May 15, 2006
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Report on Multilateral Development Bank Projects that Support Extractive Industries

Introductory Note on 2006 Report by the Treasury Department on Multilateral Development Bank Projects that Support Extractive Industries: The attached report describes "for each international financial institution, the amount and type of assistance provided, by country, for the extraction and export of oil, gas, coal, timber, or other national resource since September 30, 2005."  Treasury prepared this report pursuant to section 585(c)(2) of the Foreign Operations, Export Financing and Related Programs Appropriations Act, 2006.

The Bush Administration is committed to the legislation's goal of promoting transparency and accountability in and through the international financial institutions (the IFIs) and, in particular, in the multilateral development banks' (MDBs') support for extractive industries projects.  (The International Monetary Fund [IMF] does not provide project lending.)  Treasury agrees fully that revenues derived from extractive industries must be reported accurately and used to meet the development needs of the host country, particularly to benefit the poor.

Through our Executive Directors, the U.S. has advised IFI management that it is U.S. policy that assistance for natural resources projects should not be provided unless the country has functioning accountability and reporting systems.  We regularly stress the importance of resource revenue transparency in Board consideration of country strategies, Article IV agreements, and Poverty Reduction Strategy Papers (PRSPs), and in bilateral meetings with country counterparts.

We have insisted that specific revenue transparency provisions be included as conditions for reaching Highly Indebted Poor Countries (HIPC) decision points.  Resource revenue transparency is something we promote when considering proposed MDB policies such as the forthcoming Inter-American Development Bank (IDB) and European Bank for Reconstruction and Development (EBRD) energy policies, and overseeing their implementation in individual hydrocarbon and mining sector operations.

We have also encouraged the IFIs to make fiscal transparency a central part of their diagnostics, including through application of the new IMF Guide on Resource Revenue Transparency and the Public Financial Management Indicators.  We have been active in the Extractive Industries Transparency Initiative (EITI), and have encouraged the full engagement of the World Bank and IMF in this initiative.

Resource revenue transparency is an important standard that we use in our analysis of MDB project proposals.   Treasury interventions on loan proposals have led to more stringent conditions, and to greater transparency and accountability of subsequent proposals.  For instance, recently, we requested additional revenue transparency conditions on a gold mine project in Guyana, financed by the International Finance Corporation (IFC).

Our efforts to promote transparency and accountability extend beyond the extractive industries sector.  Following strong U.S. leadership during the fourteenth replenishment of the International Development Association (IDA), the World Bank agreed to predicate IDA's financial assistance for extractive industries projects with a significant impact on revenues upon the recipient government's having in place, or commit to establish, a functioning system for accounting for revenues and their use.  In addition, the government should also have in place, or commit to establish, a functioning system for the independent auditing of such revenue receipts and the public dissemination of the results.  Although these actions are especially relevant to extractive industry projects with significant revenue impacts, they are also applicable to IDA's budget support operations, as set out in IDA's recently approved operational policy on Development Policy Lending.  We are actively working to establish these standards and policies at all of the IFIs.

MDB Projects that Support Extractive Industries

Asian Development Bank (ADB):  Laos – Forest Plantations Development Project; $7 million ADF loan and $3 million ADF grant; 1/16/2006:  The project establishes a semi-autonomous Lao Plantation Authority (LPA) to facilitate development of small forestry plantations by poor rural villagers and large forestry plantations by enterprises and foreign investors.  Only land that has already been deforested and has limited secondary growth will be eligible for this project.  To improve transparency in land use, LPA will set up a land registry and facilitate the issuance of land-use certificates to the small ("livelihood") planters.  The project is expected to reduce poverty by generating income and employment opportunities for the rural poor.  If Laos attracts foreign investors to operate large plantations, the government could receive substantial revenues and foreign exchange from exports of wood and wood products.  The U.S. Executive Director supported this project, while expressing considerable reservations about the project not addressing illegal and unsustainable logging, and about ADB contemplating proposing a partial risk guarantee facility for investors in and commercial creditors of large plantations.

