ABN AMRO s explanation to its participation in the BTC pipeline project

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1 ABN AMRO ABN AMRO s explanation to its participation in the BTC pipeline project What is the BTC Pipeline Project? The BTC Company (BTC Co.), a consortium of eleven shareholders, is currently constructing the BTC (Baku-Tiblisi-Ceyhan) oil pipeline. The project operator and main shareholder is the well-reputed BP. The pipeline has a total length of 1,760 kilometre and connects the rich oil fields in the Caspian Sea through Georgia to a terminal on the Mediterranean coast of Turkey. Up to one million barrels of oil per day will be transported through the pipeline upon completion. The pipeline is expected to be in full operation in 2005 and will be operated for a period of at least 40 years. More details about this project can be found on the following web site: What is the impact on economic development of the BTC Pipeline Project? The BTC project will contribute significantly to the development of this part of the world. The largest economic benefits are predicted for Azerbaijan. The revenues of selling large quantities of oil to the world markets are estimated to be around USD 30 billion for this country in the next twenty years, which provides Azerbaijan with a significant opportunity for economic and social development. Georgia and Turkey will benefit from transit fees. In addition to oil revenues for the region, the project will create employment, in particular during the construction phase, but also during the forty-plus-year operating period. Furthermore, there are various indirect benefits in the form of job creation, new infrastructure, technology transfer and the transfer of high environmental and social standards. The project has and will have a positive impact on the co-operation between the three countries involved. Last but not least, the project will avoid adding to the current high transport of oil by ships through the Turkish Straits (a/o. the Bosphorus through Istanbul). A unique project, a careful process The BTC pipeline project is unique, due to the length of the pipeline, the environmental challenges and the political, social and cultural diversity in the region. As a consequence, certain NGOs have expressed concerns about the environmental and social impact of the project. Due to the nature of the project ABN AMRO conducted a careful internal decision-making process, involving a high level of due diligence of the project and the documentation thereto. The due diligence included, but was not limited to, an assessment of all relevant project documentation, the independent report of the lending group environmental consultant, various NGO challenges to the project and the responses thereto. During the due diligence period, ABN AMRO also conducted several meetings with NGOs in relation to the project. The primary objective of our due diligence was to assess the project against the Equator Principles, which we adopted in June The Equator Principles are a financial industry initiative to determine, assess and manage environmental and social risks in project finance. The Equator Principles are based on the World Bank group procedures, safeguard policies and guidelines regarding environmental and social risks. At the time of writing 18 major project finance banks have adopted the Equator Principles. More information on the Equator Principles can be found on: During the assessment period ABN AMRO has had several dialogues with international NGOs on the project. In addition, together with the other banks involved, we have hired a respectable environmental expert firm, Mott MacDonald, to prepare a review of the project.

2 What is the role of ABN AMRO? BTC Co. is providing one-third of the project s total USD 3.6 billion cost through equity, with the remaining amount comprising senior debt from a lending group consisting of 15 commercial banks (including ABN AMRO) and two multilateral development banks, being the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), the private lending arm of the Worldbank. The two development banks have the specific mandate of supporting (private) investments that contribute to poverty reduction and economic progress. In addition to the 17 banks, eight Export Credit and Investment Agencies (ECA s) (fully supported by their national governments) are involved - most of them by means of export guarantees - to mitigate the financial risks of the project. Pipeline construction, operating and financing is a very complex undertaking. ABN AMRO has developed a significant amount of expertise in financing these types of projects. BTC Co. had invited ABN AMRO to advise on the financing of the project. Recently after careful due diligence ABN AMRO decided to participate in the funding of the project. ABN AMRO s decision ABN AMRO has decided to take part in financing the BTC pipeline project. Our own assessment, which in fact is an assessment on numerous aspects as covered by the Equator Principles, was based on: - BTC project documentation; - Reports by multilateral development banks ( and ); - Reports by independent advisors and other related institutions, and; - (In some cases very extensive) reports by NGOs. We hold the opinion that the BTC pipeline project is compliant to the Equator Principles (see the appendix for the requirements we have gone through). In addition, we take comfort from the fact that BTC Co. is led by a well-reputed operator in BP. We feel that our decision is consistent with that of the two multilateral development banks, the ECAs (and their respective governments), independent consultants and other banks that have adopted the Equator Principles. Amsterdam, December 10 th, 2003

