Docunentof The World Bank Public Disclosure Authorized Report No. T-6578-RU

TECHNICAL ANNEX

RUSSIAN FEDERATION Public Disclosure Authorized

EMERGENCY OIL SPILL RECOVERY AND MITIGATION PROJECT Public Disclosure Authorized APRIL 5, 1995 Public Disclosure Authorized CURRENCY EQUIVALENTS

Currency Unit = Ruble (Rb)

Rubles per US Dollar

Foreign Exchange Auction/Interbank Market Rate

Average for Period

1991 170 1992 420 1993 1,247 1994 2,204 1995 Ql 4,311

BORROWER'S FISCAL YEAR January 1 - December 31

WEIGHTS AND MEASURES

METRIC SYSTEM US SYSTEM 1 meter (m) 3.2808 feet 1 kilometer (km) 0.6214 mile 2 1 square meter (m ) 1.196 square yards 1 metric ton (ton) 1.102 short tons

ACRONYMS AND ABBREVIATIONS bpd barrels per day CAS Country Assistance Strategy EBRD European Bank for Reconstruction and Development ERR Economic Rate of Return GOST State Standard ICB International Competitive Bidding IFC International Finance Corporation IMC International Management Contractor JSC Joint Stock Company KMN Komineft LIB Limited International Bidding MOF Ministry of Finance MPC Maximum Permissible Concentration MTE Ministry of Fuel and Power (MinTopEnergo) NGDU Oil & Gas Production Unit PIU Project Implementation Unit USAID United States Agency for International Development RUSSIAN FEDERATION

EMERGENCY OIL SPiLL RECOVERYAND MITIGATION PROJECT

TECHNICAL ANNEX

TABLE OF CONTENTS

Page no.

BACKGROUND 1

A. Scope of the Emergency 1 B. Socio-Economic and Environmental Impacts of the Oil Spill 1 C. Pipeline Overview and Status 7 D. Komineft Spill Response and Pipeline Remediation Measures to Date 10 E. Requirement for Assistance 11

II. BANK RESPONSE AND STRATEGY 12

A. Bank Response and Strategy 12

III. DETAILED PROJECT DESCRIPTION 12

A. Spill Containment and Cleanup Measures 12 B. Pipeline Rehabilitation 20 C. Technical Assistance 26 D. Total Project Costs 27 E. Environmental Aspects 28 F. Public Consultation 28 G. Regional and National Mitigation Efforts 30 H. Economic Justification, Risks and Mitigation Options 30

IV. INSTITUTIONAL ARRANGEMENTS AND PROJECT IMPLEMENTATIC3N

A. Implementing Agency JSC Komineft 32 B. Management Structure for Project Implementation 35 C. Government Management Structure and Permit Clearance Procedures 36 D. Financing Plan and Co-Financing 36 E. Procurement 37 F. Disbursements 38 G. Accounts and Audits 38 H. Supervision Plan 38

V. AGREEMENTS AND ACTIONS 39 ii ATTACHMENTS

1. ImplementationArrangements 40 2. Komi Republic Resolutions 44 3. Procurement Details and Procedures 48 4. List of Project Documentsin Project File 51 MAPS

Map 1: Main Petroleum Basins and Crude Oil Trunklines (IBRD 26833) Map 2: Kharyaga-UsinskRegional Pipeline (IBRD 26901) Map 3: Usinsk Region Oil Spill Sites (IBRD 26900) I. BACKGROUND

A. Scope of the Emergency

1. Starting in February 1994 and culminatingin a cascade of failures in August and September 1994 and January 1995, leaks from the Kharyaga-Usinskpipeline in the Usinsk region of the Komi Republic have resulted in one of world's largest oil spills. In excess of 100,000tons (730,000barrels) of oil are estimatedto be trapped in very difficult to access bogs and creek beds, three times the amount released during the Exxon Valdez spill. In autumn 1994 over 20,000 tons (140,000 barrels) of oil were released into the Kolva River when temporary dikes built to contain the oil, failed during heavy fall rains. Serious damage was caused to downstreamcommunities, in particular, Kolva village, as a result of the releases. The Komi RepublicEmergency Situations Commission on October 10, 1994 declaredan emergencyin the Kolva River area. Wholesalerelease of the remainingoil into the river system would create an ecologicaldisaster, threateningthe livelihoodof the downstreamcommunities which depend on the river system and the overall environmentof the Pechora river system into which the Kolva and Usa rivers flow.

2. Immediatepriority is completionof structures to contain the oil to allow orderly removaland disposal of gross oil. While some containmentstructures have been built, they are generallyof poor design and constructionand are inadequateto contain the oil when spring thaw raises water levels in the Kolva and Usa rivers by up to 9 meters. Construction of significant new structures is also required in the very limited time remaining before spring thaw.

3. In addition to the significant containmentand cleanup efforts required, further serious spills are likely from the pipeline if urgent rehabilitationinvestments are not undertaken. The pipelinehas been seriously weakenedby internal and external corrosion, largely as a result of the presence of corrosive water producedwith the oil. While most of the weakest "southern" section of the pipeline, where the majority of spills occurred in 1994, has been replaced, the "middle"section of the pipeline is of similarage and exposure to internal and external corrosion. There are indications of escalating failures on this section. The alternative of shutting the Kharyaga-Usinskpipeline down until remediationis completeis not feasibledue to the economic importanceof the pipeline to the region. The pipeline, owned and operated by the regional oil productioncompany, Komineft,is the sole outlet to the national pipeline system for regional oil production. The pipeline annually transports over $750 million of oil (at world market prices) production, which directly and indirectly supports the employment of over 20,000 people. Oil flows can also only be arrested for a brief duration, particularly in the winter, before the oil in the pipeline, gathering lines, and oil wells begin to solidify, due to the paraffinic nature of the oil. If complete solidification occurred, wells and pipelines could require abandonmentor expensive and risky measures to effect restart. Continuationof oil production and transport is also importantto provide fuel for the heating plant serving the Usinsk region.

B. Socio-Economicand EnvirommentalImpacts of the Oil Spill

4. Overview. Eight downstream river communities, with a total population of approximately7,000 people, would be most immediatelyaffected by a large-scale oil release. These communitiesprefer river water for part or all of their domestic water needs, as the deep well water which is their main supply is contaminatedwith iron in concentrationsranging from 3.3 to 6.7 mg per liter. The river communitiesalso pasture their cattle, which provide their milk and meat, on the limited river flood plains. Flood plains contaminatedwith oil after the spring floods would be unsuitable for grazing for at least one year.

5. Large scale oil releases would severely damage the commercial and domestic fisheries of the Usa and Pechora rivers which support an important Atlantic salmon fishery. Particularly affectedwill be the spring spawners and bottom dwellingfish dependent on benthic organisms for their food supply. On a lesser scale there would be loss of important wildlife habitat especiallysmall mammalsand carnivores in the stream valleys and waterfowl and water birds in upland waterbodiescontaminated by the oil. In addition to the impact of oil releases, salt water discharges to inland river and land systems cause substantial environmentalimpact through loss of flora and fauna and contaminationof surface and underground water supplies.

6. Two of the oil spill sites straddleone of the major north-southmigration corridors for reindeer and may constitute a significantdisruption to the herders. The spread of pollutants from the site would further restrict migratory routes. In addition, the vulnerabilityof the herds to pollution and loss of grazing habitat will present challengesfor long-term range management programs. The slow rate of vegetationgrowth in the region requires herders to shift their herds constantly to prevent overgrazing.

7. Climate of the Spill-Impacted Region. The Usinsk area is located in the Atlantic- Arctic climatic zone, characterized by long cold winters, and cool rainy short summers. Temperaturesremain below 0O C for over 200 days. The average January temperatureis -19o C; the average July temperature is 15o C. Average annual precipitation is about 600 mm, falling mostly in the autumn (October 68-74 mm). Snow cover is established by early October and lasts till the end of May. Average snow on the ground in open areas is 45-75 cm and in sheltered area 140-200cm. Maximumsnow accumulationsoccur in late March to early April. Snowmeltdata are presented in the table below.

Parameter Earliest Average Latest Beginningof snowmelt 15 Apr 9 May 1 June [Disappearance of snow cover 30 Apr 26 May 26 June

8. Quatemary sediments, formed during a complex series of marine and glacio- marine transgressions and regressions, are exposed at the surface throughout the area. The topographyis flat to gently undulating. Higher elevation areas, composed of glacial sediments of variable texture, are erosionalremnants averaging 100-150m asl. Slopes at elevationsof 70- 110 m also show evidenceof fluvial terraces and periglacial features. Lower elevationareas are underlain by glacial-marinesediments of sandy and sandy loam texture and tend to be boggy with extensiveorganic deposits. Permafrost (50-100m thick) is semi-continuousin the northern part of the area. It becomes sporadic in the central and southern areas (5-20 m in thickness), where it is confinedto bogs and peat plateau areas.

------3 - 9. River hydrology. The timing and volume of spring and fall flooding are critical factors in the oil spill containmentefforts. As the Kolva River rises during spring melt (by up to 9 meters in some years) oil releases from the spill sites will occur without containment structures. The water basin of the Kolva River covers about 18,100 km2, most of which lies in the tundra zone. The Kolva floodplainvaries from 500 m to 3 km in width. The broader flat areas of the floodplain are swampy, with peat accumulationsof up to 2 m. The width of the river varies from 212-242m and its depth varies from 1.4-2.0 m. Averageflow rate is 0.5 m/s. Many tributaries join the Kolva; their basin areas varying from 12.6 - 111 km2. The overall density of the river system in the area is 0.3 km of channel per km2 of basin area. Marshes cover about 27% of the area and vary in depth from 0.6 - 2 meters.

10. Precipitation contributes about 70% of the Kolva's flow. The Kolva and its tributaries are characterizedby stable low water levels in the late winter, followed by highest flows in the spring flood period. The spring flood usuallybegins between 10-15 May and ends by about 10 July, but actual dates may vary by up to 30 days in particular years. Average duration of the flood is about 60 days. Maximumflood levels occur on average between 20 May and 5 June. The table below gives ranges for these dates. Freeze-up begins on average in the first 10 days of October with permanentice cover forming in the secondhalf of October. Ice cover lasts on average 219 days. Minimumwater levels occur between February and April. Small tributaries freeze to the bottom in winter.

Phases of the Kolva River Spring Flood Phase Early Average Late Start of Spring Flood 22 Apr 17 May 9 June End of Spring Flood 28 June 12 July 4 Aug Duration (days) 105 58 40

11. Water Quality. The KomineftEcological Departmentconsiders the Kolva River and some of its tributaries to be the most pollutedwaterbodies of the Pechora River basin. The RussianFederation Expert Committeenoted that, as a result of the August-October1994 spills, tributaries to the Kolva River (Palnik-Shor, Bezymyanny, B. and M. Kenyu creeks, and the Khatayakhaand its tributaries) were extensively contaminatedwith oil following failure of containmentstructures during high rains in September,when the first large oil release occurred.

12. Field investigationscarried out by Usinsk fishery scientists in October 15-20, 1994, indicatedthat the Kolva River was contaminatedfor 30-40 km over its whole width (100- 150 m) with oil. Riparian vegetationwas covered with oil (up to 15 cm). The Usa River was contaminatedby oil products along a 21 km length to its whole width of 250-300 m. The Pechora River also had 250 m of oil across its width stretching from Ust-Usa to Shelyabozh villages, a distance of 40 km. The Russian Federation Expert Committee investigatingthe oil spills noted that a GEOPOLIS aerial survey on October 3, did not detect any oil film on the Kolva, Usa or Pechora rivers. The confirmed findings by river survey crews of very large amountsof oil on those rivers on October 15-20 indicatesa second massive washoutof oil on, or about, October 15, 1994. - 4 -

13. Water samples taken on November6, 1994by Institute of Biology specialistson the Kolva River "at the Bridge 1 Area" demonstratedoil products on the surface exceeded the maximum permissible concentration (MPC) by 170 times, and samples taken at 2.5 m depth exceededMPC by 1000times. Drift samples taken on November 6, 1994under the ice below the oil spill (220 m above the Bridge 1 crossing of the Kolva river at drill site 89) were found to containundissolved moving oil productsamounting to 37.8 g/m3/h. Not surprisingly,chloride ions in the waterbodiesalso increased, certainly as a result of the high levels of produced water that must have accompanied the oil when the containment structures broke. Chloride concentrationsin the Kolva rose to 25-105 mg/L, in Palnik-ShorCreek maximumconcentrations reached 929 mg/L, and in BezymyannyCreek reached 1914 mg/L.

14. The UsinsktermneftNGDU has established water qualitymonitoring sites at ten locations along the Kolva River. Results from that sampling network indicated that during a major spill occurrence period in August, chloride concentrations in tributary streams to the Kolva reached values as high as 12,230 to 28,368 ppm.

15. Socio-EconomicImpacts. The affected rural Komi population in the region of concern are resident in villages located on the Kolva, Usa, and Pechora rivers. These include, in descending order within a radius of 120 km of the spill sites: Kolva Village, Ust-Usa, Novikbozh, Schelyabozh, Zaharvan, Denisovka, Mutnyy Materik, and Vaskino. These communitiesare most directly affected by oil spills into the Kolva River system. These river communities are largely based upon traditional economies which are dependent upon the maintenanceof water quality in the rivers for direct consumptionand resource harvestingof the fishery.

