CASPIAN DEVELOPMENT ADVISORY PANEL

Transcription

1 CASPIAN DEVELOPMENT ADVISORY PANEL Lord Browne of Madingley, FREng Group Chief Executive BP plc 1 St. James's Square London SW1Y 4PD Re: Caspian Development Advisory Panel Dear Lord Browne: The Caspian Development Advisory Panel (CDAP) visited Turkey, Georgia and Azerbaijan from October. As always, we are grateful to the BP and BTC personnel in the region, and to Richard Paniguian and David Meighan in London, who coordinated our efforts. Particularly since construction of the pipeline is now in an advanced stage, we wanted to provide an early account of our impressions and recommendations from the trip. This letter, together with our planned meeting in January, will constitute our 2004 Panel report. As with our other reports, we will be making this letter publicly available. In our previous reports, we have expressed the conviction that BP s Caspian projects provide it with an opportunity to develop a new model for large-scale, extractive industry investments by major, multinational enterprises in developing and transition countries. The importance of this opportunity cannot be overstated. By living up to the demanding goals it has set for itself and the Caspian projects, BP can establish a new standard for responsible project management, setting an example for the rest of the industry to follow. Through their partnership with BP in this enterprise, Turkey, Georgia and Azerbaijan can assume a leadership role in advancing good governance a role consistent with Turkey s EU accession aspirations and the desire of all three countries to attract further foreign investment. Above all, at a time when opposition to globalization continues to grow, successful completion of the BTC and SCP DC:

2 Page 2 pipelines in accordance with the European and other standards to which the projects are committed, as well as the recommendations we have made in our previous reports, will send a powerful message that major extractive industry investments can improve the lives of ordinary people in the countries where they are implemented. In our last report of December 2003, we noted that BOTAŞ s central role under the Host Government Agreement and the Lump Sum Turnkey Agreement presented BP with perhaps its most significant challenge in Turkey. We were pleased to observe that substantial steps are being taken to meet this challenge, and we hope that these will be continued throughout the life of the project. BTC and BOTAŞ s forward-looking new leadership and project management are developing effective working relations. We have heard numerous reports of constructive teamwork between BTC and BOTAŞ from both parties, and we heard the same message from project staff on the ground. This teamwork will need to continue so that lost ground can be made up, particularly in Lot A in Turkey, and to ensure that both construction and reinstatement are finished to the high standards that have been set for the project. We were very favorably impressed by the commitment of BP and BTC personnel to live up to the project s high standards in the areas of health, safety and the environment. Indeed, BP s tireless focus on safety ranging from simple tasks such as requiring that seatbelts are buckled before a BTC car or truck will move, to the more complex construction safety procedures has been rewarded by an impressively low accident rate, as noted in BTC s Second Quarterly Environmental and Social Report, and appears to be having a positive impact on the culture of safety in the region. The local contractors and each of the project s 21,000 workers, most of whom are from the region, have been exposed to BP s first-class safety policies and procedures and, as a result, hopefully will adopt this same approach in future projects. BP and BTC are to be commended for creating such an impressive climate of safety on the project. We also want to recognize the serious consideration that BP and BTC have given to the Panel s previous reports and recommendations. We received a detailed briefing on BP and

3 Page 3 BTC s progress in the implementation of a large majority of the Panel s recommendations. Where BP and BTC disagreed with certain of our recommendations, senior staff set out clear and reasonable explanations for taking a different approach. In particular, and as discussed below, we are impressed with the evolution of BP and BTC s thinking and strategy toward supplemental community, environmental and social investments. The Regional Development Initiative (RDI), in our view, takes a sound and comprehensive approach toward sustainable development in the region. It has begun to lever the skills and work of the international financial institutions (IFIs) and other development actors in the region, and has coherent and admirable objectives. We commend you and your team for this initiative, while recommending that you consider extending the duration and increasing the size of BP s commitment under the RDI. Notwithstanding this overall high level of performance, consistent with the demanding standards that you have established for BP, we would like to raise a number of issues that we recommend that you and your management team consider. The following comments identify five areas where, in our view, your continued attention will be needed to ensure that BP seizes to the full its opportunity to create a new model for the extractive industries: completing pipeline construction to the high environmental and social standards BP has set for itself; maintaining the support of local governments and populations for the project; making sustainable investments in Turkey, Georgia and Azerbaijan commensurate with the impact the pipelines will have on those countries; promoting transparency in the financial and other benefits flowing to the host governments from BP s Caspian projects; ensuring that BP s admirable goals for the BTC and SCP pipeline projects are not compromised by its commercial operations in other markets.