3 Review The BTC Pipeline Project and the Equator Principles 1. We have categorised the risk of a project in accordance with internal guidelines based upon the environmental and social screening criteria of the IFC as described in the attachment to these Principles (See on the web-site the reference to Exhibit I. This remark also holds for the references made to Exhibit II and Exhibit III in the text below). IFC has categorised the BTC Pipeline Project as Category A, in accordance with the screening criteria established IFC s Operation Policy 4.01 and attached as Exhibit I to the Equator Principles. Categorisation at the highest level is entirely correct for a project of this size, complexity and importance. 2. For all Category A and Category B projects, the borrower has completed an Environmental Assessment (EA), the preparation of which is consistent with the outcome of our categorisation process and addresses to our satisfaction key environmental and social issues identified during the categorisation process. BTC Co. has completed environmental and social assessments for the BTC Pipeline Project. As discussed further with respect to Equator Principle 3 below, the environmental assessment complies with the requirements applicable to Category A projects and addresses key environmental and social issues. In Azerbaijan, the draft Environmental and Social Impact Assessment (ESIA) was subject to a sixty-day public consultation period and a final report was approved by the Ministry of Environment and Natural Resources (MENR) in September In Georgia, the draft ESIA was produced in April 2002 and approval from the Georgian Ministry of Environment and Natural Resources (MENR) was received in November The approval is subject to thirteen conditions, the majority of which have now been completed by BTC Co. and agreement reached with the MENR. Completion of the remainder is on-going as the project advances. In Turkey, the draft EIA report completed in June 2002 and submitted to the Turkish Ministry of Environment (MoE) for a 60-day review period. A final EIA was submitted in mid- September Approval of the EIA was obtained from the MoE in October This in-country approval process was then followed by a further 120-day public comment period as part of IFC s and EBRD s loan approval processes. 3. In the context of the business of the project, as applicable, the EA report has addressed: a) assessment of the baseline environmental and social conditions b) requirements under host country laws and regulations, applicable international treaties and agreements c) sustainable development and use of renewable natural resources d) protection of human health, cultural properties, and bio-diversity, including endangered species and sensitive ecosystems e) use of dangerous substances f) major hazards g) occupational health and safety

4 h) fire prevention and life safety i) socio-economic impacts j) land acquisition and land use k) involuntary resettlement l) impacts on indigenous peoples and communities m) cumulative impacts of existing projects, the proposed project, and anticipated future projects n) participation of affected parties in the design, review and implementation of the project o) consideration of feasible environmentally and socially preferable alternatives p) efficient production, delivery and use of energy q) pollution prevention and waste minimisation, pollution controls (liquid effluents and air emissions) and solid and chemical waste management Note: In each case, the EA will have addressed compliance with applicable host country laws, regulations and permits required by the project. Also, reference will have been made to the minimum standards applicable under the World Bank and IFC Pollution Prevention and Abatement Guidelines (Exhibit III) and, for projects located in low and middle income countries as defined by the World Bank Development Indicators Database, the EA will have further taken into account the then applicable IFC Safeguard Policies (Exhibit II). In each case, the EA will have addressed, to our satisfaction, the project's overall compliance with (or justified deviations from) the respective above-referenced Guidelines and Safeguard Policies. The E(S)IA documentation addresses in a satisfactory manner items a) to q) listed above, applicable host country laws and regulations and the minimum standards applicable under the World Bank and IFC Pollution Prevention and Abatement Guidelines and IFC Safeguard Policies. The E(S)IA reports were reviewed by Mott MacDonald (the independent environmental consultant to the lender group), IFC, EBRD and the Export Credit Agencies, following which a series of question matrices were issued to BTC Co. In response, BTC Co. produced a Supplementary Lenders Information Pack (SLIP) and an Environmental and Social Action Plan (ESAP). Social management and mitigation measures will be included in a number of plans, including the Resettlement Action Plan, the Regional Development Initiative (RDI) and the Community Investment Plan (CIP) to be implemented during the construction and operational phases of the Project. EBRD, IFC and other financial institutions, and their consultants consider all issues resolved. 4. For all Category A projects, and as considered appropriate for Category B projects, the borrower or third party expert has prepared an Environmental Management Plan (EMP) which draws on the conclusions of the EA. The EMP has addressed mitigation, action plans, monitoring, management of risk and schedules. BTC Co. has developed and implemented an Environmental and Social Action Plan (ESAP) that includes environmental management plans imposed on the construction contractors (Contractor Control Plans) that meet IFC and OPIC guidelines. These address the required mitigations, monitoring, management of risk and schedules. They are disclosed on the BTC Co. website).