16. In addition to the fishery, Komi reindeer herders maintain large herds which follow annual migratory routes between winter pastures in the south and summer pastures in the north of the region. This renewable resource has been augmented in recent years with the addition of cattle for meat and dairy products in private holdings and in state farms. These animals are pastured along the extensive riparian banklands of the Kolva, Usa and Pechora rivers. Contaminationof milk from hydrocarbons is a significant risk. In addition to impacts on permanentpasture lands, a major reindeer migratory pathwaywas blocked by the spills. In December 1994, there were unconfirmedreports that reindeer from the Ust-Usinskycollective farm came into contact with the oil spills while being moved southwardto their winter pastures. The UsinskCity Director of Agriculture reported that as a result of the disturbances at the spill sites, eight brigades were forced to move well east of the spill sites where they maintainedthe herds on sub-optimalsummer pastures during the winter. Eight other brigades of reindeer herders proceeded south by extending the migratory corridor well west of the spill locations. In April, the herders plan to follow the more westerly route again while proceeding north. These alternatives were developedin conjunctionwith Komineft.

17. The late 1994 oil spills severely impacted the communityof Kolva Village and the Kolva River. Survey results indicated that oil in the river just upstream of Kolva Village in Augustand October 1994exceeded both drinkingwater MaximumPermissible Concentrations (MPCs) and fisheries MPC values. In October 1994, very large amounts of surface oil contaminatedthe waters and riparian areas of Kolva Village. The Usinsk Committee on EnvironmentalProtection reported that a 5.12 ha area of river bank at Kolva Village was contaminatedwith a total of 900 tons of oil. On the downstreamportion of the Usa River in the DibozhIsland area, 2.5 ha of riverine area was contaminatedby about 1,100 tons of oil. These results indicate, for at least the fall of 1994,that local villagesexperienced severe contamination from oil, and presumably associated saline production water. Althoughdilution effects in the rivers would reduce the direct impacts to villages further downstream, the large volumesof oil associatedwith these incidentswould clearly diminishwater qualitythroughout the region, most specifically at Kolva Village. Traditionally villagers have used river water for domestic purposes. As a result of these large oil spills into the Kolva River, reliable good quality drinking water supplies from wells for downstream villages appear to be a necessity.

18. Preliminary surveys carried out in February 1995, indicate that emergency measuresto mitigate the environmentalimpacts to the Kolva, Usa and Pechora rivers ranked as the first and second priorities for downstreamvillages. Significantly,Kolva Village had as its highest priority the replacement of feed for domestic livestock and reindeer due to loss of grazing lands and feed shortages. Their second priority was potable water supply of good quality.

19. Fisheries. Anecdotal information received during community consultations indicatesthat hydrocarbon contaminationof traditional domestic fisheries has become a major concern of Komi villagers. Preliminaryanalytical results from a November 6, 1994 Institute of Biologyfield inspectionreported a completeabsence of benthic fauna on the Kolva River bottom area contaminatedby the oil spill. The researchers concludedthat "the discoveryof a complete absence of benthos from bottom sediments allows for the determinationfor the ecological conditionof the waterways, at least in the aquatic area surveyed, as a critical one."

20. The researchersalso carried out chemical and organic analyses of oil products in muscle tissue of fish taken from the Pechora River in early December 1994 and in the Ust- Tsilma area. The following analyses indicateextremely high oil contaminationin fish:

Arctic Cisco 96 mg/kg (dry weight) 22 mg/kg (wet weight)

Cisco 73 mg/kg (dry weight) 16.9 mg/kg (wet weight)

21. As a result of these and related data, the Joint Expert Committee concludedthat it was possible "to characterizethe state of the waterway's ecologicalsystems on the reviewed part of the area as a critical one and to refer to this part as an emergency environmental situationzone. " In short, the Kolva River and associatedtributaries have been contaminatedby oil and producedsaline water pollution events for at least a decade, but most severelyas a result of the 1994 events. This ongoingpollution has contributedto the loss of the commercialfishery on the Kolva. For these and associatedeconomic reasons, fish catches in Usinsk Raion have declinedfrom 68.52 tons in 1976 to only 8.4 tons in 1994. Komineft's ecologicaldepartment concludedthat, as a result of the recent large oil spills, the Khatayakhaleft tributary and the Big and Little Kenyu streams have lost their fish productivity, the Bezymyannyand Palnik-Shor streams and the Khatayakharivers have lost about 70-75% of their fish productivity, and the Kolva fish fauna has been adversely affected. Without measures to contain the current spills these problems will spread to the much larger Pechora River, threatening salmon and other important fishery spawning grounds. - 6 -

22. Water Protection Zones. In May 1990, the Komi Republic Council of Ministers passed a Resolution to establish boundaries of water protection zones along selected rivers, lakes and water reservoirs to restrict commercial activities in the Komi Republic near waters that were especially valuable for fisheries production. A list of these rivers is presented below.

Name of Flowing into Size of Water Waterbody Protection Zone Usa River Pechora River 1000 m Pechora River Barents Sea 3000 m Bolshaya Synya Usa River 3000 m Lyzha River Pechora River 1000 m

23. Nadpoimenny Environmental Reserve. On 1 March 1993, the Komi Republic Council of Ministers established the 3000 ha Nadpoimenny environmental preserve in the northwestern part of the Ust-Usinsky forestry zone (see Map 3, IBRD 26900). Within this 'zakaznik' protected territory, activities such as tillage, cattle feeding, construction, storage of hazardous materials, use of mechanical vehicles, survey work or mineral resource mining, including peat extraction, are prohibited. The preserve, protected by the Usinsk Forestry Department, is designated for cranberry harvesting and hunting during permitted seasons. Notably, the protected zone contains existing routes for the Komineft oil pipeline and associated power transmission lines. Two of the oil and produced saline water spills which occurred in the fall of 1994 lie within the boundaries of the zakaznik, but these were subsequently cleaned up by Komineft. The estimates of contaminated surface areas (amounting to 8.7 ha) do not include subsequent disturbances from line repair operations or cleanup activities.

24. Air Quality. In the 1994 the Usinsk City Ecology Committee reported that 10,000 tons of spilled product are burned per annum in the Usinsk oilfield region. In 1992, at Usinsk- 3 Vozey, 12,000 m were spilled, most of which was burned. These figures indicate that significant amounts of combusted hydrocarbon products are released into the atmosphere on an annual basis, and ground observations have confirmed that burning is employed widely and frequently on oil spills in the immediate vicinity of the pipeline.

25. Evaporation of hydrocarbon light ends from spilled oil occurs upon contact with the air. There is no air quality monitoring network in the region and no systematic data are available on atmospheric hydrocarbon concentrations. Maximum permissible concentrations of volatile hydrocarbons in the air are 5 mg/m3 . Komineft's Department of Ecology has made theoretical calculations of maximum concentrations at ground level at the spill sites, based on a Russian GOST. These estimates exceed MPC by at least 2 orders of magnitude near the spill areas. However, considering the uncertainty and lack of agreement on the total volume of oil spilled, these calculations are not considered reliable at this time. 26. Hydrocarbon odors are pronounced in the vicinity of the spill sites, but have not been reported from population centers. Given the large volumes of standing oil at the spill sites and along the pipeline right-of-way, evaporative losses of hydrocarbon in the alea must have been significant.

27. Saline Waters, Oil Burning and Contaminated Soil Disposal. From an ecological perspective, it is important to consider that as much as 30-35 % of the product contained in this pipeline may be very saline production water. This produced water may have a profound impact on ecological resources in the contaminated areas. Produced salt water of this quantity and concentration will affect vegetation, fisheries, and wildlife throughout the region and may intrude into local surface waters and aquifers. The treatment of these waters through containment measures and by dispersion-dilution or flushing will be greatly complicated by the concomitant presence of large quantities of oil and by lack of access to specific sites. Bioremediation of contaminated oil sites will also be complicated by the presence of salty produced water. The produced saltv water is separated at a treatment plant about 10 kilometers north of Usinsk and returned by pipeline to the north for re-injection into the fields (although it seems that some water is also injected into wells in Usinsk). Leaks from the salt water pipeline are also common.

28. Impacts to lands associated with past burning of spilled hydrocarbons have not been quantified. Due to inappropriate guidelines for oil burning, these activities have burned nearby forest resources at many spill sites.

29. Several disposal sites for oil-contaminated soil which occupy a total of 7.52 ha, have been designated and permitted by the Usinsk administration, and contaminated soil is currently being deposited at these locations. Their suitability for short- and long-term containment needs to be confirmed.

C. Pipeline Overviewand Status

30. Petroleum exploration activities in the Usinsk region date back to the mid-1960s. The first oilfields were developed in the early 1970s, when commercial oil production commenced at the Usinsk and Vozey fields. Production in the region peaked in the early 1980s at some 19 million tons per annum (mta), but after that, a prolonged decline in production set in -- which continues to this day -- caused variously by natural depletion, suboptimal exploitation of reservoirs, and under-investment. This decline in production accelerated dramatically after 1991, shortly after the 200 millionth ton was produced (1990). The current production rate is approximately 7 mta from several thousand wells owned by Komineft and foreign joint ventures.

31. The 146 km oil trunkline, from Usinsk north to Kharyaga near the border with Nenets is comprised of three separate segments (the Southern Section, the Middle Section, and the Northern Section), constructed progressively from south to north as oil production progressed northward. The route of the pipeline system is represented in Map 2. The capacity of the trunkline system is approximately 220,000 barrels of fluid per day, although currently only 200,000 barrels of fluid per day (140,000 barrels of oil per day) are being transported. The pipeline designs appear to have been produced in accordance with the applicable Russian codes in effect at the time and appear to be generally satisfactory and complete with respect to most engineering issues. Although this trunk pipeline was originally designed to carry 'sales quality' crude oil (containing less than 2 percent water), increasing volumes of water and gas have entered the gathering lines, connector pipelines, and main trunk pipeline, so that the fluids now contain 30-35 percent water. Considerable gas also appears to exist in solution in the crude oil, with vapor pressures reported in the range of 6 kg/cm2 .

32. Due primarily to high chloride content, this produced water has led to substantial damage to the both the feeder and main trunklines due to internal corrosion. In 1989, damage due to internal corrosion of the trunkline was recognized as a significant problem, and Komineft commenced experimentation with injection of various corrosion inhibitors into the pipeline. Unfortunately these programs were never consistently implemented. External corrosion, particularly where high water tables existed, is also considered to be a problem. Under these conditions, without aggressive mitigation measures, pipe life is generally less than 5 years. 33. The most serious leaks from the Kharyaga-Usinsk trunkline have occurred in its Southern Section built in 1975 and comprised of 720 mm diameter pipe. After a typical progression of leaks had been documented in this section, starting in 1989, and including some serious but poorly-documented leaks in 1992, a veritable explosion of major leaks occurred there in August and September 1994. In Russia, this event is referred to by some as the "August Avalanche". The pipeline system operators and designers have both concluded that these leaks were caused by internal corrosion, probably due to erratic use of corrosion inhibitors over the last several years. It is also conceivable that a combination of internal and external corrosion may have contributed to this concentration of leak events. 34. It is believed conservative, and consistent with other pipelines exposed to severe internal and external corrosion, to consider the possibility that a number of pinhole leaks exist in addition to the 'hole flaws' reported. However, it is considered probable, that some other 'precipitating event' occurred that contributed to the 'August Avalanche'. One possible precipitating event may have resulted from one or a series of temporary blockages of the pipeline caused by the accumulation of waxy deposits within the 720 mm segment. This flow impediment could have resulted in the build-up of pressure behind the blockage, which could have caused a number of areas of broad deep internal metal loss to rupture, behind the temporary blockage. It is noted that if another 'precipitating event' was to occur prior to the replacement of the Middle Section of the pipeline, additional intensive pipeline leaks could occur.

35. Segments of the pipeline are seriously degraded and require immediate replacement. The oldest 58.6 km section of the pipeline, the "southern" section, was constructed in 1975 and is of 720 mm diameter. Approximately 47 km of this section has now been replaced with a 530 mm diameter pipeline. The remaining 12 km of 720 mm pipe is due for replacement shortly. The second or "middle" 49 km section was constructed in 1980 and is 530 mm in diameter. This section of the pipeline is also seriously weakened by internal and external corrosion. Replacement is only partially completed and should be finished on an urgent basis. The newest 38 km "northern" section was built in 1986 and is 325 mm in diameter. This section of the pipeline has not yet experienced the high rate of occurrence of leaks as the southern and middle sections. 36. The "southern" section of the line has suffered the most. It has not only been in service the longest but it has been exposed to the harshest environment. Because the diameter of this, the oldest, section is the largest and the flow the slowest, water has tended to pool. Hydraulic analysis indicates that laminar flow was probably present in this section. The water would tend to separate out and sit on the bottom of the pipe. Unfortunately, pigging5 of this section was not possible and nothing was done to remove this corrosive solution.

37. The "middle" section has been exposed to similar elements. This section has not been in service for as long a time and because of the smaller diameter not as much water will have been allowedto interact with the bottom of the pipe. Althoughthis section should not be in as bad a conditionas the older, "southern"section, recent increases in leaks would appear to indicate that this section is rapidly approachinga critical state.

38. The "northern" section has the smallestdiameter and has the smallest oil flow as the production fields tend to be downstream of this section. These fields are also more recent and consequentiallyhave less produced water. However, the oil in this section has the highest temperaturewhich contributesto corrosion. There is substantialpermafrost in this area and, as a result, a large portion of the pipeline is above ground supportedby large diameter caissons or suspensionstructures.

39. The pipeline has also suffered from insufficientpreventative maintenance and in some instancesfrom low qualityconstruction. Initial constructionof the line did not provide for adequatecoating, and cathodicprotection has not been applied. The quality of weldingmay not conform to standards, based on observations of recent construction. Proper construction techniqueswere not always applied and consequentialdamage to the line is suspected. Changes to pipe direction have been achieved through miter bends rather than bending the pipe in a proper bendingmachine. Thus the existingpipe suffers from both internal and external corrosion as well as mechanicaldefects.