4 Page 4 I. Completion of the Construction Phase At the time of our visit, BTC was very close to closing the length of various segments of the open trench to no more than 20 kilometers, consistent with its obligations under the financing arrangements. This progress, which we commend, will help to improve safety for communities living close to the Right of Way (ROW) and comes none to soon, given reports of two child fatalities to date. In mid-2004, BTC was exceeding the maximum length of open trench to which it had committed itself in the ESIA and EIA, particularly in Turkey. The extended length of the open trench created safety risks for the local communities, imposed hardships on farmers and ranchers along the right of way, and complicated and slowed the Project s environmental reinstatement efforts. We hope and expect that BTC management will continue to monitor this issue closely to ensure that the project standards for the length of open trench are met for the remainder of the construction phase. The Panel spent a substantial amount of time, particularly in Turkey, on the issue of environmental reinstatement. You should be aware that in the limited areas where reinstatement had been fully completed at the time of our October visit - including backfill and biorestoration - BTC and its contractors have done excellent, first-class work. In several areas in Lot C of Turkey, the reinstatement was executed to such a high standard that it will soon be difficult to see where the pipeline was buried. BP, BTC and BOTAŞ should be commended for the highquality environmental reinstatement work that has been completed to date. We hope BTC will take the necessary steps to ensure that the reinstatement teams remain under contract for the duration of the work and that the significant amount of biorestoration remaining to be completed is done to a similarly high standard. At the same time, we remain concerned that reinstatement efforts are seriously lagging in some areas, particularly Lots A and B in Turkey. Indeed, BP and BTC should be concerned, in our view, that the quantity of reinstatement remaining to be done in Turkey will detract from the quality of what has already been completed. For example, at the time of our visit, with winter closing in, only 8 km of the 278 km ROW in Lot A had been reinstated, although early progress

5 Page 5 had been made on winterizing and putting in place temporary erosion control for the rest. We understand that BOTAŞ and the BTC team have faced a number of contractor-related challenges in Lot A, and we were comfortable with the strategy that was in place to address these challenges, including the addition of a second contractor to portions of Lot A. However, BOTAŞ and BTC now have a lot of ground to make up in Lot A if construction is to be completed on time (and up to standard) and if the ROW is to be reinstated to the requisite quality in a reasonable timeframe. We hope that BP and BTC will continue to encourage BOTAŞ to give this task the necessary priority in the coming months, notwithstanding the pressures to complete front-end construction and to have oil flowing along the pipeline as soon as possible. We are also concerned over a continuing lack of clarity over BTC s and BOTAŞ s intentions with regard to reinstatement of that part of the East Anatolia Natural Gas Pipeline (NGP) that runs parallel to the BTC ROW for approximately 330km. In the Environmental Impact Assessment for the Turkish portion of the pipeline, BTC and BOTAŞ agreed to certain reinstatement standards across the two parallel corridors in order to ensure that it would not inherit soil erosion problems caused by the poor reinstatement of the NGP. Neither BOTAŞ nor the Lot B subcontractor, however, was able to explain clearly to the Panel how and when the necessary reinstatement of the NGP would take place. We believe it is important that BP and BTC management, in coordination with BOTAŞ, confirm their collective intention to reinstate the part of the NGP that runs parallel to the BTC ROW and articulate a path forward on this front. Proper reinstatement of the BTC and SCP pipelines is important not only for environmental and economic reasons, but also for BP, BTC and SCP s reputation in the region and the world. Poor reinstatement of previous pipeline projects in the region has been a blight on the environment in some places and may be one of the reasons for the suspicion which some communities hold toward major construction projects. By properly reinstating the pipeline route, BP and BTC can send a signal to the communities beside which the pipeline is routed that large-