Asian Development Bank:  Indonesia – Tangguh Liquified Natural Gas Project; $350 million ADB loan; 12/14/2005:  This private sector project aims to develop, build, and operate gas production wells, platforms and a liquefied natural gas (LNG) facility to export gas to PRC, Korea, and the West Coast of North America.  The LNG facility initially will consist of two "trains" (equipment units that purify and liquefy gas) with name-plate capacity of 7.6 million metric tons of LNG per annum.  The ADB believes that the project is critical for Indonesia's energy development and export efforts, and that it will help Indonesia maintain its global position as a key LNG export center.  The project is in accordance with the Indonesian government's policy of maintaining security of LNG supply and encouraging the development of foreign-exchange generating projects.  It is also in line with ADB's energy policy that emphasizes support for the development of cleaner fuels with private sector participation, and will provide LNG to support sustainable economic growth and promote usage of cleaner fuel in the region, especially in the Peoples Republic of China and the Republic of Korea.  The project design shows that ADB has given careful thought to social and environmental impacts, and has undertaken a thorough course of remedial actions to address them.  Also, ADB's participation will catalyze a significant amount of long-term debt to support Indonesia's energy sector.  Since the project is ADB's first private sector project in Indonesia's oil and gas sector, it has the potential to provide significant demonstration effects for subsequent projects not only in Indonesia but also in the region.  The United States voted to support this project.

International Finance Corporation (IFC):  Russia – Chukotka Mining; $41 million in loans to Russian mining company; 11/1/05:  The IFC Board approved a $16 million A-loan and a $25 million C-loan to Chukotka Mining and Geological Company to support the development of the Kupol gold project, a greenfield gold mine in the Chukotka Autonomous Okrug (ChAO).  Based on the available information, this project did not meet the 120-day review condition established in the Pelosi amendment, so the U.S. Executive Director abstained.  If not for the legislative mandate and concerns about the web-based disclosure, we probably would have supported the project.  This project poses less environmental risk than most mining projects given its location in an area unsuitable even for reindeer herding, and the local population, including indigenous peoples, is eager to see development and jobs in the region.

IFC:  Chile/Argentina – GeoPark; $10 million equity investment and $20 million loan to Argentine energy company; 1/30/06:  The IFC Board approved an A-loan of up to $20 million and an equity investment of $10 million in GeoPark, a small, independent exploration and production company with assets in Argentina and Chile.  GeoPark is undertaking an $80 million capital expenditure program to increase oil and gas production to around 5,000 barrels per day and 40 million cubic feet per day by 2008 (compared to current output of 371 barrels per day and 165,000 cubic feet per day).  This includes the drilling of about 100 primary wells and the completion of approximately 50 "workovers."  Since the project entailed increased recovery from older oil and gas fields, there was minimal environmental impact.  The United States voted to support this project.

IFC:  Ghana – Ahafo; $125 million in loans to U.S. mining company; 1/31/06:  The IFC Board approved extending a $75 million A-loan and a $50 million syndicated B-loan to Newmont Mining Corporation for the Ahafo Gold Project, a large open cast gold mine 300 km northwest of the capital city Accra.  The Newmont facility will mine, process, and extract the gold on-site.  The expected production is 500,000 oz. of gold per annum over a 20 year period.  The United States abstained on this project pursuant to relevant provisions of the "Pelosi Amendment".  In particular, there were deficiencies in the publicly-disclosed environmental assessment regarding cumulative impacts, impacts from associated facilities, and consideration of alternatives.

IFC:  Russia – Alliance Oil Company; $25 million loan to Russian energy company; 2/1/06:  The IFC Board approved extending a $25 million loan to Alliance Oil Company (AOC), a mid-size Russian oil company that is engaged in refining, logistics, and wholesale and retail distribution of petroleum products.  The United States voted "no" on this project because the company demonstrated only minimal standards of corporate governance with excessive time proposed for any governance improvements.  We have generally opposed any IFC investments in the Russian oil and gas sector.

IFC:  Argentina – Capsa; $70 million in loans to Argentine energy company; 2/17/06:  The IFC Board approved a $50 million A-loan and a $20 million B-loan to Companias Asociadas Petroleras S.A. (Capsa), a medium-sized Argentine oil producer that operates several fields in Southern Argentina (Chubut province).  Capsa is embarking on a $110 million, five-year capital expenditure plan that will implement 6 "waterflood" projects throughout its existing fields, drilling 209 producer wells and 69 injector wells, maintenance and repair of existing wells, and the construction of related water treatment facilities.  This project is exclusively based on intensified extraction from existing oil fields using new technology.  The project involves previously worked fields in an area that does not have any environmentally or socially sensitive habitats.  The United States voted to support this project.