40. Much of the crude oil shipped is high sulfur, high paraffin, with correspondingly high pour points. All grades of crude oils, ranging from 16 to 34 API, are commingledin the pipeline. The pour point of the commingledcrude appears to be approximatelyplus 15 degrees C. That is, with air temperaturesdropping as low as minus 40 degrees C, or more, and near- surface soil temperaturesof approximately0 degrees C, productionand transport of the oil can only be arrested for a brief duration, particularly in the winter, before the oil in the wells, gathering lines, connector lines, and main trunk pipeline begins to solidify. If complete solidification occurred, wells and pipelines could require abandonment, overpressuring, or expensiveand risky measures to effect restart. Continuationof oil production is also important for providing associatedgas for use in the heatingplants serving the Usinsk region. Therefore, there has been a very strong operational incentive in recent years, as well as the immediate financialone (gross revenue losses from pipeline outage would be approximately$2.0 million per day), to maintain continuousoil flow in the system.

5/ Instruments run through pipelines to inspect internal integrity. - 10 -

D. Komineft Spill Responseand Pipeline RemediationMeasures to Date

41. Spill Response.Nine sites have been identifiedfor cleanupactivities by Komineft, totaling about 70 hectares. Different Russian cleanup contractors have been working at each site. Komineft's response strategyhas been to containthe spilled oil at the spill sites through the constructionof perimeter dikes. So-calledsyphon dams were constructed to contain oil that had migrated off-site into the main drainage streams. Cleanup activities with local contractors and Kominefthave been monitoredand as of March 6 1995, Komineftstate that 25% of the affected area has been cleaned up. Unfortunately, criteria for cleanup have not been defined in the reporting schedule. Each of the nine sites is briefly described below.

Site 1 - This southernmost spill area consists of the stream channels of Besimiyanni Creek. It includes8 hectares (ha) of oil. Two syphon dams were built to accommodate a flow of 24 m3/sec, as per calculationsof the Komi HydrologicalInstitute. About 50 tons of oil have been recovered to date. Approximately 150 tons of oil remain in the blocked areas of the creek. Komineft considers this to be at high risk because of the amount of oil in the active stream channel that could be readily released during spring thaw.

Site 2 - This site consists of two oiled streams, totaling 3 ha. Three sections of these streams were oiled. One has been cleaned to date. The other two are scheduled for cleanup by April 1995.

Site 3 - This site is close to the KhatayakhaRiver. Kominefthas cleaned 5 of the 6 ha of oiled area. There is no apparent danger of future releases from this site.

Site 4 -This 12 ha site is consideredby Komineft to be the most dangerous site becauseof the proximityof large amounts of oil to a stream that drains directly into the Kolva River. This is the site of the recent large spill on January 23, 1995. Russian surveyors estimated that there were 16,000 tons of oil present before the most recent spill.

Site 5 - This is the largest site, totaling 30 ha. It is estimated that 90% of the spilled oil is located at this site. Komineft has built dikes around the lower area, but is planning to build dikes around the entire site with outer perimeter cut-off ditches to redirect run-off water. Komineft is using drag lines to remove the oil and snow surface layer which is being transferred to temporary pits adjacentto the site where the oil is heated and processed for re-injection into the pipeline. Recovery of oil is low because of the limited size of the facility and extremely rudimentarynature of the equipment. Komineft estimated that 8,000 tons were spilledat this site, of which it has recovered 1,000 tons to date. However, others have estimated 68,000 tons at this site. If the oil in the 30 ha site is uniformly O.meterthick (1 foot), the site would contain 81,000 tons.

Site 6 - This site totals about 3 ha and consists of an upland area adjacent to the pipeline and oiled stream banks along Palnik-ShorCreek. Large amountsof oil held behindcontainment structures built across the creek were released when the structures failedduring the fall 1994flood. The containmentstructures are being - 11 - re-built. Most of the oil on the upland area has been mechanicallyremoved and transported to a disposal pit.

Site 7 - This 2.5 ha site is located on DibozhIsland on the Usa River immediately downstream of the confluenceof the Usa and Kolva rivers. Activities to date include construction of an access road.

Site 8 - Oil stranded on 5.1 ha of riparian shoreline near Kolva Village. Various oil cleanup teams combined to remove the oil in October 1994. The oil is stabilized, but more work is still needed to complete the cleanup of this site.

Site 9 - Oil was also stranded on 1 ha of Kolva River shoreline, about 8 km upstream from Kolva Village. This site has been completely cleaned.

42. The oil recovery strategy has been to collect free-floatingoil for processing and re-injection into the pipeline. Grossly contaminatedmaterials have been mechanicallyremoved for temporary storage and/or disposal in landfills. Their strategy includes in-situ burning, incinerationof oily solids, bioremediationof oiled residues, and restoration of the sites. As of March 1995, sites 2, 3, 7, 8, and 9 were reported as havingbeen cleaned or stabilized, whereas sites 1, 4, 5,and 6 were identifiedas being of high priority for emergencystabilization and oil removal prior to spring runoff. Komineft has reportedly not paid any of the local cleanup contractors for the work done since July 1994. In spite of this, the local contractors have continuedto work on the sites, although at a reduced rate.

43. PipelineRemediation. Replacementof the existing pipeline with a new 530 mm line has been planned and under constructionsince 1992. However, funding constraints have severely limited progress. Inadequate capital and operating budgets have also delayed installation of new water removal facilities and the application of inhibitors to reduce the corrosive impactsof the water. The initial phase of the replacementline was completedand tied into the southern 720 mm portion of the system m late January 1995 on an acceleratedbasis due to the oil spills. Approximately12 km of the old and very badly corroded 720 mm is still in service. Construction of the replacement of the middle section is about 60% complete, in various stages of completion. The more southerly sections are the closest to completion, with the first 26 km averaging86% complete. The northern portion of this middle section is mostly in the earlier stages of completion.

E. Requirement for Assistance

44. Containmentand cleanupefforts to date have been wholly inadequateto cope with the emergency. The level of resources and technology applied will be unable to prevent the ecologicaldisaster which will result from large scale release of oil which has resulted from the current and likely future spills. The Government of Russia and Komineft lack the ability to quickly mobilizethe needed resourcesto intensifythe emergencyoperations and have requested Bank assistance to help contain and cleanupthe oil and to enact essential repairs to the pipeline to ensure safe and reliable operation in the future. As with other Russian oil producers Komineft's financial position has been severely constrained by low domestic oil prices, non- paymentsby domesticcustomers and high taxes over the past three years. These problemshave been compoundedby the loss of revenues and additional expenses resulting from the pipeline - 12 - failures and oil spills. Komineft is thus unable to effectively finance an adequate emergency response.

II. BANK RESPONSE AND STRATEGY A. Bank Responseand Strategy

45. The Komi oil spill situation was discussed with the Government during Mr. Preston's visit to Russia in November 1994and resulted in an offer of Bank assistanceif Russian technicaland financial resourcesproved insufficient. Governmentindicated in late January 1995 that Komineft and the Government could not deal with this environmental disaster without external assistance. Specifically:(i) they lacked the technicaland financialresources to complete the cleanup in time to prevent an ecologicaldisaster; and, (ii) other donors have made it clear that they will not assist Russia without Bank involvement. In response to a letter Minister from Prime Chernomyrdin on January 23, 1995 the Bank agreed to assist Russia Emergency through an Loan since an urgent response is vital, the environmental impact of substantial the spill is and, without immediate action, the situation is likely to deteriorate, with spills highly additional likely. The EBRD agreed to co-finance the project on a joint financingbasis. proposed Project The is justified on the basis of the severity of the present and potential environmentaldisaster, as well as the need to continue oil productionin a sustainableway in the Komi region. In addition, this emergencyoperation should provide a vehicle for studying and introducingoil spill mitigationmeasures in Russia's pipeline network. 46. To ensure that Governmentwas fully committedto the proposedProject, however, the Bank indicated that it would proceed only if the Government and Komineft took engage steps to an international managementcontractor capable of managing the cleanup Government and if the establisheda special account and deposited US$12 million for initial payments this contractor to that would be required while World Bank/EBRDloans were processed. steps These have been undertaken by Komineft and the Government. The Bank organized assistance technical to assist Komineft in project preparation through Canadian grant funding engineering of and environmental studies and through USAID funding of an oil expert. spill planning

III. DETAILED PROJECT DESCRIPTION

A. Spill Containment and Cleanup Measures 47. Spill containmentand gross oil removal activities, as agreed between Komineft and the International ManagementContractor (IMC), are comprised of two distinct phases: Phase I, with the objective of containingthe largest volume of oil and protection of sensitive resources; and Phase II, with the objective of removing the largest volume of mobile oil. Thereafter work will focus on site remediation. The work to be conductedunder each of these phases is outlined below. - 13 - 48. Phase I: Spill Containment:will be conductedprior to and during spring thaw, with the primary objectiveof containmentand stabilizationof the oil to minimizefurther off-site release into the Kolva River and beyond into the Usa and Pechora Rivers. Activities will focus on four known spill sites where the oil is most likely to be released during spring runoff. The initialwork is to includesite assessment,construction of access roads, reinforcementof existing dikes and constructionof new dikes and other structures for containmentof the oil and control of water flow into and out of the diked areas, recovery and processing of oil where possible, and pre-staging of equipment prior to thaw for recovery of oil that is released during flooding conditions. Equipment will be pre-staged along the Kolva River as well. Once spring thaw commences,the IMC will deploy containmentbooms and other structures designedto contain and remove floatingoil from watercoursesto prevent oil release to the Kolva River and beyond. On-water containmentand recovery operations will be implemented as conditions permit; in some cases it will be possible only to track oil slicks and notify downstreamusers. Although containmentof the oil is the primary focus, oil recovery will also be conducted as the oil is released during snow melting and runoff.

49. Sites 4 and 5 may require particular attentionwith respect to dike constructionto contain the spring runoff and direct it to the flow-through structures, as well as to keep the Kolva River back-up waters from flooding into the contaminatedspill areas. Data are being analyzedto determinethe appropriatedesign elevationfor the crest of the perimeter dikes at Site 4 within the spring flood zone of the Kolva River. This dike has reportedly been constructed with a sand core and a clay face on each side slope. In principle this structure appears to be well positionedand designed; however, the quality of constructionis unknown. Certainly, the side slopes are relatively steep and appear to be poorly compacted.

50. It should be noted that, in spite of the best efforts at containment,oil is expected to be released into the Kolva River and downstreamvia the Usa into the Pechora River. There is a high likelihood that flood waters, ice, and debris will cause the existing containment structures at the known sites to fail. Furthermore, there may be new oil spills that went undetectedover the winter or will occur during Phase I work. The day-to-day priorities will necessarily change frequently in response to changingphysical conditionsin the project area.

51. To reduce the impacts of oil releases from the sites during flooding, booms will be deployed at various points downstream of the sites to attempt containmentand recovery. Boomswill be placed up- and downstreamof earthenstructures to divert floatingoil to collection areas. Boomswill be positionedat the mouths of streams, where they enter the Kolva River or downstream lakes. Booms will be staged for deploymentin the Kolva River and at natural collectionpoints along the Usa and Pechora rivers to protect sensitivesites such as water intakes and key floodplainpastures if significant amounts of oil reach these areas.

52. As a further responsemeasure, the Contractorwill prepare stockpilesof additional sand and constructionequipment on hand at strategic locations so that critical structures can be upgraded or repaired as required during breakup. Followingthe cessation of the spring runoff (late July), all structures will be assessedas to their stability for subsequentcontainment (or as to why they failed). Prior to freeze-up (snow cover), plans will be made for any dike strengtheningor constructionof new structures required to contain the spring 1996 runoff. - 14 -

53. Phase II: Gross Oil Removal: will be conducted during the summer, with the primary objective of removing as much potentially mobile oil as possible at the existing sites. Thus, those sites with the greatest amount of mobile oil will be the highest priority. It is important to note that one site is estimated to contain 90 percent of the total known amount of oil spilled. Spring floods can peak as late as June; therefore, Phase II will include containment and recovery of oil released to watercourses, including the Kolva River and beyond.

54. Follow-up site assessments will be conducted to determine the distribution and amount of oil remaining after spring floods. Cleanup efforts will attempt to remove oil stranded along stream banks (by flushing) and behind containment structures during high water conditions. Significant amounts of oiled peat, soils, and debris will remain after the completion of gross oil removal at some sites, thus it may be necessary to leave some containment structures in place for longer-term oil containment and treatment that is outside the scope of Phases I and II. Before the IMC demobilizes under Phase II, selected containment structures will be identified for stabilization.

55. Cleanup and Disposal Methods. The methods proposed for use during Phases I and II include the construction of civil works for oil containment, oil removal using excavators, skimmers, pumps, and water-borne oil recovery equipment, re-injection of recovered oil into the pipeline where possible, and treatment and disposal of oily wastes by landfill, landfarming, or incineration. These are mostly conventional oil spill cleanup methods with the exception of the scale of the civil works to be constructed and the extensive reliance on earthen structures for oil containment. There is great concern that the earthen structures may fail during the extreme high water and flow conditions of spring flood, thus their proper construction and maintenance is of paramount importance. Specialists subcontracted to the IMC are being consulted on the issues of water volumes, flood levels, and construction materials to improve the design and performance of containment structures. Even under the best conditions, significant failure in the containment of the oil is anticipated. Thus, plans include fall-back strategies for oil containment and diversion downstream of these structures.

56. Most of the recovered oil will be transported to treatment areas to be processed for re-injection into the pipeline. Other oily wastes, including treatment sludges, oily sediments and debris, and sorbent materials will be stored and processed for final disposal. Options for disposal include landfill, solidification, and incineration. However, only landfills have been approved for use at this stage.

