Social Safeguards Compliance Audit Report

Date: March 2011

UZB: Khauzak-Shady and Kandym Gas Field Development

This report is made publicly available in accordance with ADB’s Public Communications Policy (2005). It does not necessarily reflect the views of ADB.

UZB: Kandym Gas Field Development Social Safeguards Compliance Audit Report

I. INTRODUCTION

1. Lukoil Operating Company (LUOC, the Operator) is seeking financial assistance for the development of the Kandym Group of gas field (the Project) located in Region in Uzbekistan. The Project will start production in 2017 and will reach its peak production of 8 billion cubic meters (bcm) per year of natural gas in 2019 and will continue production till 2039. It is part of a development program governed by production sharing agreements (PSA) signed by the Government of Uzbekistan and a consortium of investors including Lukoil and Uzbekneftegaz. The prospecting works for the Kandym Group started in 1960-63. The Project plans to drill 126 production wells and develop gathering stations, field pipeline transfers, gas processing plant, gas main pipelines and other infrastructure facilities such as power substations, access roads and railway for logistics and supply. 2. For projects where there are existing facilities, ongoing construction or involves prior land acquisition, ADB’s Safeguards Policy Statement requires the conduct of a social compliance audit, including on-site assessment, to identify past or present concerns related to land acquisition and involuntary resettlement and indigenous peoples impacts. The objective of the social compliance audit is to determine whether actions were in accordance with ADB’s SPS and Safeguard Requirement (SR) 2-3 and to identify and plan appropriate measures to address outstanding compliance issues. Where noncompliance is identified, a corrective action plan will be submitted to ADB. 3. This audit report is based on the findings of the Mission1 in March 2010, interviews with LUOC staff, interviews with representatives of the State Committee on Natural Protection, local government officials in Bukhara Region and desk review of documents provided by LUOC after the mission. The location map and site visit photos are available in the attachments. This audit report will be made available to the public through ADB website in accordance with ADB information disclosure requirements.

II. MISSION FINDINGS

4. The proposed gas production unit (GPU) at the Kandym group of fields (KGF) will comprise production wells, cluster sites, gathering points, in-field pipelines, gas processing plant, and to build trunk gas pipeline and other infrastructure facilities (railway branch, access road, water supply wells, power transmission lines, voltage reduction station, etc). Drilling of production wells and the KGF is planned for 126 wells, including 28 at the satellite fields. The contract for drilling of initial 40 wells was awarded in 2009 to Eriell Corporation, a Czech drilling company. Initial drilling activities at KGF have already begun. Construction works of facilities at KGPP is scheduled to begin in 2014 and complete in 2019. 5. The nearest populated settlements are the towns of Karakul and Alat Districts located approximately 25km (Alat) and 40 km (Karakul) from the south-east boundary of the KGF, with homonymous railway stations. As shown in Table 1, several rural settlements (villages), called kishlaks, are located within the KGF area. These kishlaks have a population of 50 to 1200 people. Houses in these villages are made of clay, with flat roofs and streets are mainly narrow and curved. The majority of kishlaks are electrified and landscaped. The sources of water supply are rivers, ditches and wells. Water in rivers and ditches is fresh, in

1 The Mission was fielded on 9-12 March 2010 comprised of Armando Balloffet, Senior Environment Specialist (Staff Consultant), Jocelyn Erlinda Munsayac/ADB, and Marinela Cecilia T. Pascua/ADB.

1 wells it is saline. Gasli town is located 50km to the north of the area. The general location of the KGF is shown in Attachment 1.