5 5. For all Category A projects and, as considered appropriate for Category B projects, we are satisfied that the borrower or third party expert has consulted, in a structured and culturally appropriate way, with project affected groups, including indigenous peoples and local NGOs. The EA, or a summary thereof, has been made available to the public for a reasonable minimum period in local language and in a culturally appropriate manner. The EA and the EMP will take account of such consultations, and for Category A projects, will be subject to independent expert review. BTC Co. developed a comprehensive Public Consultation and Disclosure Plan (PCDP). The PCDP was carried out, with careful targeting of type and level of information for various stakeholder groups. As required, the E(S)IA documentation was made available to the public as part of the host country approval process. As part of the due diligence, IFC has witnessed and validated consultation efforts on the ground and engaged in intensive and ongoing discussions with NGOs, civil society, local communities, and local and national authorities via various means (face-to-face discussions/meetings; visits to affected communities; responding to numerous NGO letters and fact-finding mission reports). IFC, together with EBRD, also held Multi-stakeholder Forum (MSF) meetings in order to provide an opportunity for IFC/EBRD to communicate their position on issues of concern directly to local stakeholders and to listen to their concerns and suggestions. After consultation with, and agreement by World Bank specialists, IFC concluded that the Indigenous Peoples policy does not apply to Kurds or to any other group along the pipeline. 6. The borrower has covenanted to: a) comply with the EMP in the construction and operation of the project b) provide regular reports, prepared by in-house staff or third party experts, on compliance with the EMP and c) where applicable, decommission the facilities in accordance with an agreed Decommissioning Plan. a) Such covenants are provided in the Common Terms Agreement (CTA) and ESAP. b) BTC Co. will report to the Lender Group quarterly during construction and annually during operations. An independent environmental consultant will also undertake monitoring and report to the Lender Group with the same frequency. c) No decommissioning plan has yet been developed by BTC Co, although one is required pursuant to the Host Government Agreements (HGA) should the agreement be terminated. Given the 40+ year life expected of the project, Mott MacDonald is not concerned by such absence. 7. As necessary, lenders have appointed an independent environmental expert to provide additional monitoring and reporting services. Mott MacDonald was appointed in 2002 to act as Independent Environmental Consultant (IEC) to the Lender Group and has carried out two construction monitoring visits. The Lenders Group will retain the services of an IEC for the remainder of the construction phase.

6 8. In circumstances where a borrower is not in compliance with its environmental and social covenants, such that any debt financing would be in default, we will engage the borrower in its efforts to seek solutions to bring it back into compliance with its covenants. The CTA establishes mechanisms, such as notification obligations and cure periods, to allow the opportunity for the Project to re-establish compliance in the event of a possible default. 9. These principles apply to projects with a total capital cost of USD 50 million or more. The total capital cost of the BTC Project is in excess of USD 3,000 million, hence the Equator Principles apply.