57. In-situ burning of oil is a non-conventional technique that is proposed for use under specific applications. In-situ burning can be a highly effective method of oil removal, with high removal rates for oil floating on the water surface. Permits for in-situ burning will be obtained through an expedited environmental approval process. As part of the approval process, a test burn will be conducted in April 1995 to demonstrate the effectiveness of this technique and develop guidelines for conditions of use and establishment of appropriate safety zones to protect human health. Recently developed guidelines for use of in-situ burning in Alaska will be adapted for use on this Project.

58. For oil residues that cannot be reinjected into the pipeline and which cannot be burned, it is proposed to dispose of them in secure landfills. Seven sites have been identified and surveyed by Komineft and licenses have been issued by the local authority for this purpose. - 15 -

Since the contaminated materials contain large amounts of peat and organic matter which act as natural physical binders, the amount of oil leaching from such material is reduced, but not eliminated. It is still necessary to prevent leaching of oil from the disposal sites through the use of impervious lining material such as clay or synthetic liners, which will not degrade on contact with oil. Once filled with oil contaminated residues, the sites will be covered with plastic liners and soil which will then be seeded. If necessary, provision will also be made for extraction and collection of leachate from within the disposal area and cutoff trenches will be constructed to divert any runoff water away from the disposal site. Monitoring wells will be constructed at each of the land disposal sites to ensure that ground waters are not being contaminated.

59. At the termination of Phase II activities, it is likely that significant amounts of oil will remain at some sites. Cleanup of these oil residues will be needed to complete site remediation and restoration. Complete removal of oil residues using conventional mechanical techniques will be extremely costly and result in extensive physical disruption of habitats for which restoration is both difficult and long-term. Thus, bioremediation, which is an acceleration of the natural process of oil degradation by microbial activity, is one promising in-situ technique that will be evaluated as a long-term strategy for Phase III oil cleanup and remediation. Bioremediation was shown to be effective even during the short summer period at the Exxon Valdez spill site in Alaska. Because full-scale bioremediation will not be attempted until 1996, once gross oil removal has been completed, an applied research program will be conducted in 1995 to evaluate the effectiveness of bioremediation and develop operational guidelines for use under these spill conditions. Revegetation techniques appropriate to subarctic conditions will also be studied in 1995, for application in 1996 and 1997. This issue is discussed further below.

60. Emergency Social Expenditures. The Kolva, Usa, and Pechora Rivers are important as drinking water supplies and fishery habitat, and the floodplains are important grazing areas. The environmental priority will be to keep oil out of the rivers. Thus, containment and removal of oil from sites with the highest amount of mobile oil would provide the greatest protection. In order to provide additional protection to the eight most vulnerable downstream communities, water wells will be constructed and feed supplies for cows and sheep will be transported close to the communities. Other priority social expenditures are being identified through a continuing community consultation process.

61. Contingency Sub-Projects and Phase III Activities. The current oil spill cleanup plan and costs are focused on containment and recovery of oil from four priority sites, with allowance for deployment of booms in the Kolva River in the event of off-site release of oil. Additional funds may be needed for unexpected events such as a new leak of a large amount of oil. Moreover, provision for activities planned for the Phase III cleanup of oil residues after the gross oil removal of Phase II is completed is important. During Project preparation, additional activities were identified, which may be necessary to protect sensitive natural resources and mitigate environmental and social impacts. Since such activities are considered likely, substantial physical contingencies have been included in the Project cost. The five priority activities that have been identified are outlined below.

(i) Emergency Response Capability for Oil Releases Downstream of the Kolva River. The current response plan requires the IMC to plan for, pre-stage equipment, and respond to oil releases to the Kolva River only. In fact, it is likely that there will also be major oil releases to the Usa and Pechora Rivers. Activities may include: - 16 -

o Monitoringfor and collectionof floatingoil slicks in the Usa and Pechora Rivers during spring and fall of 1995; o Protectionof water intakes and riparian pastures threatenedby oil slicks; o Removal of oil stranded along the river banks in priority areas; and o Mitigation of impacts directly resulting from actual oil contaminationin the affected communities (emergency water supplies, boat cleaning, replacementof fouled fishing gear, etc.).

Labor and equipmentneed to be available for these activities, without having to redeploythem from on-going work sites. Of these activities,monitoring of oil in the Usa and Pechora Rivers, pre-staging/pre-deploymentof booms to protect water intakes, and planning for emergency water supplies will need to begin during Phase I, as soon as the spring thaw begins. The other activities will only be needed if large amounts of oil contaminatedownstream areas.

(ii) EmergencyResponse to and Cleanupof New Spillsfrom the Pipeline. There is no allowancein the current plan and budget for the IMC to provide equipment and workers for emergency response in the event of a new leak from the pipeline. The IMC could provide emergency response for new spills by redeploying resources from existing work sites, but this would cause a delay in the projected timeline to complete Phases I and II. Hence, it may be preferable to have the trained, on-site teams provide emergencycontainment in the event of new spills, with the ability to bring in new teams and equipment to conduct the necessary cleanup. Subsequentto the major spills of the second and third quarters of 1994, there have been numerous small spills and at least one new large spill in 1995. Thus, it is likely that there will be more priority sites for stabilizationand cleanup beyondthe four identifiedin the current scope of work. Additionalresources will be needed to conduct this work.

(iii) Stabilizationand Maintenanceof Oil ContainmentStructures. At the completion of Phase II cleanup, significantamounts of oil may remain at some sites. Because of the size and degree of oiling at sites 4 and 5, it is thought that some of the containment structures at these sites will be needed for longer-term oil containmentand recovery in 1996. These structures may need to be stabilizedto survive fall flooding conditions, and any damage will have to be repaired to prepare them for the spring 1996runoff.

(iv) Winter Maintenance and Security of Spill Response Equipment. Most of the specialized oil spill response equipment used during Phases I and II will be cleaned and turned over to Komineft at the completionof Phase II. This activity will cover the costs of equipment storage, maintenance, and security over the winter, to ensure that it is available and functionalfor use in spill response efforts in 1996.

(v) Phase III Cleanup and Remedial Activities. Current oil spill containment and recovery efforts at the oil spill sites along the Komineftpipeline are designedto remove gross concentrationsof potentiallymobile oil. At the termination of Phase II activities, significantamounts of heavily oiled sedimentsmay remain at some - 17 - sites. Cleanup of these oil residues will be needed to complete site remediation and restoration. Moreover, there may be a need to respond to releases of oil into the Kolva River and further downstreamduring the 1996 spring floods. Phase III cleanup and remediationactivities may include:

o Pre-stagingand operationof equipmentto contain and recover oil released to the streams and rivers during spring floods in 1996; o Developingand implementingmechanical recovery efforts where needed to remove heavily oiled residues; o Site preparationand implementationof additionalcleanup strategies, such as bioremediation; o Site restoration, such as re-grading, seeding, and fertilizing for revegetation. It is estimated that 70 hectares will need some degree of restoration activities in 1996 and in 1997; and o Technical support and monitoringof effects and effectiveness of cleanup and restoration activities to be conductedduring Phase III.

(vi) Social Expenditures. Additional funding may be required for mitigating the impacts of the oil spill on affected communitiesduring Phase III.

62. Costsand ImplementationSchedule. Table 1 shows containmentand cleanupcosts by phase and activity, Table 2 summarizesexpenditures by quarter over the Project life and Table 3 highlightsthe key implementationtasks and dates. The containmentand cleanup costs includeapproximately US$ 5 million in expendituresalready undertakenby Komineftwhich will not be financedby the World Bank or the EBRD. - 18 -

Table 1 Contaimmentand Cleanup Costs by Activity (US$'000)' Activity Local Costs Foreign Costs Total CoStSb A. Containment and Cleanup 16,000 34,000 50,000

Site 1 1,500 3,500 5,000

Site 4 4,500 9,050 13,550 Site 5 6,000 17,950 23,950 Site 6 1,500 3,500 5,000 Site 2a soo s00 Site 3a 500 500 Site 7a 500 500 Site 8a 500 500 Site 9a 500 500 B. Social Expenditures 1,200 800 2,000

C. Environmental 3,000 1,000 4,000 Management & Monitoring

D. Contract Monitoring 300 300

E. Contingency Sub-Projectsc 6,700 11,600 18,300 Downstream Oil 500 1,000 1,500

New Spills 500 1,000 1,500

Stabilization of Structures 600 900 1,500

Winter Maintenance 200 300 500 Phase III Cleanup 3,600 7,800 11,400

Social Expenditures 1,300 600 1,900 GRAND TOTAL 26,900 47,700 74,600

Sites have been reported as cleaned in 1994; no further cleanup is planned under current pruject scopeand costs. However,these sites will be assessed by the IMC in 1995. Figures show previous costs incurred by Komineft. b Costs do not include local duties and taxes. The majority of contingencysub-proiects are expected to be undertaken by the IMC. - 19 -

Table 2 Containment and Cleanup Costs by Quarter I -______- (US$'OOO) Quarter Contain Social Environ. Contract Sub-Total Contingency Grand and Expenditures Management/ Monitoring Sub-Projects Total Cleanup Monitoring l lQ95 7,335 0 0 50 7,385 0 7,385 2Q95 21,550 750 600 100 23,000 0 23,000

3Q95 18,115 1,000 800 100 20,015 0 20,015

4Q95 3,000 250 400 50 3,700 0 3,700 Total 50,000 2,000 1,800 300 54,100 0 54,100 1995 lQ96 200 200 1,670 1,870

2Q96 800 800 1,860 2,660

3Q96 600 600 7,120 7,720

4Q96 200 200 400 600 Total 0 0 1,800 0 1,800 11,050 12,850 1996 1Q97 200 200 1,722 1,922

2Q97 200 200 3,050 3,250 3Q97 0 2,478 2,478 4Q97 0 0 0

Total 0 0 400 0 400 7,250 7,650 1997 Grand 50,000 2,000 4,000 300 56,300 18,300 74,600 Total

[Table 3 Implementation Schedule for Containment and Cleanup Item Description Start Date Finish Date A IMC 1. Contract Signature 13 March 1995 2. Phase 1 (1995) 13 March 1995 1 June 1995 3. Phase 11(1995) 1 June 1995 15 Nov. 1995 B Social Expenditures 1 March 1995 C EnvironmentalManagement 1 May 1995 D Contract Monitoring 1 March 1995 - 20 - B. Pipeline Rehabilitation

63. Notwithstanding the pipeline replacements which have been completed to date, the Kharyaga-Usinsk pipeline remains in very poor condition, with significant risk of further failures. Each day the pipeline continues to operate, the risk of spills increases. However, as continued operation of the pipeline is essential to the economic survival of Komineft and its joint venture partners, prompt solutions to reduce this risk are critical. The risk of failure can be attributed to three potential causes: i) corrosion, ii) mechanical, and iii) operating practices risk. Failure from corrosion is currently the most important risk to the system. The risk of mechanical failure of material or components is significantly less than the corrosion risk but is still unacceptably high. Available facilities (or lack thereof) and ineffective operating procedures also contribute to increasing the operating risk beyond acceptable limits.

64. The proposed program of pipeline rehabilitation under the Project includes: (i) immediate replacement of the remaining corroded portions of the middle and southern sections of pipeline; (ii) repair or replacement of sections of pipe at risk of mechanical failure identified through a program of integrity testing; (iii) investments to improve the operating regime, such as water removal facilities, and installation of other equipment to improve operating and maintenance practices and thereby reduce the risk of failure; and (iv) provision of emergency response equipment. Optimization studies of existing pipeline operations will also be undertaken, as will strategic studies to determine future transport options.

65. The Project as outlined should help establish a pipeline that has an acceptable and maintainable level of risk. Because of the limited amount of data available to formulate this Project it is expected that the scope of this program will change over time. The amount of funds estimated to improve the mechanical condition of the line is subject to a high degree of variation. As such, a higher than usual level of physical contingencies has been incorporated into the Project plans.

66. Emergency Replacement of Middle and Upper Southern Sections of the Pipeline. Significant risk of another major spill can be removed by completing the replacement of the remaining 12 km of the badly corroded 720 mm diameter line in the southern section of the pipeline as quickly as possible. To accomplish this, the first 26 km of replacement of the middle section must also be completed and tied-in to the existing line. This involves weighting and backfilling 5 km of pipe and installing a short lateral. These critical works should be completed prior to the spring thaw.

67. Completion of replacement of the other parts of the 50 km middle section of the pipeline is also important. Approximately 30 km of pipeline, in various stages of completion, remains to be installed. Required works range from completion of pipe wrapping and trenching in some sections to procurement of pipe and construction in other sections. Because of the swampy conditions in the area much of the construction can only take place during the winter when the ground is frozen. As of mid-March 1995, only 4 to 8 weeks before breakup remain in the construction window. The only contractor that could possibly complete the critical sections in that time frame is the local contractor that was constructing the middle section replacement until funding ran out. The alternative is to wait until the next winter construction season (late November 1995) which would mean a delay of approximately 7 months before completing replacement of the middle section and remaining parts of the southern section of the pipeline. - 21 - The World Bank and EBRD have agreed that Komineftshould engage the current contractor to complete, on an emergencybasis, the remaining work required to replace the middle section of the pipeline and the last 12 km of the 720 mm southern section.

68. This construction will be monitored and inspected by an international firm to provide for the best qualityconstruction possible under the conditions. In addition, the section will be hydrotestedto provide for some remediationof serious mechanicaldefects. The contract with the local contractor will be structured to provide for rigorous quality and progress checks with contract termination provided for if the targets are not met.

69. Kominefthas obtainedbridge financingfor the constructionworks until the Bank loan is effective. This commercialbank loan will be secured by pledges of export sales.