Table 1 Distance of Kishlaks and Towns to the Project Area Name of Kishlak/Town Distance to GPP, km Distance to contract area boundary, km

Jigachi 21.0 Inside contract area Mirzakala 19.5 Inside contract area Kuwacha 24.0 Inside contract area Chandyr 27.0 Inside contract area Vahim 23.5 Inside contract area Kishlaks Ketmandugi 26.0 Inside contract area Arabkhona 23.5 Inside contract area Karahodja 20.5 Inside contract area Asiya 22.0 Inside contract area Karakul 33.5 12.5 Towns Gazli 55.5 32.6 Alat 37.0 9.0

A. Involuntary Resettlement

6. The Kandym GPU facilities will be located in several sites, within the contract area covering 114,000 hectares at Karakul District in Bukhara region. The contract area is an arid desert zone characterized by shifting or drifting sands with very limited vegetation to hold the sands in place. Construction of project facilities will require permanent acquisition of 845.16 ha of land and temporary/provisional acquisition of 3,636.86 or a total of 4,482.02 hectares (ha) of land. All provisionally acquired land comprising 81% of the total land required for the project will be used for construction of linear objects, e.g. in-field pipelines, hence the impacts are temporary. 7. The estimated total land requirements for the Project are shown in Table 2. The gathering stations occupy small land plots whereas the gas processing plant and some infrastructure facilities require larger areas. The locations of gathering stations, gas processing plants, gas pipelines, auxiliary objects will be specified during detail design of deposit development. The planned construction of the Kandym GPP is expected to entail limited or no involuntary resettlement impacts as compared to other alternatives.2 8. These lands are officially classified as agricultural land and forest land in the provincial land registry. Due to the dry, arid climate, the KGF area and lands required for permanent and temporary acquisition are not being used for agriculture. These lands are being leased to the Karakul forestry farm for sand binding by sowing and planting wild grasses and shrubs and by the Karakul Corporate farm for pasture. There are no surface water features within the KGF reserve and no history of irrigation in the area. After construction, these lands will be subject to technical recultivation (i.e. sowing of wild grasses) and returned to the previous leaseholders. 9. Land plots are being acquired by the Operator in several phases and following the timing of construction of the project facilities. As of 31 December 2010, 245.26 ha of land were withdrawn from the Karakul forestry farm and Karakul Corporate farm for the construction of wells, shift camp, electric power substations, and roads. Following the laws

2 Construction of a main gas pipeline to the Mubarek GPP will pass arable lands of Alat and Karakul district, cross republican level communications (railway, automobile roads, PTL, communication cables, etc.) and water courses (canals, irrigation collectors)

2 and resolutions of the Government of the Republic of Uzbekistan (RUz) such as the Decree of the Cabinet of Ministers of the RUz. “on approval of Regulations on order of consideration of land disputes in the RUz ” No. 246 dtd. 25.05.1992 and the Land Code (2003), the khokim of Karakul region and khokim of Bukhara region had issued decrees allocated these lands to the Project. 10. Due diligence review of the RUz Land Code (2003) shows that the it includes provisions for land acquisition and compensation that are consistent with ADB’s Safeguards Policy Statement: Article 17 provides rights of legal entities and individuals for land plots on the basis of constant possession, constant and temporary use, lease and property. Article 37 defines conditions for reclaiming/acquiring land for public needs. Such land acquisition should be carried out with the agreement of landowners or with the concurrence of land user and lease holder after consultation with the district or province hokim or Cabinet of Ministers. In case of disagreement with landowner, landuser and leaseholder, the decision can be appealed in court. Article 41 ensures the rights for land plots and establishes, that removed rights of land owners, landusers, leaseholders agricultural and forest enterprises, agricultural scientific - research institutions, experimental and training farms and owners of land plots are subject to reinstating in legislative order. Losses caused by the infringement of rights of landowners, landusers, leaseholders and owners of plots (including lost profits) are subject to full compensation. Article 86 defines procedures of compensation to landowners, landusers, leaseholders and owners of plots. Landowners, landusers, leaseholders and owners of plots will be compensated in full (including lost profits) in the following cases:

 Acquisition, reclamation or temporary occupation of lands;  Limitation of land use rights in connection with assignment of conservation, sanitary and protection zones around state reservations, wildlife preserves, national recreation areas, natural monuments, cultural-historical monuments, water reservoirs, water supply sources, resorts, along rivers, canals, water escapes, roads, transmission lines, communication and electrical lines;  Deterioration of lands caused by construction and operation of reservoirs, canals, ponds and other objects; the remittance of harmful or noxious substances by legal entities or individuals which cause crop damage and/or decreases in crop yields.  Compensation allocated under such circumstances will be paid by the offending enterprises, organizations and agencies, to the owners/users who use the affected plots. 11. As of 31 December 2010, compensation amounting to 420,351,671 soums was paid by the Operator to the Karakul forestry farm and Karakul cooperative farm for lands and 389,197 soums to the special account of State committee of lands cadastre. Upon completion of construction, the Operator will restore and transfer the lands to Karakul forestry farm and Karakul co-operative farm for sowing of wild grasses. The project also plan to extend the shifting sand prevention program being carried out in Karakul reserve to the infrastructure areas in the KGF. 12. Prior to taking possession of each land area required for the facility scheduled for construction, LUOC pays compensation to the leaseholder. The rate of compensation which is 889,445 soum per 1 ha/year (around 593 USD per 1 ha/year) was agreed with the leaseholders. It is based on the land area, land use and estimated “lost profits” during the period required by the Operator of the construction of the facility. Lost profit or income is profit, which the land user could have gotten, but did not, because its rights to the land were

3 infringed due to withdrawal of land for construction of Project facilities. Lost profit compensation amount is defined by the land user/leaseholder itself with application of three- year average State purchase prices for produced output and volumes of produced output. This amount defined by the land user/leaseholder is agreed by the surveyors, taxation and statistical structures, and approved by district and then regional authorities. The approved amount of compensation for provisional acquisition shall be paid for three years as this is the estimated period for restoration of natural soil fertility. This calculation satisfies the replacement cost principle in ADB’s SR 2 on Involuntary Resettlement. 13. Due diligence on the cooperative and forestry farms also show that they have large landholdings inside and outside the KGF area. The Karakul State Forestry Farm, with 60 members, has been operating since 1960 and has a total landholding of 36,000 ha and 112,000 ha inside and outside the KGF contract area, respectively. The Karakul Cooperative Farm, with 600 members, has been operating since 1960 and has a total landholding of 130,000 ha and 426,000 ha inside and outside the KGF contact area. Lands acquired from these farms represent less than 0.01% of their total landholding and these lands are located approximately 8-10km from the nearest house in the village. Hence the acquired lands did not affect their operations. Details on the landholding of these corporate farms are in Table 3.

4

Table 2. Land Requirements for Kandym Project Facilities District Project Facility Estimated land Permanent Temporary Duration of Official land Present Present Land- Land usr Expected Year of (Enumerate all permanent and temporary project area required Use use temporary use Classification Land Use User consulted? Acquisition facilities) for each facility) (hectares) (hectares) (Yes/No) 2010 year -15 wells; 2011 year -27 wells; 2012 year- 24 wells; Production wells 121 pcs х 3,5 ha 423,50 43,56 379,94 2013 year -13 wells. Flow lines well-cluster 231.6 km х 28 m 648,48 648,48 Collector cluster-cluster 9.7 km х 33 m 32,01 32,01 Collector cluster-gathering station 91.8 km х 33 m 302,94 302,94 Collector gathering station GPP 87.1 km х 39 m 339,69 339,69 Cluster site 21 pcs х 1,5 ha 31,50 31,50 Field roads GPP-cluster 188.6 km х 20 m 377,20 188,60 188,60 Bukhara State forestry region Fuel gas electrochemical protection, connection GPP - agricultural agricultural "Karakul" and 3 years Yes Karakul cluster 188.6 km х 50 m 377,20 1,00 376,20 (pastures) (pastures) Cooperative district GPP site 350,00 200,00 150,00 farm "Karakul" 2013 year Railroad 31.0 km х 80 m 248,00 108,50 139,50 Road 31.0 km х 20 m 62,00 31,00 31,00 Water duct 31.0 km х 10 m 31,00 31,00 Sales gas pipeline 59.0 km х 50 m 295,00 1,00 294,00 Road and electrochemical protection GPP–tie-in point of sales gas 59.0 km х 50 m 295,00 60,00 235,00 Power transmission line -220 45 kmх15 m 67,50 3,00 64,50 Communication 45.0 km х 10 m 45,00 45,00 Field camp 10,00 10,00 Railroad Kandym GPP- Khodjadavlyat station 18 km х Bukhara 80 m 144,00 63,00 81,00 Alat State region agricultural agricultural forestry and Road Kandym GPP - well305 Khauzak 52 km х 20 m 104,00 52,00 52,00 3 года Yes 2013 year Alat (pastures) (pastures) Cooperative district Water duct 23 km х 10 m 23,00 23,00 farm "Alat" Intake facilities 25,00 25,00 Bukhara Sales gas pipeline 25.0 km х 50 m 125,00 1,00 124,00 Cooperative region agricultural agricultural 3 years farm named Yes 2013 year Djandor Road ,electrochemical protection, connection GPP – (pastures) (pastures) after "A.Timur" district –Center pipeline 25.0 km х 50 m 125,00 26,00 99,00 TOTAL: 4482,02 845,16 3 636,86

