Roadsign to the Koshanai Village site of the Koshanai Cuttings, OilyWater Treatment Facility. (c) FOEE

Kashagan, Kashagan, Kashagan - it’s all over the news: Which additional stake will Kazmunaigaz be able to take over from the international consortium? Is Exxon going to continue playing its hardball tactics? Is ENI going to remain the sole operator?

Besides the non-abating speculation surrounding the tense negotiations, it is no surprise that the international NGO community is trying to draw the spotlight on the societal and environmental impacts the development of the huge oil field is going to have.

Friends of the Earth and CEE Bankwatch published “Kashagan Oil Field Development” as part of its ‘Extractive Industries: Blessing or Curse’ series last week. It’s a commendable piece of work, not only for its density of research and interesting facts about this mega project.

It’s well worth reading through the report in its entirety. I found of particular interest the rather detailed field description which demonstrates on which technological frontier ENI has to operate. It is not surprising that the bulk of the report is highly critical of the project, especially of its:

• Regional impact: Although blessed with hydrocarbon resources, the two Western oblasts Mangystau and Atyrau have yet to see the benefits of its subsoil riches. High regional GDP does not translate into high per-capita income for the average population. In fact, poverty and unemployment are high vis-à-vis the nationa average, health and sanitary indicators are also extremely lagging (see neweurasia archive for background).
• Environmental impact: Local NGOs and inhabitants are reporting a growing loss of biodiversity. A large-scale spill/accident could even risk a complete biological death of the Caspian Sea. Of course, disposing of the huge amounts of sulphur (a by-product of the sour Kashagan crude) is a challenge. Unearthing crude of similar quality at Tengiz has already meant stockpiling sulphur deposits so huge they can be seen from space (neweurasia reported).
• Socio-economic impacts: Besides the structural “underdevelopment” in the two oblasts, other factors directly related to the oil field development are: exposure of local oil workers to hazardous pollutants. As many as 10% of all workers in the Atyrau region are employed in the oil sector (mostly in construction). What will happen to these workers once the large-scale development phase is over?
• Health impacts: Diarrhoea, skin diseases, drowsiness, genetic mutations, respiratory diseases - all of them seem exponentially higher in their prevalence the closer people live to oil-processing facilities.

KazMunayGaz facility for ToxicWaste Utilization fromOil Processing near Koshanai Village. (c) FOEE

The report then takes a big turn and discusses the Kashagan production sharing agreement and the way it is disadvantageous for the Kazakhstani state. To recap: The PSA was signed in the late 1990s/early 2000s, when oil prices were low, perceived political and economic risk in the region was high, etc. In essence, the consortium was getting too good a deal in a high-price environment. And:

The effect of this could be to constrain the Republic’s ability to address the socio-economic concerns raised above, and to meet the needs of its citizensmore generally.

This is good fodder for the Kazakh government’s cannons. And in a way, it’s justified to alter the terms of the PSA, maybe even to switch to a royalty scheme that would see the state’s take in the project rise steeply (once it goes online). In the light of recent developments, the following paragraph is quite funny to read (which shows that bulk of the report must have been written before the negotiations turned hot):

Furthermore, the PSA (Article 14.5(d)) provides for a right of renegotiation in extraordinary circumstances resulting in “economic hardship” to the consortium. There is no corresponding right for the state – thus in the “hardship” arising from failures of project management and changed circumstances, there is no provision to adjust the terms to ensure adequate revenue to the state.

So, an update to the report would now make sense. The Kazakh government is set to increase not only its own share but also that of its champion KMG. But the main question is, will this really change anything to address the problems of the local population?

There is reason to be cautious. National oil companies don’t have a better environmental track record than their international peers. Much of the trouble cited above actually stems from other developments in the region - e.g. the construction of refining and processing facilities, other oil and gas fields, etc. - often owned by smaller companies with no environmental policies and guidelines whatsoever.

I also find the impact assessment of the report too “holistic” and perhaps unduly taking the focus away from the main threats of the growth of the industry in the region - i.e. the health and environmental problems. Regional disparities as well as socio-economic issues are to me more sign of a malfunctioning local and national government than the malfeasance of the oil industry.

In the light of the imminent reshuffle at Kashagan and a growing assertiveness of the Kazakh government in high-profile oil and gas projects on its soil, it is important to ask whether this bodes well for the inhabitants of the region. I personally don’t think so. Environmental concerns are a good pretext for getting a larger piece of the pie - once it is on the plate, the concerns all too often fade.