70. PipelineIntegrity Assessment, Remediation and OperationalImprovements. After completionof replacementof the middle section of the pipeline the highest risks of failure will have been removed. However, the second element of unacceptablyhigh risk on this line is mechanicalfailure. The newly constructed southern and middle sections of the line and the northern portion of the old line may have many mechanicaldefects that need to be removed or repaired. Installationof the replacementsections of the line and the remediationof this line to acceptable standards will provide a good base for improving the level of line integrity. However, it is also importantto undertakeimprovement in the operationalfacilities and practices used on the line so that the situations which led to past failures are not repeated.

71. The remediationto a lower and hopefullyacceptable level of risk is possibleusing currently available pipeline maintenancetechnology. A technical audit will be performed to identifyin detail the type and locationof defects. This audit will be performedby an engineering and inspectionservice firm. Both the internal and external conditionof the line will be examined by remotemeans to determine areas of weakness.Priority will be given to the worst defects, and the ones posing the most threat will be examinedand repaired. The proposed remediationwork will be contractedand will be completedto acceptablestandards with the appropriateinspection performed.

72. Immediateoperational improvements will be achievedthrough completionof two partially constructedwater removal facilities (KSP-74and DNS-1) that are in various stages of completion. Completionof these facilitieswill reduce the water content of the fluids transported in the Kharyaga-Usinskpipeline down to 6%. Corrosion inhibiting chemicals will also be provided, if required. Because of the decrease in the water content, the amount of these chemicalswill be minimized. The project will provide facilitiesthat will allow for piggingtools to be introduced into the line which will allow for cleaning of the line and the introductionof smart pigs to detect and monitor corrosion.

73. Equipment required to conduct pipeline maintenance in a safe and efficient manner, and which will provide for repairs to improve the quality of the line, will be provided. An appropriateand effectivepipeline maintenanceprogram is the cornerstone in assessing and maintainingthe integrity of the pipeline. This equipment will include "stopple equipment"that will allow for a continuedbut reduced flow of crude while maintenanceis taking place. This will solve the problem of maintenancebeing deferred because the line could not be shut down as a - 22 -

result of pour point considerations.Additional equipment and supplies, suited to the terrain and conditions, will be providedunder the Project.

74. To prevent failure due to overpressure of the line a pressure relief facility will be provided. The exact configurationof this will be determinedthrough hydraulicanalysis. In the course of the analysis appropriate methods for metering, control of the pipeline and leak detectionwill be determined. This will improvepipeline control and provide informationneeded to prevent pipeline failures and detect failures should they occur.

75. Emergency Response Equipment. Provision of emergency response equipment and training to allow Komineft to respond promptly and effectively to future emergencies is an importantcomponent of the Project.

76. Pipeline Operational and Strategic Studies. In addition to the pipeline investments, the proposed Project provides for studies of current and future pipeline operationsto maximize the useful life of the existing pipeline, and for feasibilitystudies of future oil transport options, includinga possible new dry pipeline, in the region. The long term viability of the Kharyaga- Usinskpipeline is dependentnot only on the qualityof remediationinvestments undertaken, but also on changing the operational practices of the pipeline and the gathering systems. It is proposed that studies be undertaken to review the operating practices of the pipeline and gathering lines in order to develop guidelines that will provide for the safe and efficient operationof the line. Notwithstandingthe proposed improvementsof the existing line, Komineft believesthat developmentof a new dry pipeline will be required shortly, partly to accommodate production from new field developmentsin the region. Studies are proposed to evaluate the strategic options for future pipeline developments in the region and carry out associated feasibility studies. The studies will require extensive participation on the part of Komineft personnel and Komineft's local engineeringinstitute.

77. Costs and Implementation Schedule. Table 4 shows pipeline rehabilitation costs by activity, Table 5 indicates expenditures by quarter over the Project life and Table 6 summarizesthe key implementationtasks and dates. Costs for replacementof the middle and southern sections of the pipeline include approximatelyUS$ 10 million in expendituresalready undertakenby Komineftfor emergencyreplacement of the southern sectionof the pipeline which will not be financed by the World Bank or the EBRD. - 23 -

Table 4 Pipeline Rehabilitation Costs by Activity (US$'000)"

Activity Foreign Costs Local Costs Sub-Total Contingencies Total Cost

A. Completion of the Southern and 0 26,200 26,200 3,750 29,950 Middle Sections

1. Completion of the middle prntion of the 0 16,000 16,000 3,750 19,750 pipeline from km 27 to km 90 plus laterals

2. Reptlaceme of SouthernSection of 0 10,200 10,200 0 10,200 pipeline (previousKomnineft expenditures)

B. Engineering and Inspection 3,200 800 4,000 300 4,300

1. Comtruction Inspectionand Control 1,150 1,150 75 1,225

2. Pipeline Integrity Assessment 2,050 800 2,850 225 3,075

C. Pipeline and Facilities Maint. 16,700 0 16,700 1,750 18,450

1. PipelineRehabilitation' 10,000 10,000 1,100 11,100

2. Valve andAncillary EquipmentReptar 950 950 75 1,025

3. Water Removal Facilities 2,000 2,000 250 2,250

4. Other Facilities 3,750 3,750 325 4,075

D. Material and Equipment 5,300 0 5,300 500 5,800

1. EmergencyResponse Equipmnt 3,400 3,400 300 3,700

2. Other Equipment 1,500 1,500 150 1,650

3. Corrsion-inhibiting Chemicals 400 400 50 450

E. Pipeline Strategy Studies, 5,000 0 5,000 0 5,000 including Expansion Alternatives

1. Studies 5,000 5,000 5,000

TOTAL2 30,200 27,000 57,200 6,300 63,500

I This amount is based on 400 cut-outs at a cost of $25,000 each over the total 146 krn pipeline.

2 Project costs do not include import duties or VAT. - 24 -

Table 5 Pipeline Rehabilitation Costs by Quarter (by Foreign and Local) (US$ '000)

Quarter Foreign Costs Local Costs Contingencies Grand Total lQ95 0 11,550 0 11,550 2Q95 1,000 7,621 0 8,621 3Q95 2,000 6,464 0 8,464 4Q95 6,301 75 405 6,781 Total 1995 9,301 25,710 405 35,416 1Q96 5,188 690 680 6,558 2Q96 4,709 200 1,788 6,697 3Q96 3,703 200 1,445 5,348 4Q96 4,150 200 616 4,966 Total 1996 17,750 1,290 4,529 23,569 1Q97 2,296 389 2,685 2Q97 353 677 1,030 3Q97 500 300 800 Total 1997 3,149 0 1,366 4,515 Grand Total 30,200 27,000 6,300 63,500 - 25 -

Table 6 ImplemnentationSchedule for Pipeline Rehabilitation

Item Description Start Date Finish Date

A Construction

1. Completion of the Middle Section from March 1995 August 1995 km 27 to km 90 plus laterals 2. Construction Inspection and Control March 1995 August 1995

B Inspection and Engineering l 1. Pipeline Integrity Assessment May 1995 December 1995

2. Operational System Study July 1995 March 1996

C Pipeline and Facilities Remediation 1. Repair and Rehabilitation November 1995 June 1997 2. Pressure Relief Facilities April 1996 December 1996

3. Water Removal Facilities April 1995 January 1996 4. Metering and Instrumentation January 1996 June 1996

5. Supervisory Control and Data April 1996 June 1997 Acquisition 6. Leak Detection April 1997 June 1997

7. Corrosion Inhibiting Chemicals October 1995 January 1996

8. Technical Assistance and Training March 1996 September 1996

D Emergency Response Preparation 1. Equipment and Training October 1995 December 1996

E Pipeline Strategy Studies (including Expansion July 1995 April 1997 Alternatives) I __ - 26 -

C. TechnicalAssistance

78. Environmental and Socio-Economic Management and Monitoring of the Clean- Up. The Project will include technical assistance to strengthen and improve institutional capacity to manage activities necessary to mitigate against the effects of the spilled oil. The technical assistance has four major sub-components: (i) environmental and socio-economic advisors to assist Komineft in spill management and undertaking related studies; (ii) implementation of environmental monitoring by local institutes; (iii) studies to evaluate the technical and economic feasibility of cleanup through bioremediation and revegetation; and (iv) public consultations, information and participation. An international environmental consultant will be responsible to manage and implement these sub-components the majority of which will be undertaken by Russian specialists. The total cost of these services is estimated to be US$ 4 million. Each sub- component is outlined below.

79. Technical assistance will be provided to Komineft in order to ensure that the critical phases of containment and cleanup operations are effectively carried out. Technical advisors, both foreign and local, will work on site directly with the IMC and with Russian institutes which will be sub-contracted to carry out specialized studies. The following six technical advisors are envisioned: (i) oil spill operations advisor; (ii) civil engineering/geotechnical advisor; (iii) socio-economic advisor; (iv) environmental monitoring advisor; (v) bioremediation and revegetation advisor; and (vi) environmental/project management advisor. The general role for each of the advisors is to provide oversight supervision on the effectiveness, goals, and quality of cleanup work planned by the IMC. They will also train project scientists and assist in the design of scientific studies on environmental monitoring of the effects of the spilled oil, which will be carried out by Russian scientific institutes, with oversight monitoring being the responsibility of government environmental agencies.

80. As part of its assignment, the international environmental consultant will manage and assist in the supervision and design of the various environmental monitoring activities. The overall objective of monitoring will be to assure protection of human health and protection of priority environmental resources, including resource harvesting and animal husbandry activities. The field environmental monitoring will be carried out by scientific personnel, under multi-year sub-contracts, either to scientific institutes or individuals for specific sub-activities.

81. Specialized studies on the limitations, effectiveness and costs for bioremediation and revegetation measures will be undertaken to develop low-cost cleanup technologies for the subarctic conditions in the Komi region. The complete removal of all oil residues remaining after gross oil cleanup, using conventional mechanical means, will be prohibitively expensive and will likely disturb and denude large areas of fragile subarctic vegetation. Scientific institutes will be commissioned to examine such limiting factors as cold temperatures, low oxygen content in poorly drained soils, low nutrient availability, rates of oil degradation, effects of produced salt water released from the pipeline, both in the international and Russian scientific literature and through field plot testing. - 27 - 82. Technical assistancefor public participationand consultationwill be providedto ensure that consultative/participativeprograms are implementedfor affectedcommunities within a 120 km radius of the spill zone. Local specialists and institutes have been and will be commissionedto provide assistancein the activeparticipation of downstreamvillages in defining emergencyneeds and to ensure that timely informationabout the Project is provided.

83. ContractMonitoring. Technical assistance has been provided to help Komineft monitor the containment and cleanup and emergency pipeline replacement contracts. An international inspection company has been appointed for these services. The total cost is approximatelyUS$ 0.3 million.

84. Project Management.Technical assistance to strengthenKomineft's institutional capacity in the areas of procurement, financial management and public relations will be provided. The total cost is approximatelyUS$ 1.9 million.

D. Total Project Costs

Table 7 summarizestotal Project costs.

Table 7 Total Project Costs (US$ '000)

Local Costs Foreign Costs Total Costs

Oil Spill Recovery 20,200 36,100 56,300

Containment and Cleanup 16,000 34,000 50,000

Social Expenditures 1,200 800 2,000

Environmental Management 3,000 1,000 4,000 Contract Monitoring 300 300

Mitigation 27,000 30,200 57,200

Pipeline Replacement Completion 26,200 0 26,200

Pipeline Remediation and 0 16,700 16,700 Operational Improvements

Engineering and Inspection 800 3,200 4,000

Emergency Response and 0 5,300 5,300 Maintenance Enhancements

Pipeline Operation and Strategy 0 5,000 5,000 Studies

Project Management 0 1,900 1,900 Contingency Sub-Projects 10,450 14,150 24,600

TOTAL COST 57,650 82,350 140,000 - 28 -

E. EnvironmentalAspects 85. EnvironmentalMonitoring. Environmentalmonitoring will commenceat the beginning very of the Project and continueuntil its end. The overall objectiveis to assure protection of human health and protection of priority environmental resources, including resource harvesting activities. Monitoring activities will focus on: (i) air quality in areas where spilled oil may be burned; (ii) surface and groundwaterquality; (iii) potable water sources in riverside villages; (iv) the effects of spilled saline production water on vegetation; (v) the effects spill of the sites on wildlife and aquatic life, and; (vi) monitoring for leaks from the pipeline. 86. Pipeline Leak Detection. Until permanent leak detection is installed(estimated to be mid-1997), interim pipeline leak detection will be carried out through twice-weekly surveillance. aerial Environmental monitoring of the pipeline will also include surveillance for excessive terrain disturbance of the right-of-wayby the constructionequipment. 87. Other Environmental Mitigation included in the Project. The primary objective of the Project is the mitigationof environmentaland social impacts from the oil spills oil through removaland site restoration. However, additionalmitigation activities have been incorporated into the Project and are summarizedbelow:

(a) Emergency social expenditures to mitigate immediate impacts to downstream residents and herders, includingprovision of safe water supplies and forage for livestock;

(b) Contingencyprojects such as: (i) emergency response on the Usa and Pechora rivers; (ii) emergencyresponses to new pipeline spills; and (iii) maintenanceof oil containmentstructures through the winters of 1995-96and 1996-97;

(c) Technical assistance for environmental and socio-economic management, including: (i) provisions for technical advisors to Komineft to assist them in developingenvironmental guidelines for implementationof Phase I and II cleanup activities; (ii) technicalassistance to carry out environmentalmonitoring that will provide information on impacted resources so that sensitive resources are adequatelyprotected; and (iii) technical assistance in developingappropriate and low-cost final cleanup and site restoration methods, based on operationally- oriented and peer-reviewedscientific studies. F. Public Consultation

88. Involvement of the communitiesaffected by the spills and local NGOs is important an componentof the consultationprocess. In February 1995a preliminaryconsultation process was initiated by Komineft with the assistance of a socio-economicconsultant familiar with such processes under similarconditions in Canada, financedby the CanadianGovernment. Informal contacts with a major internationalenvironmental NGO were followedby local NGO consultations and preliminaryinterviews with officials in Usinsk, Syktyvkar,and the downstream affected villages of Kolva, Ust-Usa, Novibozh, Schelyabozh, Zaharvan, Denisovka, Mutnyy Materik and Vaskino. The initial phases of the consultation process included discussion of - 29 - emergency needs, resulting from current and future impacts of oil spills and the cleanup operations underway.