6 Page 6 scale construction projects can be completed properly, with a minimal impact on the environment, while also setting a standard for other projects. Land acquisition for this project is an enormously complex task, particularly with the evolving and differing land-ownership norms in the host countries. The Panel has been impressed with the overall approach BP and BTC have taken and with the essential fairness of the BTC land acquisition process. BP and BTC are to be commended for their work. At the same time, we were struck by the number of Article 27 cases in Turkey for which compensation settlements were still outstanding. Landowners with whom BTC was unable to agree on compensation, and whose land was therefore taken under the expedited procedure authorized by Article 27, sometimes face long delays in securing judicial resolution of their subsequent Article 10 claims for compensation. Because of these delays, which are due to domestic factors, there is a risk that some will not receive full compensation before the end of construction. The Panel also heard concerns from NGOs that some affected landowners have trouble gaining access to the courts. The Panel heard concerns in Georgia about the process for acquiring communityowned/used lands through payments to newly organized community-based organizations. A number of NGOs, including one involved in the land acquisition process in Georgia, expressed concerns about the integrity and fairness of the ultimate distribution of communal payments. Against this background, and in view of BTC s overall strong approach to the land acquisition process, we encourage BP and BTC to consider whether there are ways to speed the resolution of outstanding land-acquisition issues, particularly in Georgia and Turkey, to ensure that landowners and land users are compensated in an appropriate and timely manner. Resolution of outstanding land acquisition issues could have a measurable impact on the level of local support for the projects in communities along the ROW. Waste management in Georgia and Azerbaijan presents a further risk to BP s and BTC s reputation. As the lenders independent environmental consultant (IEC) has observed in recent

7 Page 7 monitoring reports, the decisions of the BTC teams in these two countries to send waste from the project to substandard municipal disposal sites represent significant deviations from ESAP commitments. We understand that these decisions were largely motivated by a desire to avoid safety problems associated with an accumulation of waste caused by non- or malfunctioning project incinerators. Clearly, BTC was confronted with a choice between what it saw as the lesser of two evils. We are concerned, however, that unless current practices are improved BP will be sending a negative message about its performance in meeting the high environmental standards set for the projects. We accordingly urge BP and BTC to devote the necessary resources to finding a solution to the waste problems that complies with the ESAP, either by putting the EU-compliant project incinerators into working order or by committing to bring the municipal disposal sites in question up to EU standards. We were favorably impressed with the ongoing implementation of the projects cultural heritage management plans, particularly in Turkey. The construction process has unearthed a number of important historical sites along the route, and it appears that the BTC team has deployed the resources necessary to address chance finds that raise cultural issues. As indicated in our prior reports, we believe that BP and BTC should also commit the resources necessary to ensuring that the public and the academic community can study and appreciate the culturally significant sites and artifacts that have been discovered. This might include, for instance, funding academic research or publication of project-related work or organizing a regional exhibition on the cultural significance of the areas affected by the project. II. Maintaining Support Among Governments and Local Populations Many, if not all, large infrastructure projects require outreach to host governments and local populations if they are to be completed and operated successfully. When a particular project has economic, environmental and social goals as ambitious as those contained in the BTC framework documents, public and private diplomacy become almost as important to success as good engineering. To create a new model for large-scale extractive industry investments, BP and

8 Page 8 BTC need not only to meet the high standards established in those documents, but to be seen to be meeting them too. Nowhere was this more apparent to the Panel than in Georgia. The country has undergone major changes since our previous visit, not least the passing of power to a younger, reformist generation of leaders. The desire of the new government to put its own stamp of approval on the project had made for a difficult few months in its relations with BTC, which, quite understandably, was eager to complete construction according to the sovereign agreements already in place. One regrettable consequence of this mutual lack of understanding was a loss of working time in July and August after the government issued a stop work order while it reviewed the project s impact in the Borjomi region. This turn of events was all the more unfortunate in that BTC s stated goals and those of the new Georgian government are entirely compatible. The Panel met with both President Saakashvili and Prime Minister Zhvania and was strongly impressed by the seriousness of their commitment to root out corruption, pursue market-based reform and attract foreign investment. With its emphasis on transparency and sustainable investment in the countries the pipeline traverses, and its role as the largest foreign investor in Georgia, BTC should be a natural partner for the new government. The recent signature by BTC and the Georgian government of agreements on a grant program for Georgia and the provision of non-lethal security equipment, facilities and operations funding is a welcome sign that both sides now recognize this fundamental point. We encourage BP and BTC to continue their recent constructive engagement with the new government. In addition to continuing cooperation in the security field, we hope that agreements will soon be forthcoming with regard to an oil spill response plan. We note in this respect the request made by the Georgian Minister of Environment for a special relief tank to reduce the risk of environmental damage from a spill in the Borjomi region. As noted in a prior report and as

