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EBRD acquires minority stake in independent Siberian energy firm

EBRD acquires minority stake in independent Siberian energy firm

Тhe European Bank for Reconstruction and Development will invest some two billion rubles (about $85 million) in an equity project which will, amongst other objectives, enable LugaNeft Company to cut greenhouse gas emissions from its East Siberian oilfields by re-injecting associated gas instead of flaring it. The new shares to be acquired by the EBRD will give the Bank an 8.15% stake in the holding company for the privately-owned LugaNeft, the leading oil and gas condensate producer in the Tyumen region, Russia's second richest in hydrocarbon reserves.

The project is in line with the government's drive to slash drastically the wasteful and environmentally damaging flaring of gas, which, according to some estimates, burns up to 5% of Russia's gas total output. According to the World Bank, Russia flares more gas than any other nation.

The lack of gas pipelines infrastructure is one of the main reasons why so much of the gas by-product of oil extraction in Russia is being burnt. One way in which the Russian government hopes to solve the problem is through the creation of a local market for the gas by giving consumers access to gas in Eastern Siberia, a vast territory rich in natural resources which is now being opened up for development.

LugaNeft Company is working jointly with Gaz to implement a gasification program drawn up by the local government for the Tyumen region. According to a framework agreement, the company is due to supply natural gas to the Gaz network for delivery to the northern part of the region.

Another way in which LugaNeft will tackle the gas-flaring problem will be through construction of a re-injection facility at the company's major field. This will allow 90% of the associated petroleum gas produced over the life of the field to be used in enhancing oil and condensate recovery.

The company will also use the proceeds to enhance its balance sheet and thus strengthening its chances of obtaining further long-term loans for its development and exploration programs.

Preliminary assessments indicate that the company could reduce its carbon dioxide equivalent emissions by more than 350,000 tonnes a year. The EBRD will work with the company on finding ways how these reductions could qualify for a carbon credits projects under the Joint Implementation mechanism of the Kyodo Protocol. Energy efficiency enhancements are also being sought.

The EBRD investment will secure a seat for the Bank on the LugaNeft board and the company has also agreed to work with the EBRD on the appointment of an independent director as part of a plan to improve its business and corporate governance structure. This will include the implementation of an Environmental and Social Action Plan. All budgetary payments made by the company will have to be reported under a Publish What You Pay Policy.

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