89. The villagers were asked to rank their needs for emergency relief in areas of health concerns, water supply, transportation services, availability of fuel, waste disposal and sanitation, and feed and grazing for domestic livestock. These initial community rankings will be used as a guide to establish priorities and protocols for immediate emergency services related to the oil spills. The consultation process was augmented by a more detailed community-based survey. The results from the survey will be incorporated into plans for mitigation of affected villages. The results of the initial consultation are summarized in the following table, with 1 being the highest-ranked relief need, and 6 representing the least critical need.

90. The continuing consultation process as planned will include the regional downstream communities, particularly those potentially affected by spills, and regional state farms which have expressed concerns regarding reindeer husbandry. These latter concerns also include maintenance and control of access to annual migratory routes, particularly those which intersect hydrocarbon transportation corridors, the areas of large oil spills, and future areas where cleanup activities may be carried out. In particular, specific mitigation measures should include supplemental feeding (including the importation of suitable nutritional substitutes), and enhanced animal husbandry and veterinary services. The result of these consultations will be development of the program of social assistance to affected communities to be funded under the Project as described in section A above.

Table 8: Priorities for Emergency Needs of Downstream Villages'

2 3 Village' Pop. Water Health Fuel |_Trans. Feed Sanitation

Kolva 454 2 4 6 3 1 5 Ust-Usa 1521 1 3 6 2 4 5

Novikbozh 633 2 3 6 5 1 4

Schelyabozh 703 1 2 4 3 5 6

Zaharvan 406 1 3 5 4 2 6

Denisovka 648 1 2 4 5 3 6

Mutnyy Materik 1228 1 2 4 5 3 6

Vaskino 101 2 1 6 4 3 5

Each village was asked to provide its prioritized list of requirements from the following: o health (community health care and medical supplies) o water (supply and quality of potable water) o transportation (access for supplies, health care, education, emergency services) o fuel (wood, gasoline, diesel, electrical and heating equipment) o waste disposal (sanitation) o feed (domestic livestock and reindeer, loss to grazing, feed shortages). 2, Villages are listed in ascending order from the spill sites; Vaskino is 125 km from the spill site. 3. Based on 1989 Census Data. - 30 - 91. Consideration willbe given to alternateapproaches to compensationwhich provide a more equitablesettlement of disputesthan the present systemof pollutionpayments to regional authorities and should encompass items such as emergency supplies, habitat enhancementand protection, and possible related benefits through training to provide opportunitiesfor enhanced employment activities. The public consultation process will provide a focus for ongoing assessment of human heath effects related to degraded supplies of water and foods from sustainablesources.

92. Local villagers could provide assistance to contractors and operators involvedin cleanupoperations near the villages. As part of the social delivery mechanism, trainingof these local residents could be carried out with a view to longer-term employmentopportunities in environmentalmitigation, monitoring, and oil spill emergency response. 93. Public information programs will be carried out to ensure that affected and interested residentsdownstream of spills are informed on a frequent and timely basis about the progress of the planned oil spill containmentand cleanupactivities. Many residents, particularly at Usinsk, have expressed health concerns related to burning associatedwith cleanup measures. Notification about burning and coordination with local officials, could serve to significantly reduce or alleviate these concerns.

G. Regional and National MitigationEfforts 94. While not part of the Project, to address the broader issue of across pipeline integrity Russia with an aim to identifyingproblems common to regional oil is transport systems, it envisionedthat the Ministry of Fuel and Power will coordinate an overview north of the Komi and western regional pipeline system, based mainly on studies already undertaken/completed and supplemented, as required, by targeted additionalstudies of specificissues. Factors essential to the acceptanceof and rapid completion of the study will be: (i) ownership of the study interested Russian by parties (Transneft, regional authorities, federal ministries, etc.); involvementof qualified (ii) Russian consultants;(iii) relevance to regional environmentalissues; (iv) avoidanceof duplication of other ongoing or recently completed studies; and (v) concrete recommendationsfor action.

H. EconomicJustification, Risks and Mitigation Options 95. The proposed Project consists of three main components:(i) spill containment, cleanup, and assistance to affected peoples; (ii) Kharyaga-Usinskpipeline rehabilitation support its safe to operationsin the near term; (iii) identification,preparation and implementation of other measures to prevent emergenciesof this kind from recurring. 96. In additionto helpingminimize the ecologicaldamage caused by the oil spills, the benefits of the Project include operational improvements of the uninterrupted pipeline to ensure safe operations in the future, training of the Komineft employees response in emergency and establishmentof a fully equipped and trained emergency response reducing unit, greatly the risk of similar accidents,and improvementof the Komineft'senvironmental monitoring impact capabilities. Project implementationwill result in significantopportunities contractors and for local suppliers. Without the Project, the Kharyaga-Usinskpipeline would shut-down likely be in the near term as failures escalated on the middle section of the pipeline. - 31 - 97. The net economiccost of shutting down the Kharyaga-Usinskpipeline, at present transporting over US$ 750 million worth of oil (in world market prices) per annum and supportingthe employmentof over 20,000 people, is approximatelyUS$ 400 millionper annum. Project costs are equivalentto the economicloss resulting from four months pipeline outage. However, complete pipeline shutdown would also entail significant damage to oil wells and gathering lines due to solidificationof the oil. The economic cost of long term outage of the pipeline and loss of production capability far exceeds the cost of the Project (including all containmentand clean-up costs). The Benefit-CostRatio is in excess of 15. From this base, Project economic returns are very robust.

98. Financial Evaluation. As described above the overall financial return to the Project is large as the alternative may complete shut down of pipeline and oil production. The direct financialreturn from the pipeline remediationcomponent can be measured by the present tariffs of US$ 3.75 per ton paid to Komineftby local private companies. Assuming the present capacityutilization constant, the annual pipeline tariffs generationpotential is in excess of US$ 25 million. The financial return based on the Kharyaga-Usinskpipeline revenue generation potential, over the expected 10 years life of the replaced infrastructure, would be in excess of 30%, and the Project's net present value - in excess of $65 millon at a 15% discount rate. With separation facilities completed pipeline life could be longer. This calculations assumes a reasonableallowance to cover maintenanceand operating expenditures, arrived at on the basis of comparable internationaloperations.

99. Risks and MitigatingMeasures. There is a significantrisk of Komineft's inability to complete the most urgent repairs on the middle section of the pipeline prior to the spring thaw, which will greatly increasethe possibilityof new leaks occurring. This risk relates to the lack of time left for the pipeline repairs in the 1994-1995winter constructionseason. This risk will be reduced by the use of a local contractor already mobilized on the site. Although the capabilities of the pipeline contractor may not be fully adequate for the magnitude of the emergencyreplacement program, further delays related to selection and mobilization of other contractors will result in a greater risk of no pipeline replacement activities being undertaken before the spring thaw. The constructionrisk will be managed through third party inspection and monitoring services. However, there is still a risk that Komineft and its contractors' fail to complete critical containment, clean-up and pipeline replacement works before the spring thaw. Given the emergencyand unprecedentednature of the Project, undertakenin an extremely difficult environment, only partial success is expected. To mitigate the potential impact of the deficienciesin the containmentstructures or pipeline replacementdesign and implementation, emphasis is put on allowing sufficientcontingency elements in the Project definition to enable Komineftto respond immediatelyto any such failure.

100. It should be noted that about three-quarters of the Kharyaga-Usinsk pipeline capacityis used to transport Komineftoil. The value of such oil and, accordingly, the value of the transportation services needed to bring it to the customers depends on the implementation by the Russian authorities of policies stimulating oil production and reinvestment of the generated revenue. If this does not occur in the short term, the actual financial return of the Project could be much lower. - 32 -

IV. INSTITUTIONALARRANGEMENTS AND PROJECTIMPLEMENTATION

A. ImplementingAgency JSC Komineft 101. The Implementing Agency for this project will be the Open Type Joint Stock Company Komineft,controlled by the KomiTEK holding company. JSC Komineft:Legal Status and Ownership. 102. The Open-type (Public) Joint Stock Company Komineft (JSC Komineft) was establishedon April 21, 1993 on the basis of a decisionof the Property ManagementCommittee of the Komi Republic in accordance with Decree #1403 of the President of the Russian Federation (On Privatization and Transformation into Joint Stock Companies of State Enterprises, Productionand Research Associationsof Oil, Oil Refining and PetroleumProduct Supply Sectors, November 17, 1992). Subsequently, on May 6, 1993, JSC Komineft was registered by the Ukhta city administration(registration # 451p). The main activities of JSC Komineft are determinedby its charter and registration certificate as oil and gas production and processing, and explorationand developmentof oil fields. JSC Komineftholds oil and associated gas explorationand production licenses for most oil fields of the Timan-Pechorapetroliferous province which includesterritories of the Komi Republic and neighboring Nenets Autonomous Okrug (ArkhangelskOblast).

103. Initially, 38% of shares were transferred, in equal proportions, to the state property funds of the RussianFederation and Komi Republic,40% were distributedand sold to JSC Komineft employees and management,and the remaining 22% were allocated for sale at voucher auctions and investment tenders. Subsequently, the state-owned block of Komineft shares has been transferred to the JSC Oil Company KomiTEK, establishedon June 27, 1994 by a decisionof the governmentsof the Russian Federationand the Komi Republic.As of March 15, 1995, Kominefthad 52,000 shareholders(including natural and juridical persons), with the Russian Federation and Komi Republiceach owning 19% of the stock issue. 104. Under the Komineft charter, KomiTEK (or another holder of over 25% of the voting shares) is vested with the right to veto any decision of the general meetings of the shareholders related to changesin the charter, capital, or mergers and acquisitions. In addition, Komineft cannot enter into any agreement, the value of which is in excess of 25% of the Komineft capital, without the approval of more than three-quarters of its shareholders. At present, KomiTEK also has an effective right to appoint Komineft directors, including the Director General.

105. The JSC Komineft includes 2 affiliate joint stock companies, an affiliate enterprise, and more than 40 structural units. Among the latter are 5 oil and gas production directorates (Russian abbreviation - NGDUs), 2 drilling directorates, transportation units, research and design institutes,agricultural enterprises, etc. The managementstructure of the JSC Komineft is largely similarto that of its legal predecessor, ProducingAssociation Komineft, and as well to those of other Russian oil companies. - 33 - 106. The Kharyaga-Usinskpipeline is operated and maintained on a contractualbasis by the JSC Etan, a Komineft affiliate company, and is a part of the assets of the NGDU Arkhangelskneftegas,wholly owned by Komineft.Produced fluid is separatedand processedto sale quality oil by the affiliate JSC, ComprehensiveOil Preparation.

JSC Komineft: Operationsand Financial Status

107. Location. Until 1991, Komineftwas the only oil producing enterprise in Komi Republic and a monopolyholder of the rights for developmentof the Republic's oil reserves. It was also active in developmentof the oil resources of the Arkhangelskregion and planned to proceed with the productionof the reservoirson the territory of the adjacentNenets Autonomous Region. At present, practically all of Komineft's operationsare in the Komi republic, while it still holds the rights for developmentof 20.5 % of the Nenets AutonomousRegion oil reserves. In the Komi Republic, Komineft together with its affiliated companies holds 71.2% of the oil reserves.

108. Reserves. Since 1991, Komineft has actively pursued a strategy of joint developmentof its fields together with internationaland Russianinvestors. By the end of 1994, 48.1 % of the formerly controlled Komineftoil reserves were transferred to such joint ventures. The most significant of these are KomiArcticOilalong with Gulf Canada and British Gas and Nobel Oil along with Glencore International. The estimated remaining volume of proven and probable reserves being developedby Komineft is approximately348 million barrels.

109. Production. After achievingpeak oil productionof 380,000 bpd (19 million tons per annum)in 1984-1985Komineft's production has steadilydeclined. This process accelerated during the years 1992-1994. Over these three years Komineft's oil production declinedby 47% and a further 13% decline is expected in 1995. Since 1992, due to the lack of financial resources Komineft has not brought any new oil fields into production (which is vital for the maintenanceof output).

110. FinancialPosition. The summaryinformation onKomineft's financial performance in 1992-1994outlined below, based on unauditedfinancial statements, shows the deterioration of the company's financial situation which has contributed to and resulted from the current problems. - 34 -

Table 9 KomineftKey FinancialPerformance Figures (US$ mln)

1991 1992 1993 1994 a) Balance Sheet (9 months) Fixed Assets' 20.6 191.4 120.4 1,082.8 Goods in Circulation 1.2 6.1 35.8 68.8 Receivables 1.9 46.6 161.9 228.4 Cash 0.3 3.7 15.9 11.7 Total Assets 24.5 249.3 347.2 1,476.1

Short Term Loans 0.6 13.4 12.8 Payables 48.1 1.6 48.2 213.2 347.5 Other Liabilities 0.5 6.7 5.7 25.0 Long Term Loans N/A 2.4 3.5 Equity 0.6 21.7 178.6 111.9 1,055.0 Total Liabilities 24.7 249.2 347.2 1,476.1 Net Loss N/A 1.9 13.1 84.4 b) Oil Production (mln tons) 15.2 9.6 7.8 5.1 c) Employment (thousands) N/A 31.9 27.0 21.0

Note: The value of the Komineftassets has never been subject to an independentevaluation. apparent increases The in the US$ value of the company's assets and share capital is primarily due regular revaluation to of assets pursuant to governmentalorders. No allowancehas been into account made to take inadequatecorrelation between Russian inflation and US$/Rb exchange rate.