9 Page 9 raised with the Panel by the Georgian government in a meeting, we also hope that a resolution of the matters involving the Georgia Glass and Mineral Water Company will be achievable. We similarly hope that, in the wake of the recent agreements on security, the Georgian government will feel more able to lend public support to the BTC project. We were encouraged to learn from the President and Prime Minister that they intend to do just that. President Saakashvili s visit to Azerbaijan for the ceremony marking the welding together of the Azeri and Georgian sections of the pipeline was an important milestone in this regard. But, in view of earlier disagreements and the continuing ambivalence of many ordinary Georgians to the project, we believe it would be helpful if the Georgian government could find further opportunities to clarify its position by communicating clearly and publicly its support for BTC. Building support for the project among local communities is a further challenge in Georgia. Demonstrations by affected villagers have been responsible for numerous work stoppages along the Georgian section of the pipeline route over the last year. The frequent recourse to mass protest, and the unusually high number of complaints to the IFC s Compliance Advisor/Ombudsman (CAO), suggests that BTC s grievance mechanism could be improved in Georgia. The Panel heard many diagnoses of the problem from the NGOs it met in Tbilisi and Borjomi and prior to our recent visit. We endorse the view of many of those with whom we spoke that the Community Liaison Officers (CLOs) employed by the project, although bright, well-educated and ambitious, are generally too young and turn over too frequently to be effective points of contact for the inhabitants of the often remote and ethnically diverse villages through which the pipeline passes. For instance, that the CLOs in Georgia are mainly from Tbilisi, and lack familiarity with the local communities, makes it harder to build trust. The apparent lack of a clear allocation of responsibilities between BTC and contractor CLOs, at least to those outside the project, simply compounds the problem. We recommend that BP explore ways to strengthen the CLO team, particularly in Georgia where there have been a proportionately greater number of local

10 Page 10 grievances. This could be undertaken in accordance with the recommendations made to us by the IFC s CAO and others in the region to increase the number of CLOs and recruit more mature staff, from more diverse backgrounds, who are better able to convince local communities that their concerns are being taken seriously. BP and BTC should also ensure that the CLOs remain on staff well into the operations phase, particular in Georgia. The CLOs are ambassadors for the project, and sustained effort to address concerns of, and build support in, communities along the pipeline route will be important to the long-term success of the project and BP s reputation in the region. We recommend that BP and BTC also consider structural changes to the grievance mechanism itself. To put the issue in context, we note first that, at the time of our visit, BTC had received nearly 2,000 grievances so far in Georgia alone dealing with land or construction issues. BTC had already resolved approximately half of these cases. Of the unresolved cases, sixteen have been presented to the IFC CAO as formal complaints. Twelve of these were found by the CAO to fall within its remit and have been investigated accordingly. While we recognize BTC s achievement in clearing a large proportion of the complaints to date, we remain concerned at reports that the grievance mechanism is perceived by some local inhabitants as biased towards BTC. We also believe that the CAO is simply not resourced to be acting as a court of appeal for the full range of complaints generated by the pipeline project, certain of which are detailed and technical (potentially demanding more resources than the CAO is able to furnish efficiently) and others of which are much smaller in scale (potentially raising issues that could be resolved more efficiently with local resources). Although the construction phase for the pipeline is now nearing completion, it is not too late to consider whether there are more effective ways of dealing with the complaints that are still unresolved and the disputes the remaining construction work will undoubtedly engender. Nor is it too early to start thinking through how best to handle the rather different complaints that are likely to emerge when the pipeline begins its operations and the emphasis shifts to the impact of security measures on human rights. As to disputes during the operations phase, we continue