5 Table 3. Kandym Land Registry Lost profits Amount of Cost of compensation compensation to the Withdrawn Destination works Total area of amount to the special account of Ground for lands from Permanent Temporary (for which (services) № District withdrawal land-user for state committee of allotment farmstead use (ha) use (ha) facilities is on lands (ha) lands lands and cadastre lands allotted) allotments withdrawal for lands (soum) (soum) withdrawal (soum) Karakul Khokim's Decision Cooperative Highway district, 1 № 601 dated enterprise 19,70 8,70 11,00 construction and 387 000 9 019 206 71 662 Bukhara 24.06.2006г. Karakul wells repair work region Khokim's Decision Karakul industrial base Cooperative № 679 dated district, 2 enterprise 2,00 2,00 384 308 1 129 232 18.08.2006г. Bukhara Karakul region Khokim's Decision Karakul checkpoint Cooperative №131 dated district, 3 enterprise 0,20 0,20 350 650 94 080 03.02.2007г. Bukhara Karakul region Khokim's Decision Karakul Binding and Cooperative № 903 dated district, aggregate 4 enterprise 9,50 9,50 2 082 460 3 763 200 20.12.2006г. Bukhara quarries Karakul region Khokim's Decision Karakul temporary road Cooperative № 369 dated district, 5 enterprise 10,00 10,00 836 706 3 394 760 07.06.2007г. Bukhara Karakul region Khokim's Decision Jandor GosZemZapas aggregate № 203 dated district, (State Land quarry 6 9,00 9,00 454 478 7 056 000 25.01.2007г. Bukhara Reserve) region Khokim's Decision Karakul Karakul state Well № 1086 № 323 dated district, forest farm and access road 7 5,50 0,36 5,14 9 018 394 16.06.2009г. Bukhara region Khokim's Decision Karakul Karakul state Wells № 1088 № 753 dated district, forest farm and 1050 and 8 9,10 0,72 8,38 23 471 477 12 550 14.12.2009г. Bukhara access roads region

6 Lost profits Amount of Cost of compensation compensation to the Withdrawn Destination works Total area of amount to the special account of Ground for lands from Permanent Temporary (for which (services) № District withdrawal land-user for state committee of allotment farmstead use (ha) use (ha) facilities is on lands (ha) lands lands and cadastre lands allotted) allotments withdrawal for lands (soum) (soum) withdrawal (soum) Khokim's Decision Karakul Cooperative Temporary № 607 dated district, enterprise storage of pipes 9 2,00 2,00 13 218 000 19.11.2009г. Bukhara Karakul region Khokim's Decision Karakul Cooperative Wells № 321-2 № 473 dated district, enterprise and 1055 and 10 12,00 0,72 11,28 20 914 440 12 550 31.08.2009г. Bukhara Karakul; Karakul access roads region state forest farm Khokim's Decision Karakul Cooperative Construction of № 18 dated district, enterprise high voltage 11 26,26 2,06 24,20 44 188 743 11.01.2009г Bukhara Karakul; Karakul lines 10 and 35 region state forest farm kW Khokim's Decision Karakul Karakul state field base main № 128 dated district, forest farm office 12 25,00 25,00 40 992 700 07.03.2009г. Bukhara region Khokim's Decision Karakul Cooperative water wells, № 537 dated district, enterprise access roads 13 26,00 2,16 23,84 26 270 552 12.10.2008г Bukhara Karakul; Karakul region state forest farm Khokim's Decision Karakul Karakul state Well № 320-2 № 194 dated district, forest farm and access road 14 3,70 0,36 3,34 9 870 063 98 700 23.04.2010y Bukhara region Khokim's Decision Karakul Karakul state Wells № 1028 № 188 dated district, forest farm and 1049 and 15 9,80 0,72 9,08 26 149 682 26 149 19.04.2010y Bukhara access roads region Khokim's Decision Karakul Cooperative Temporary № 187 dated district, enterprise access roads to 16 11,00 11,00 14 214 313 19.04.2010y Bukhara Karakul; Karakul water wells region state forest farm