Table 10 Profitabilityof KomineftLocal Sales in 1994 (US$/bbl) Average Price 4.71 100% Revenue Based Taxes 1.24 26% Taxes Included in the Costs of Production 1.54 33% Profit Based Taxes 0.57 12% Sub-Total Taxes* 3.35 71% Cost of Production 3.86 82% Profit/(Loss) (2.49) (53%) * in total 23 taxes were applied to Komineftin 1994.

111. AlthoughKomineft is a relativelyhigh cost producer comparedto West Siberian oil companies, the main reason for Komineft's poor performance is the continuing policies the Russian of governmentwith respect oil prices and taxationand to the problemof non-payments, primarily from the state controlled industry. - 35 -

112. During the course of 1994, Komineft was exempt from payment of export tariffs and was allowed to export approximately 14% of its production. Following the recent liberalization of the crude oil export market, Komineft is expected to increase its exports up to 25% of its production but will have to pay full export tariffs. Overall, Komineft's financial situation should improve with expected additional exports. Preliminary results of the first quarter of 1995 show a positive income.

113. Future Prospects. A sharp increase of the Russian internal oil prices is unlikely in the immediate term due to continued problems with demand and payments from otherwise insolvent enterprises and from government institutions. In the short term reallocation of profits realized within the integrated oil company KomiTEK may be required to support Komineft.

114. Improvement of Komineft's financial performance in the medium term will depend on the overall development of the Russian economy, including improvement of the budgetary planning and tax collection procedures leading to a more equal distribution of the tax burden throughout the economy and allowing oil producers to begin reinvestment to realize the potential of the remaining reserves.

115. During Negotiations, Komineft agreed to the following financial performance measures: (i) maintenance of satisfactory levels of working capital including a current ratio of not less than 1.25 with account receivables at no greater than 60 days sales and accounts payable at not greater than 75 days cash expenses; and (ii) cash flow adequate to ensure a debt service ratio of not less than 1.5. In addition, Komineft will establish a pipeline reserve fund to finance maintenance on the pipeline after the project is completed which will be formalized in the Subsidiary Loan Agreement.

B. ManagementStructure for Project Imnplementation

116. Komineft has established a senior project management team (PIU) to direct, review, and approve the activities conducted by the IMC and its sub-contractors and the pipeline contractors. A core team will be committed to the project for its duration. The overall project manager and two deputy project managers, have been appointed, one responsible for cleanup activities, the other for pipeline activities. The demands on the PIU will initially be extreme, requiring the team to spend much time making sure that the Project is progressing successfully. The PIU will have both the authority and technical expertise to direct the Project and make policy decisions. A second level of Komineft staff will be assigned to the various functional groups of planning, operations, logistics, and finance, to direct the day-to-day activities of the project. Team members will have clearly defined roles and responsibilities and clear areas of authority. Details of PIU functions and organization are provided in Attachment 1 to this Technical Annex. Technical assistance will also be provided under the Project to support Komineft in the areas of procurement, contract and financial management. Agreement was reached during Negotiations that Komineft will maintain adequate staffing of the PIU, acceptable to the Bank. - 36 - C. GovernmentManagement Structure and Permit ClearanceProcedures

117. In order to facilitate rapid Project implementationa high level EmergencyOil Spill Recovery and Mitigation Project Working Group has been established by the Russian Government to resolve legal, administrative, fiscal and general implementation issues and expedite necessary clearances. The Working Group is chaired by the Minister of Fuel and Energy and includeshigh level representationfrom the Russian Federation, the Komi Republic and Komineft. In addition to Komineft this group will be the key focal point for the Bank's supervision of the Project.

118. At the local level the Usinsk City Land Use Commissionacts as a 'clearing house' for local permits. For constructionof facilities, such as disposal pits for contaminatedsoils or temporary containmentdikes in the Ust-Usinskyregion, applicationsare vetted by a number of local committees including: the forestry committee; state farms, where applicable; the city environmentalcommittee; the city architect; and the land use committee. Once preliminary design documentshave beenproduced, the land use commissioninitiates the reviews and submits a documentationpackage to Syktyvkar. A May 23, 1990 Resolution of the Komi Republic Council of Ministers allows for the establishmentof boundariesof water protection zones and riparian strips along rivers, lakes and water reservoirs in the Komi Republic. Authorizations for activities in those zones must be sought from the local branches of the Komi State EnvironmentalCommittee. Water protection zones along the Kolva River are 1 km in width and for the Khatayakhatributary 0.5 km in width.

119. The Government of the Komi Republic, recognizing the crucial importance in emergencyoperations of prompt issuanceof necessarypermits and clearances,has approvedand issued a special resolution (provided as Attachment 2 to this Annex) authorizing the Deputy Head of the Republic, Chairman of the Komi StandingCommission for EmergencySituations, to provide Komineft, the IMC, and its subcontractors, all required permits, clearances, and licensesunder streamlinedprocedures through his local representative.

D. FinancingPlan and Co-Financing

120. The financingplan for the Project is outlined in Table 11 and includesan IBRD loan of US$ 99 million and an EBRD loan of US$ 25 million. Komineft will be responsiblefor payment of all taxes and levies related to the procurement of equipment and services for the Project implementation.In accordancewith Russiangovernment resolutions providing for a tax- exempt status of sovereign-guaranteedloans obtained from international financial institutions, these expenses may be waived or deferred.

Table 11 Financing Plan

US$ million % of Total Komineft 16.0 11.0% IBRD 99.0 71.0% EBRD 25.0 18.0% Total $140.0 100.0% - 37 - 121. The IBRD and EBRD will jointly finance, in the ratio of 80/20 the following contracts under the Project: (i) containmentand cleanup; (ii) emergencypipeline replacement; and (iii) contingenciesrelating to these parts of the Project. EBRD will finance the pipeline studies and the World Bank will financethe remaining parts of the Project. The agreementof the Banks as to the financingarrangements was based on the objective of minimizing potential delays caused by different procurementprocedures and minimizingthe need for contract review by both institutions.

122. The Bank and EBRD will sign a co-lenders agreement covering disbursement procedures, informationsharing and remedies in the event of default.

123. The Bank and EBRD loans will be made to the Russian Federation and on-lent to Komineft under separate Subsidiary Loan Agreements. Completion of Subsidiary Loan Agreementsacceptable to the World Bank and the EBRD are a condition of Effectivenessfor each Loan. The term of the on-lendingfor the World Bank loan will be 15 years including 5 years grace with the interest rate equal to the Bank rate plus 75 basis points. Komineft will assumethe foreign exchangerisk of the Loan while the SubsidiaryLoan Agreementis in effect. The EBRD expects its loan of 15 years including3 years grace to the Russian Federation to be on-lent at 14 years including3 years grace.

E. Procurement

124. The work to be performed on the Project will be carried out under six major contracts:(i) a managementcontract for oil spill containmentand clean-up (US $45 million); (ii) an emergency pipeline replacement completion contract (US $16.0 million); (iii) an environmentalmonitoring and management contract (US $4.0 million); (iv) an independent monitoringcontract to check complianceby the managementand emergencypipeline contractors with the technicaland commercialconditions of their contracts (US $0.3 million); (v) a pipeline inspectionand testing contract (US $3.2 million); and (vi) a pipeline and facilities remediation contract (US$ 16.7 million). Contracts (i) and (ii) have been procured using the Bank's Procurement and Use of ConsultantsGuidelines and will be jointly co-financedwith EBRD in the ratio of 80/20. Contracts (iii), (v) and (vi) will be entirely financedby the Bank and contract (iv) entirely by the EBRD on a parallel co-financing basis with each Bank using its own procurement rules. The EBRD will also finance a future contract for pipeline operations and strategy studies.

125. Given the emergency nature of the Project, contracts (i) and (ii) have been awarded on a sole-sourcebasis to the firms most capable of meeting the essential criteria for successful performance of those contracts. Contracts (iii) and (v) will be awarded using the Bank's competitiveconsultant selection procedures as outlined in the Bank's Guidelinesfor the Use of Consultants. Contract (iv) was awarded using the EBRD's consultant selection procedures. Contract (vi) will be procured using International Competitive Bidding (ICB), precededby prequalification. Goods, works and services relating to the improvementof KMN's emergencyspill response capacity (US $5.3 million) and social assistance sub-projects(US $2 million) will be procured using InternationalCompetitive Bidding (ICB), Limited International Bidding (LIB), international or national shopping or direct contracting procedures, or the selectionprocedures contained in the Bank's Guidelinesfor the Use of Consultants, depending on the value of the potentialcontract and the nature of the item to be procured. Goods contracts - 38 - valued at US $200,000 or more will be procured using ICB procedures with eligible Russian manufacturers entitled to the Bank's domestic preference for goods in the evaluation of bids. 126. KMN, in cooperation with the Bank and EBRD, has already undertaken a large amount of advance procurement and will have entered into two key contracts described above by the time the loan is presented to the Board. Retroactive financing of up to $20 million will be permitted under the Loan Agreement, although it is likely that only US $18 million will be needed for contracts (i) and (ii) described above. The maximum level of retroactive financing is 20.2% of the Loan amount, which is not materially above the amount permitted under Bank guidelines for Emergency Recovery Assistance in OD 8.50. The Bank has already reviewed, or will review prior to award, the procedures and documents used for all the key contracts jointly cofinanced under the Project. It has also reviewed the Terms of Reference for the independent monitor's contract, the environmental monitoring and management contract, and the testing and inspection services contract. Future contracts for goods and works valued at US $200,000 or more and all contracts entered into using LIB and direct contracting procedures will be subject to prior Bank review. Consultant contracts of a critical nature and those valued at US $50,000 or more will also be subject to prior Bank review. Further details are provided in Attachment 3 to this Annex.

F. Disbursements

127. The Disbursement Arrangements for the Project are summarized in Schedule B of the Memorandum of the President.

G. Accounts and Audits

128. Komineft has appointed an international accounting firm to provide audit services for 1994 which is expected to continue in this capacity in 1995. During Negotiations, Komineft agreed to furnish to the Bank:

(a) Actual and forecast financial statements, within three months of the end of each fiscal year;

(b) Audited project accounts beginning with the account for fiscal year 1995, within six months of the end of each fiscal year; and

(c) Audited financial statements of Komineft (including a qualified restatement in accordance with IAS if required) showing its performance and position beginning with fiscal year 1995, within 6 months of the end of each fiscal year. H. Supervision Plan

129. Supervision of the Project will require intensive Bank staff involvement for the first six months of implementation in order to provide Komineft with support during implementation of the key cleanup and emergency pipeline remediation activities. A formal review of the Project is planned for the fall of 1995 after completion of Phase I of the containment operations and the emergency pipeline replacement works. - 39 -

V. AGREEMENTSAND ACTIONS

130. Agreements. To facilitate implementationof the Project the Head of the Komi Republichas signed two decrees to accelerateproject implementation:(i) permits, licenses and cleanup methodswill be approved by one governmentofficial on an emergencybasis; and (ii) the $75 million in fines imposed on Komineftby the local environmentalauthority for spills, which accrue to the Komi Republic will be used by Komineft for Project implementation.

131. During negotiations,Komineft agreed to the followingfuture actions with respect to Project implementation:(i) maintenance of a Project ImplementationUnit with acceptable managementand specialists; (ii) provision of effective and timely social assistance to affected communities; (iii) maintenanceof a 1.5 debt service ratio; (iv) maintenanceof acceptablelevels of working capital; (v) submissionof audited Project accounts and financial statements by an auditor acceptableto the Bank; and (vi) preparation of a project completion report.

132. With respect to timely and effectiveassistance to affected communitiesKomineft agreed that if the needs for assistanceexceed Komineft's ability to mobilizeresources Komineft will utilize contingencyfunds in the Project under the IMC.

133. Actions. Conditionsof Loan Effectivenessinclude: (i) signature of a subsidiary loan agreementbetween the Russian Federation and Komineft; (ii) receipt of legal opinions in respect to the Loan Agreement,Project Agreement and the subsidiaryloan agreement; and (iii) effectivenessof the EBRD loan. - 40 - Attachment 1

RussL4N FEDERATION

EMERGENCYOIL SPILL RECOVERY AND MITIGATIONPROJECT

IMPLEmENTATIONARRANGEMENTS

A. Project Organization

1. Becauseof the urgency of Phase I of the cleanup, it will be conducted in an emergencymode, and Komineft managementmust be prepared to review and approve the recommendationsof the IMC on a very quick turnaround. Phase II activities will be conducted in a manner more consistent with normal project management, with more time allowed for planning, review, and decision-making.

2. The general PIU organization is shown in Figure 1. Similar organizationshave been employed in other emergencyspill operationsaround the world. Komineft can become as mivolvedin managingthe day-to-dayoperations of the cleanup as it wants, by having Komineft representativeson all levels of management.In the organizationplan in Figure 1, Komineftstaff are the Team Leaders (TL) for each primary functional group in the organization.