11 Page 11 to believe that our earlier recommendation of a regional ombudsman or some other independent mechanism capable of receiving and acting on human rights grievances remains relevant. For the remaining land- and construction-related complaints, we would recommend that BP carefully examine the establishment of an independent appellate body based in the region. This body could be simple in structure, perhaps modeled on a three-person arbitral panel with the project and representative local NGOs or other interest groups each appointing one member and the third chosen by the other members. It would need to be staffed by individuals who are knowledgeable about the region and the project and respected as credibly independent. The body s remit would also need to be strictly limited to unresolved and new complaints, so that it does not encourage complainants whose files have been closed to seek to reopen them at the appellate level. Nevertheless, we recognize that even that limitation could complicate BTC s efforts to clear the backlog of unresolved grievances. We understand that the IFC s office of the CAO has considered some sort of new appellate mechanism in Georgia, and intends to continue to review grievance resolution with BTC in the coming months. We encourage BP and BTC to engage fully with the CAO and other interested NGOs on these issues. The establishment of a security regime for the pipeline that upholds the human rights of individuals and communities living along its length is itself an important ingredient in building support for the project at the local level. The importance of this issue has been highlighted in recent months by several demonstrations at construction sites in Georgia and the related response of local authorities, which one local NGO has suggested was overly vigorous. In light of demonstrations of this sort and similar pressures elsewhere along the pipeline route, BTC and SCP s initiative to fund and organize human rights training for the Azeri Pipeline Protection Department by Equity International is to be commended. We believe this approach is sound, and we were favorably impressed with the response of the Government of Azerbaijan to be an active partner in this endeavor. We also understand that Equity International has completed the first human rights-based security training program for the Special State Protection Service in Georgia. Although we note the desire of the Turkish local authorities to assume responsibility for human

12 Page 12 rights, we would urge the Government of Turkey to conclude a bilateral protocol on security with BP, similar to those in place for Georgia and Azerbaijan. We also encourage BP and BTC to explore opportunities with Equity International and the Government of Turkey to provide human rights-based security training for the relevant security force in Turkey. III. Sustainable Investment Together with the promotion of transparency, which we discuss below, it is through its supplemental and sustainable investment initiatives in the region that BP and BTC will have the most significant long-term positive impact on the region. In our earlier reports, we argued that BTC s various investment programs would have a greater long-term impact if brought together under the umbrella of a single Caspian Development Fund. We also recommended that BP commit itself to provide funding for the full lifespan of its Caspian projects not just the construction phase and to linking the scale of its funding to the revenues those projects will generate. We were encouraged to learn that BP and BTC are taking significant steps in this direction. In Baku, the Panel received a comprehensive briefing from BP and BTC staff on progress with the Regional Development Initiative (RDI), which BP had previously announced it would be pursuing with support from the EBRD and others. BP has already committed $25 million to the RDI over a ten-year period starting in 2005 and will seek additional support from partners once the RDI strategy is further developed. We understand that the EBRD and the IFC have committed similar amounts to BP, and that negotiations are underway with development agencies in an effort to coordinate common activities and to increase the finance available for the initiative. The Initiative will focus initially on enterprise development, effective governance, access to energy and building institutional capacity. This is a significant initiative. As now structured, the RDI will provide funding for ten years after the completion of the pipeline construction phase. By partnering with other

13 Page 13 development organizations, BP will also double the RDI s funding over the lifetime of the Initiative and could spur much-needed coordination of effort within the donor community. BP and its partners have chosen their priority sectors for the RDI well; indeed, they closely track the priorities we recommended in our earlier reports. Comprehensive sustainable economic development, effective governance and institutional capacity building must be top priorities if oil and gas revenue is to be a long term blessing, rather than a curse, for the economies of the three countries through which the pipelines pass. Improved access to energy, especially in Georgia, is essential if the Caspian projects are to be seen as delivering benefits to local communities, and not only to the shareholders of the oil companies involved. The decision to focus on these four areas fits well with BP s economic, environmental and social goals for the Caspian projects. Although we welcome these extremely positive steps, we continue to believe that BP can and should go further in the direction it is now headed. In particular, we believe that it would be appropriate, given the size of BP s investments in the region, for BP to make a larger investment in sustainable development projects over this initial ten-year period and to announce publicly its intention to provide support for sustained regional development spending over the life of the projects. We understand the fear that a large headline figure would raise unrealistic expectations in the region, but BP s current strategy of spreading its grants across several discrete programs seems to obscure the magnitude of what it has already done or is planning for the region. Moreover, we would encourage you and your team to review BP s initial RDI commitment with a view to ensuring that it represents a commitment commensurate with the size and importance of the projects and BP s role in the region (especially considering the impact of inflation over time and the role that is envisioned for others). We hope that as the RDI begins to be implemented, BTC will look for greater synergies with existing projects under the Community Investment Program (CIP) and Environmental Investment Program (EIP), so as to maximize the long term impact of each of these programs. Again, we offer these recommendations and ideas