IFC:  Guyana -- Guyana Goldfields; $5.1 million equity investment in Guyanese mining company with potential warrants for another $6.6 million; 2/22/06:  The IFC proposed to make a Can$5.85 million (approx. US$5.1 million) equity investment in Guyana Goldfields (GG) with a potential exercise of warrants worth up to Can$7.61 million (approx. US$6.59 million).  GG is a publicly listed (on the Toronto Stock Exchange) "junior" mining company that is conducting gold exploration programs in Guyana.  It has mineral rights to two properties totaling 63,200 hectares (156,000 acres) in Guyana.  The IFC's investment will help finance the completion of exploration activities, a definitive bankable feasibility study, public consultation, and an Environmental and Social Impact Assessment.  The United States supported the investment since it is limited to exploratory and feasibility work.  The United States circulated a statement to the Board urging the use of independent experts in the preparation of an EIA, parallel capacity-building work with the government, and full public consultation on the ESIA, including solicitation of input from international experts.

IFC:  Colombia – Petrotesting; $15 million equity investment and $15 million loan to Colombian energy company; 3/13/06:  The IFC Board approved a $15 million equity investment and an A-loan of up to $15 million to Petrotesting Holding (PTH), a holding company of five small Colombian energy companies.  The investment will support the development of current oil and gas assets and raise production by the dominant company, Petrotesting Colombia (PTC), from 4,700 barrels of oil equivalent per day (boepd) to 9,500 boepd by 2008.  The equity investment will provide necessary capital for the $85 million capital and exploration expenditure plan.  The $15 million loan will be disbursed over time against proven reserves.  The United States voted to support this project.

IFC:  Egypt/Pakistan – Rally Energy; $25 million in loans to Canadian energy company; 3/31/06:  The IFC Board approved up to $25 million in loans to Rally Energy, a Calgary-based junior oil and gas company that is exploiting assets in Egypt and Pakistan.  The investment includes a $20 million revolving credit line that will be available in two tranches, a $5 million term loan, and up to 3 million equity warrants that could be exchanged for an equity investment of up to $5 million (to be paid for by a mandatory repayment of the term loan).  The sites are not very large and pose limited environmental risks.  Full compliance with IFC/World Bank standards is expected in the near future.  The United States voted to support this project.

IFC:  Guinea – Rio Tinto; $5 million equity investment in U.S. mining company; 4/11/06:  The IFC Board approved an up to $5 million equity investment to acquire a 5% interest in SIMFER Guinee, a wholly owned subsidiary of Rio Tinto and the project company for the Simandou Iron Ore project in Guinea.  Rio Tinto has obtained mining rights in Guinea that it believes contain a significant amount of high grade iron ore, and it has another 10-12 exploration targets in the Simandou mountain range in the Eastern Region of Guinea.  The United States supported the $5 million investment since it would only support the exploration and feasibility study phase of the project, and the IFC would have to return to the Board for any additional investment in development of the mine.  The IFC characterized Rio Tinto as "strongly committed to sustainable development and [leading] several mining sector initiatives on conservation, land rehabilitation, biodiversity, climate change, and water and energy use."  The United States circulated a statement underlining the need for improvements in governance and transparency prior to mine construction and operation and that the IFC should look closely at political development and government support for needed reforms.

Multilateral Investment Guarantee Agency (MIGA):  Russia -- Bema Gold Corporation; $370 million in guarantees for equity and loans; 10/25/05:  MIGA proposed to extend a guarantee to Bema Corporation covering up to $20 million of its $122.8 million equity investment in Chukotka Mining and Geological Company (CMGC) for the development of the Kupol gold project in Russia's Far East.  MIGA is also extending guarantees for non-shareholder loans of $300 million by Societe General (on behalf of itself and Bayerische Hypo-Und Vereinsbank) and $61 million from Mitsubishi Corporation to CMGC.  As with the IFC investment, the United States abstained because the project did not meet the 120-day review condition established in the Pelosi amendment.