrastructure

E-mail:

ei@bstdb.org