14 Page 14 as ways to improve BP s already impressive approach toward sustainable development initiatives. Finally, and more immediately, we note the suggestion from the IFC CAO that, while the CIP has done a good job of grasping the region s rural development challenges, it has been less successful at engaging those urban communities that are most directly affected by the pipeline. This issue appears to have been presented most directly in the complaint brought to the CAO by inhabitants of Rustavi in Georgia. IV. Promoting Transparency Our first report, in August 2003, commended BP s decision to publish estimates of various project-related payments to the BTC host governments. BP s continued leadership role in encouraging transparency with respect to financial flows generated by oil and gas production is a vital complement to its long term investments in the region. Previous experience elsewhere around the world has shown how failure fully to disclose such payments can fuel corruption, ultimately retarding rather than enhancing economic development. The Panel was briefed during its visit on a proposal under discussion among foreign oil and gas companies active in Azerbaijan, local NGOs, and the government of Azerbaijan to publish aggregate data on the financial transfers that the extractive industries are making collectively to the Azeri government. This proposal was implemented in a Memorandum of Understanding agreed on November 24, We believe this will make a useful contribution to the goals of the Extractive Industries Transparency Initiative (EITI), which seeks to increase transparency associated with payments by extractive industries to governments and governmentowned companies. A bolder step is, however, both possible and desirable. Publication by the companies of disaggregated data identifying the amount and nature of financial transfers by each company would be more in keeping with the transparency objectives of the EITI. We encourage BP to take the lead in urging fellow industry members down this path, including

15 Page 15 through the continued publication of its own disaggregated data on payments to the government of Azerbaijan. We understand that BTC and SCP are not participating in the EITI agreement with the Azeri government because, as pipelines, BTC and SCP are not considered part of the extractive industries. In our view, the fine distinction that can be drawn between pipelines as transport vehicles and the extractive industries proper is no reason for BTC to be less than fully forthcoming in the EITI context. Indeed, BP has made clear from the outset that it would make public any financial transfers to the three host governments resulting from the pipelines operation. It would be helpful, in addition, for such data to be presented in a common format and to be published alongside the other financial transfers accruing to the Caspian countries from the extractive industries. We therefore recommend that BTC and SCP report their own data as part of the EITI exercise, as well as taking the lead through individual, disaggregated reports. We also believe that BP, working with the IFC, EBRD and its partners in the region, should work towards creating even more transparency. Publishing data on revenues flowing to regional governments is an important step. With publication of this data, governments could be held more accountable by their citizens and civil society. To create more complete transparency, however, governments should also be open about how they are spending these substantial oil and gas-related revenues. We realize doing so would require a decision and action by the three governments, and not BP. BP can play a leadership role on this issue, however, by encouraging these governments to improve overall fiscal transparency and by building the institutional capacity among civil society in the region to participate fully in the public debate about the management and use of energy revenues. We welcome the important steps which BP has already taken in this direction, including by organizing a workshop with Azeri ministers in November 2003 focusing on the lessons to be drawn from the experience of other countries in managing oil revenues and another workshop organized in November 2004 that focused on macroeconomic modeling. We encourage BP to continue to explore ways it can play a greater