7 Lost profits Amount of Cost of compensation compensation to the Withdrawn Destination works Total area of amount to the special account of Ground for lands from Permanent Temporary (for which (services) № District withdrawal land-user for state committee of allotment farmstead use (ha) use (ha) facilities is on lands (ha) lands lands and cadastre lands allotted) allotments withdrawal for lands (soum) (soum) withdrawal (soum) Khokim's Decision Karakul Karakul state Wells № 324-2 № 248 dated district, forest farm and 1036 and 17 7,40 0,72 6,68 19 745 678 19 746 31.05.2010y Bukhara access roads region Khokim's Decision Karakul Karakul state Wells № 1042 № 247 dated district, forest farm and 1090 and 18 8,00 0,72 7,28 21 346 679 21 347 31.05.2010y Bukhara access roads region Khokim's Decision Karakul Cooperative Wells № 215-2 № 342 dated district, enterprise and 1032 and 19 8,00 0,72 7,28 15 433 010 15 433 21.07.2010y Bukhara Karakul access roads region Khokim's Decision Karakul Karakul state Wells № 243-2 № 437 dated district, forest farm and 245-2 and 20 7,00 0,72 6,28 19 814 323 19 814 23.09.2010y Bukhara access roads region Khokim's Decision Karakul Cooperative Wells № 1031 № 483 dated district, enterprise and 1039 and 21 8,70 0,72 7,98 16 783 183 16 783 08.11.2010y Bukhara Karakul access roads region Khokim's Decision Karakul Karakul state Wells № 1027, № 673 dated district, forest farm 1035, 1041, 22 22.11.2010y Bukhara 25,40 1,80 23,60 1048 and 1079 74 463 956 74 463 region and access roads Total: 245,26 21,40 223,86 4 495 602,00 420, 351, 671,00 389 197,00

8 Table 3. Information on Forestry and Cooperative Farms State forestry Cooperative farm Alat State Cooperative farm Cooperative farm "Karakul" "Karakul" forestry "Alat" "A.Timur" Nature of business Animal agriculture, Animal agriculture Animal agriculture, Animal agriculture Animal agriculture forestry, storage of forestry, storage of seed grains and seed grains and herbs. herbs. Start of operations 1960 2001 1960 2001 2001 (Year) Number of members 60 members 600 members 32 members 173 members 5 members comprising the farm

Total landholding inside 36000 hectares 130000 hectares 10000 hectares 20000 hectares 210 hectares KGF contract area Total landholding outside 112000 hectares 426000 hectares 45239 hectares 133163 hectares 285500 hectares KGF contract area Type of agricultural Animal agriculture, Animal agriculture Animal agriculture, Animal agriculture Animal agriculture activities engaged in forestry, storage of forestry, storage of inside and outside the seed grains and seed grains and KGF contract area herbs. herbs. Information whether they After completion After completion After completion After completion After completion can still use the project the construction of the construction of the construction of the construction of the construction of area for pasture the Project's the Project's the Project's the Project's the Project's facilities the lands facilities the lands facilities the lands facilities the lands facilities the lands used on the used on the used on the used on the used on the temporary basis temporary basis temporary basis temporary basis temporary basis will be transfer for will be transfer for will be transfer for will be transfer for will be transfer for pasture pasture pasture pasture pasture Information on The terms of the The terms of the The terms of the The terms of the The terms of the verbal/written usage, duration usage, duration usage, duration usage, duration usage, duration agreements with these and return of the and return of the and return of the and return of the and return of the farms on conditions of lands have been lands have been lands have been lands have been lands have been use, duration and return approved by the approved by the approved by the approved by the approved by the of provisional lands Act dated Act dated Act dated Act dated Act dated 06.05.2009 06.05.2009 30.03.2009 30.03.2009 30.04.2009