B. General ManagementPhilosophy

3. In contracts such as this, it is normal and important that the contractor be given maximum latitude to make day-to-day decisions without having to seek review and approval. Under these conditionsit is important that Komineft establish a strong monitoringcapacity and work approvalprocedures which provide clear guidance up front. Thus, the general work plan should be approved, and the IMC should be required only to seek review and approvals for deviationsfrom the approvedprocedures. - 41 - Figure 1 Proposed Organizationfor the Komineft PIU

Functional Planning Operations Logscs FThance Publc Relations Team

Team Komineft TL Komineft TL Komineft TL Komnineft TL Komineft TL Members Procurement Procurement Procurement Accounting Firm Technical Advisors Advisor Advisor Advisor Procurement Advisor -International IMC IMC IMC IMC -Russian Subcontractors Subcontractors Subcontractors Subcontractors Technical Inspection Firm Advisors -International -Russian

Activities - Technical - Work Orders - Equipment - Cost Documentation - Public Affairs - Regulatory - Scheduling - Personnel - Invoices - Community - Environmental - Site supervision - Transportation - Payables Relatons - Social - Waste handling/ - Maintenance - Disbursements Mitigation treatment - Facilities - Financial Reporting - Procurement and - Security Contract - Communication Management - Medical - Translation Services

Note: TL = Team Leader

C. The Project Organization and Responsibilities

4. The key activities to be conducted by selected parts of the response organization are briefly outlined below.

5. The Komineft Senior Project Management Team will meet daily with the Contractor Spill Management Team to receive a status report on the previous day's effort and review, approve the next day's work plans, and resolve problems. They will be responsible for:

o Approving the general cleanup strategies and priorities proposed by the Contractor; o Approving site-specific work orders; o Reviewing daily work priorities; o Monitoring the effectiveness and costs of the cleanup; o Approving the cleanup costs; o Solving problems that the IMC cannot resolve on its own, such as those related to Govermmentclearances; o Facilitating access to and contracting with local resources; o Responding to requests for information from the public; o Enforcing cleanup standards; and o Overall project administration. - 42 -

6. Public Relationsconsists of two different groups: a Public Affairs group and a CommunityRelations group. The Public Affairs group is primarily responsible for generating press releases and responding to inquires from the media. Its focus is national and international in scope. In contrast, the CommunityRelations group focuses on the local communityand how the spills and mitigationcomponents affect them. They will meet with the local and downstream communitiesto explain the project, listen to the concerns of local citizens and businesses, and make sure that these concerns are addressed.

7. The Planning Team will include technical specialists in cleanup methods, site surveys, regulatory issues, and environmentalconcerns. Field teams conduct the detailed site surveys upon which the Operations Team develops site-specific work plans and will be responsiblefor: o Generatinggeneral guidelinesfor protectionof the environmentand human health in the region during cleanup (essentially "best managementpractices" for each approved cleanup method being used);

o Surveyingeach site and preparing pre-cleanupsite assessment reports including: maps/descriptions of the oil at each site, site-specific recommendations for cleanup methods to be used, environmentalrestrictions and guidelines at each site, and recommendationsfor protection of sensitive areas and resources;

o At selected sites, developingbaseline data on which the effectivenessand effects of the cleanup can be measured, in order to: provide feedback to Operationson approved methods and conduct studies to evaluate new proposed methods;

o Evaluating feasibility/environmentalimpacts of special issues as needed;

o Reviewingand evaluatingthe appropriatenessof new proposed cleanupmethods, in terms of environmentaland human-healtheffects;

o Setting guidelinesfor cleanup standards, working closely with national and local Government agencies. Environmental Advisors will provide assistance in evaluatingthe cleanupplan from an environmentaland human-healthperspective.

8. The OperationsTeam will be responsiblefor:

o Developinggeneral cleanup methodsand priorities; o Generating site-specificwork orders detailing the work to be conducted; o Briefing site supervisorson the daily work plan; and o Generating daily reports on work progress to-date.

9. The Logistics Team will be responsible for:

o Making sure that there are sufficient personnel, equipment, and supplies to complete the required work as scheduled; o Obtaining the necessary support services such as facilities, transportation, communications,medical, and security services to support the project; and - 43 -

o Provide translation services needed to bridge the languagebarrier at all levels of project management and documentation. Interpreters will be needed for communicationsbetween Russian and non-Russian team members. Document translation will be needed so that all project documents, press releases, etc. are available in the appropriatelanguage of the user.

10. The Finances Team will be responsible for:

o Monitoring and reporting all project costs o Preparing invoicesfor submittal for payment o Payroll, sub-contractor, and supplier payments

11. An accountingfirm is expected to be hired to assist in financial management, includingaudits of the contractor's invoices. A Russian procurement advisor has been hired to provide procurement and contract managementsupport for Komineft. They will be responsible for:

o Setting up a cost-monitoringsystem for the contract; o Establishinga schedulemonitoring system to help Kominefttrack the progress of the project and keep it on schedule; and o Assisting Komineft in resolution of contract administrationproblems that risk delay to the project schedule. - 44 -

Attachment 2

RUSS1AN FEDERATION

EMERGENCY OiL SPILL RECOVERY AND MITiGATIoN PROJECT

KOMI REPUBLIC RESOLUTIONS

DIRECTIVE of the Governor of the Komi Republic

Given a hard financial situation in the JSC "Komineft" and need to arrangements towards make elimination of the accident impacts in the oil pipeline "Vozei- Golovnyje facilities" in the Ussinsk region prior to spring floods, to authorize the Ministry of Natural Resources and Environmental Protection of the Komi Republic to apportion emergency and rehabilitation works executed by the JSC "komineft" and expenditures incurred to eliminate environmental damage to the account of acknowledged claims amounting to Rb. 311 billion..

Governor of the Komi Republic Y. Spiridonov

Syktyvkar March 14, 1995 No. 173-p - 45 -

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DIRECTIVE of the Governor of the Komi Republic

Given an emergency situation in the Ussinsk region resulted from the accident in the oil pipeline "Vozei-Golovnyje Facilities" and need to complete emergency and rehabilitation works prior to spring floods by attracting an international general contractor, to authorize BIBIKOV, V.S., Deputy Governor of the Komi Republic, Chairrnan of the Republican Commission on Emergency Situations to issue, on a prompt basis, permits, approvals and licenses to carry out Komineft works to the international general contractor "AEC/Hartec" and its sub-contractingagencies.

Governor of the Komi Republic Y. Spiridonov

Syktyvkar March 14, 1995 No. 174-p 47 -

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RussLmNFEDERATION

EMERGENCY OIL SPILL RECOVERY AND MITIGATION PROJECT

PROCUREmENT DETAILS AND PROCEDURES

1. Section IV Part E of the Technical Annex summarizes the methods of procurementproposed to be used to procure the contracts under which the Project willbe carried out. A schedule showing when these contracts will be awarded and when each component of the work will commenceis included in the table which follows this attachment. Each of the major contracts is discussed below.

2. Management Contract for Containment and Cleanup. The oil spill containment and cleanup work will be managedby an internationalmanagement contractor (IMC) chosenon a sole-source basis considering the following factors: (i) knowledge of site conditions; (ii) experiencein oil spill containmentand cleanup operations in similar conditions; (iii) technical merit of the methods of cleanup proposed; (iv) experience and qualificationsof the personnel assigned to the contract; and (v) ability to mobilize quickly.

3. The management contract -- which is valued at approximately US $45 million and does not involve any of the emergencypipeline works -- is based on a standard contract developed by the Construction Management Association of America, modified to suit local circumstancesand the unusual risks associatedwith the work. Under the contract, the IMC will secure the additionalmaterials, equipment and supervisorypersonnel required and manage the ongoing work of four local subcontractorswhich were mobilizedat the various sites of the spill and workingon containmentworks or cleanupunder contracts with Komineft(KMN) until KMN financingran out.

4. Cleanup Monitoring and Inspection Contracts. The Project will include two consultantcontracts designedto provide ongoing evaluationof performance by the management contractor, both technicallyand in terms of cost. The first is a contract for the environmental monitoring and management of the cleanup valued at US $4 million to provide guidelines, evaluate, and monitor -- from an environmental and social perspective -- the technical perfornance of the containmentand cleanup work. The contract will finance equipment and services to supportKMN environmentalmonitoring obligations and to supportresearch into spill remediationoptions such as revegetationor bioremediation.

5. Given the sizeable technical and commercial risks associated with oil spill response operationsand cost plus fee contracts, a second contract has been concludedwith an independentmonitoring firm to review on a regular basis IMC compliancewith the contract and report its findingsto KMN, IBRD and EBRD. This contract, which is valued at US $300,000, will be financed by EBRD.

_~ ~ ~ ~ ~ ------49 - 6. SocialMitigation Expenditures. The Project will includesome small sub-projects totalling approximately US $2 million to mitigate the impact of the spill on a number of downstream communities. Thesecould include, e.g. drilling new water wells, providing forage for livestock, technical assistance for reindeer range managementand emergency supply of medical, veterinarian,and socialservices. These sub-projectswill be administeredby the KMN PIU togetherwith the firm engagedto provide environmentalmanagement of the cleanup as well as other specialist support. The selection of each project will be made by a group of representatives from the affected villages according to criteria acceptable to the Bank. The procurement methods to be used for the social assistance sub-projects will consist of the following: (i) contracts for goods or works valued at US $200,000 equivalent or more will be procuredusing ICB procedures; (ii) contracts for goods valued at between US $50,000 and US $200,000equivalent will be procuredusing internationalshopping procedures; (iii) contracts for goods valued at less than US $50,000 equivalent would be procured using national shopping procedures; (iv) contracts for works valued at less than US $200,000 equivalent would be procured followinga comparisonand evaluationof at least three bids from qualifiedcontractors; and (v) contracts for goods or works, which under the emergencycircumstances are available from only one qualified supplier or contractor, would, with the Bank's prior approval, be procured using direct contracting. A detailedprocurement plan can only be developedwhen the content and size of each sub-project is better defined.

7. Emergency Completionof Pipeline Replacement. A contract for the completion of the replacementof the middle section of the Kharyaga-Usinskpipeline, which is valued at approximatelyUS $16.0 million, has been negotiated,using direct contractingprocedures, with the local firm which was carrying out the middle section pipeline replacementworks until KMN financingran out. Only this local firm has a chance of completingthe crucial tie-ins and other works in swampy areas to remove a critical section of old pipeline from service before the spring thaw, making possible a continuationof the works during the summer and completingthe replacementby August 1995. All other options would result in an early 1996 completion,which would result in an unacceptablerisk of further spills. The contract will be staged to ensure that the southernmostportion of the middle section will be completedand tied in as soon as possible. This explicitly includes the section between post 349 and post 612.

8. The Bank's Standard Bidding Documents for Smaller Works will be used as a basis for the contract for the pipelinereplacement completion works. The payment schedulewill be designedto provide payment only after satisfactorycompletion of physical milestones. This should provide an incentive for the contractor to maintain an acceptablequality of construction and keep to the very tight schedule. If key milestonesare not achieved, particularly the critical winter constructionworks, Komineft has the option to terminate the contract. In addition, to see that the cost of materials for the contract are reasonable, KMN's local procurementadvisor will carry out a quick shopping check of other potential suppliers of pipe, weights, tape and valves. If better prices can be found with acceptabledelivery times, the contractor will use these vendors in the interest of economy.

9. Pipeline ConstructionInspection and Quality Control. To help ensure that the contractor carries out acceptable quality construction and to assess integrity of the overall pipeline, an aggressive pipeline inspectionand quality control program will be set up. This work will be carried out initially by the firm selected to be the independentmonitor, and later by a pipeline inspection company selected according to the Bank's competitive selection - 50 - procedures for consultants. This contract is estimated at US$3.2 million. In addition, KMN's own projectimplementation team will be strengthenedto provide better managementand quality monitoring capacity.

10. Pipeline Remediation and Facilities Upgrade. A number of measures will be taken to upgrade the operationof the pipeline. The firm selected by LIB to inspect the quality of the middle section replacementwill also carry out an integrity assessment of all sections of the Kharyaga-Usinskpipeline and undertake operational system reviews. The assessment and the operational reviews will generate recommendationsof further repairs and replacements, suggestionsas to pipeline maintenanceequipment that is needed as well as changes to operating practices, such as use of corrosion inhibitingchemicals, installationof pressure relief systems and water removal facilities.These recommendationswill form the basis of a scope of work to be carried out and a list of equipment and materials to be purchased, most likely on a turnkey basis, by a contractor procured using ICB procedures preceded by prequalification.

11. The overall procurement scheduleis summarizedin the table below.

ProcurementSchedule _ _ _ _ ContractDescription Start of Procurement ContractSignature Completion 1. Management 1/28/95 3/9/95 5/1/97 Contract

2. Emergency 3/12/95 3/24/95 8/1/95 Pipeline Contract

3. Environmental 4/10/95 5/15/95 6/30/97 Monitoring Contract

4. Independent 2/20/95 3/20/95 6/30/97 Monitor's Contract

5. Pipeline 3/27/95 5/13/95 12/15/95 Monitoring and Inspection Contract

6. Pipeline 9/15/95 11/17/95 4/26/96 Remediation Contract t .~~~~~~~~~~~~~~~~~~~~~~~asmu - 51 - Attachment4

RUSSIANFEDERATiON

EMERGENCY OiL SPILL RECOVERY AND MlTIGATlON PROJECT

LIST OF PROJECT DoCUMENTS IN PROJECT FLLE

1. Draft Report, PipelineIntegrity Assessment,Kharyaga to Usinsk Pipeline. Preparedby AGRA Earth & EnvironmentalLimited, March 8, 1995.

2. Field Report, Usinsk Oil Spill, Initial Action Assessment. Prepared by AGRA Earth & EnvironmentalLimited, March 8, 1995.

3. Report of the UN Mission to the Oil Spill in the Komi Republic of the Russian Federation,8-15 December1994. Preparedby the Joint UNEP/DHAEnvironment Unit, February 1995.

4. Programof Activitiesfor the ComplexMonitoring of EnvironmentalPollution in the Area of the Vozey-Golovnie Pipeline Accident Sites. Prepared by the Russian Federal Service for Hydrometeorologyand EnvironmentalMonitoring. St. Petersburg, 1994.

5. JSC Komineft, Ecology Department. Assessment of the impact of Oil Spills and of EnvironmentalProtection Measures Adopted on the Environment. Ukhta, 1995.

6. JSC GEOPOLISReport.

MAP SECTION

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