16 Page 16 leadership role on transparency issues world-wide, much like it has shown extraordinary leadership among energy companies on environmental issues. Of course, the concept of transparency has much wider applicability in the Caspian projects than the financial transfers which are the focus of EITI. We accordingly welcome the approach that BTC has taken in its recent agreements with the government of Georgia on security issues. BP has published these agreements on its project website, broadly briefed local and international NGOs, and ensured that any understandings with the government are available to public scrutiny. The agreement on provision of security equipment, facilities and operations funding, in particular, raises some difficult questions about how far a private company may properly go in supplying sovereign governments with equipment that could potentially be put to military use. Having discussed this matter at length with BTC officials, we are satisfied that the agreement, which is limited to non-lethal equipment such as vehicles and binoculars and contains safeguards against misuse (such as detailed monitoring and reporting on use), is consistent with the Voluntary Principles on Security and Human Rights and could be a useful model for the industry. We commend BTC and the Georgian government for this and for making the agreement available immediately to the public. V. Consistency with BP s Other Operations As it strives to meet the exacting standards it has set for itself in the construction of the BTC and SCP pipelines, BP needs to ensure that its efforts are not compromised by its operations or commercial interests in other markets. We see two potential concerns in this regard. First, Kazakhstan s developing oilfields will in the next few years be producing large volumes in search of an export route to world markets. Trans-shipment of Kazakh oil across the Caspian, for injection into BTC, is an obvious export option, and one which already is the subject of intergovernmental negotiations between Azerbaijan and Kazakhstan. We were told during our visit that BTC s capacity could over time be increased from 1 million bpd to up to 2

17 Page 17 million bpd. In the future, it is quite possible that a significant proportion of the oil passing through the pipeline will first have crossed the Caspian from Kazakhstan. To help ensure that BTC s high environmental standards are not undermined, we encourage BP to continue to insist that international standards comparable with those applicable to BTC are applied to whatever trans-caspian transport arrangements are put in place for Kazakh oil. The tanker traffic needed to accommodate the volumes in question would pose a risk to the ecosystem of the Caspian, even if new double-hulled vessels are constructed and dedicated to the trans-shipment of Kazakh oil. Application of the sorts of environmental and social standards guiding the BTC project to these related transport facilities for Kazakh oil would help to protect the financial and reputational investment BP has made in meeting the high standards set for BTC. The Panel will continue to follow the development of transport options for Kazakh oil insofar as it relates to the potential use of the BTC pipeline and the terminal at Sangachal. We are also concerned about the increased pressure that the anticipated growth of oil extraction in Russia and the Caspian could place on the Turkish Straits. As we noted in our first report, one of the strong and important strategic justifications for choosing the Baku-Tbilisi- Ceyhan export route for ACG oil over existing pipelines terminating on the Black Sea coast was to avoid the subsequent need to transport the oil through the Straits. BP has rightly been commended for its vision in this respect: an accident on the already congested Turkish Straits, situated alongside the World Heritage Site and major population center of Istanbul, could have devastating effects. Although the BTC routing decision has alleviated anticipated pressure on the Straits, it has not solved the problem. Already, excess traffic along the Straits is causing significant congestion and delays. The tankers needed to carry the growing volume of oil being pumped to Black Sea ports from Russia and other former Soviet republics, including Kazakhstan, threaten to clog the Turkish Straits still further. BP s own activities, such as the planned use of a pipeline in Ukraine terminating at the Black Sea port of Odessa for the transport of Russian oil (reversed from its original flow north from Odessa to the city of Brody), as well as

18 Page 18 the planned exploration operations in the south-eastern part of the Black Sea, could further contribute to the problem. The considerable investment BP has made in BTC gives it a stake in helping to deal with this problem. BTC s contribution to safety in the Straits could potentially be reduced if, in the long run, the place of the ACG oil to be piped to Ceyhan is taken by new volumes coming from the Black Sea and elsewhere. BP has a ready partner in this endeavor in the form of the Turkish Government, which has been developing Voluntary Principles on the Passage of Oil Tankers through the Turkish Straits designed to improve traffic management and, with it, safety in the Straits. We encourage BP to engage with the appropriate Turkish ministries as they further develop these principles, and to take a leading role in building an industry consensus around the concepts of responsible use of the Straits and development of alternative export routes. * * * We have sought in this assessment to set out the issues we regard as requiring further and, in certain instances, near-term attention if BP and BTC are to deliver fully on the demanding standards they have set for this project. As we trust the foregoing makes clear, the observations in this letter are to be read against a background of overall project achievement, which we consider to be very positive. We hope that our recommendations will assist you and your team in your effort to make BTC a model for future large-scale extractive industry investments in transition and developing countries. Sincerely, /s/ Jan Leschly, Chairman Stuart Eizenstat Jim MacNeill Mohamed Sahnoun