B. Indigenous Peoples 14. Karakul District, where the KGF is located, occupies an area of 9.9 thousand sq. km. The district has a total population of 125.3 thousand people and with approximately 12 persons per 1 sq. km. The local population are dominantly Uzbek (98.48%) while the rest are Tatar (0.56%), Russian (0.33%), Turkmen (0.196%), Ukrainian (0.05%), Tajik (0.05%), Kazakh (0.067%), Azerbaijanian (0.04%), Byelorussian (0.01%), others (0.2%). In Alat district, where the population density is 24.6 people per 1 sq. km., 97% (76,600 people) are Uzbeks while the rest of the population are Kazakhs (0.63%), Turkmens (0.5%), Russians (0.38%), Ukrainians (0.13%), (0.38%), Tatars (0.38%), Bashkirs (0.38%), Azerbaijani (0.25%), and Byelorussians (0.25%). A small percentage of the population have different nationalities and they are not considered as Indigenous Peoples as per ADB SPS, hence the Project is categorized as C with respect to SR 3 on Indigenous Peoples.

9 C. Consultation and Participation 15. During project preparation, LUOC held meetings and consultations with chiefs of Khokimyats, representatives of regional financial, environmental and social agencies, owners of farm enterprises located on or near the contract area. During the meetings, LUOC made a presentation on the proposed project, development prospects, project impacts and measures to mitigate possible negative impacts. Issues concerning land allocation, waste management, procedures for processing of appeals and suggestions, and regional ecological impacts of the project were discussed. The prospects of improving social and economic status of the region as a result of a successful project implementation as well as potential charitable projects for the community were also discussed. 16. To address the issues raised during the meetings, LUOC has adopted the following measures: (i) agreement with the affected corporate farms that the compensations for land withdrawal will be 889,445 soum per 1 ha/year (around 593 USD per 1 ha/year) and all payments will be made by the Operator as lands are withdrawn from leaseholders; (ii) domestic solid waste treatment will be disposed in a specially allocated landfill; (iii) drilling waste will be treated and a temporary storage identified; and (iv) a grievance process is outlined in the EIA. 17. Consultation and participation activities during project implementation are discussed in the EIA and the resettlement framework. During project implementation, LUOC will establish and maintain a high level of continuity between the public consultation and project disclosure program which will include briefing on grievance redress, the recording and management of specific cases and the more general project-wide monitoring and evaluation (M&E) provision. At the field level, a community complaints-management register (CCMR) will be maintained which includes a log of all grievances received related to environmental or social issues. Over a period of three years, LUOC officers will visit each community once every quarter or as desired by the community to consult with village representatives and identify any concerns or issues related to the Kandym project. A record of these visits (date visited, persons met, issues discussed and complaints bought forward) will be logged in the CCMR.

III. CONCLUSION AND RECOMMENDATIONS

18. Based on information gathered by the Mission through a site visit, interviews and review of documents provided by the Operator, the Mission has verified that compensation has been paid based on agreed rates and in accordance with national laws which are consistent with ADB’s SPS. There are no remaining issues or concerns related to the 245 ha of land acquired for the facilities scheduled for construction in 2010 and 2011. 19. No corrective action plan is required with respect to acquired lands. Future land acquisition will be carried in accordance with national law, the Lukoil Resettlement Framework agreed with ADB and ADB’s SPS SR 2 and 3. Prior land acquisition did not affect any Indigenous Peoples as there are none in the area.

10 Attachment 1

Location Map

11 Attachment 2

Site Visit Photos

Well pad

Access Roads

12

Power substation for drilling operations

Power Transmission line

13

Drilling Contractor (Eriell) Shift Camp

14