House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 3

Memorandum by the Baku Ceyhan Campaign

Thank you for your letter of 23 July enclosing the reply of Mr Weiss, Deputy Director of ECGD, to the Committee Chair's letter requesting a written response to the concerns raised over ECGD's support for the Baku-Tbilisi-Ceyhan (BTC) project.

Please find attached the Baku Ceyhan Campaign's response to Mr Weiss's letter and accompanying documents. The response is submitted collectively by Corner House, Friends of the Earth (England, Wales and Northern Ireland), Kurdish Human Rights Project and PLATFORM.

We have reviewed the documents sent to the Committee by the ECGD and, on the evidence available to us, conclude:

— The ECGD's due diligence of BTC was insufficiently rigorous and that it relied to a compromising extent on the project sponsor for information and reassurances over the many detailed concerns that have been raised by independent parties;

— The ECGD's monitoring procedures failed to alert ECGD to a range of problems that should have been picked up, notably the problems that have arisen with the field joint coating system;

— The human rights due diligence took insufficient account of the context in which the project was being implemented and the abuses that were likely to result;

— The coating problem constituted—and still constitutes—a clear material threat to the project's timing, safety and viability. The Minister's judgment that the field coating problem was limited does not stand up to scrutiny. In our view, BP was therefore in breach of its obligations by not reporting the coatings failures.

The Baku Ceyhan Campaign recommends that:

— Immediate steps should be taken to address these institutional failures.

— The project loans be suspended until a full independent assessment of the project's safety has been completed.

We hope that the submission assists the Committee in its deliberations. Please do not hesitate to contact us if there are points on which the Committee would like clarification or further information.

Nicholas Hildyard

Corner House

Anders Lustgarten

Baku-Ceyhan Campaign

Greg Muttitt

PLATFORM

Hannah Ellis

Friends of the Earth England Wales and Northern Ireland

Kerim Yildiz,

Kurdish Human Rights Project

6 September 2004

INTRODUCTION

1. We have received from the Committee the reply of Mr Weiss, Deputy Director of ECGD, to the Committee Chair's letter requesting a written response to the concerns raised over ECGD's support for the Baku-Tbilisi-Ceyhan (BTC) project. We have now had an opportunity to review Mr Weiss's letter and the accompanying documents.

2. We should point out that the WorleyParsons Energy Services Redacted July 2004 Desktop Study which Mr Weiss forwarded is not the same document as the "Parsons report" referred to by ECGD in previous correspondence with the Corner House, the Baku Ceyhan Campaign and, indeed, in evidence to the Committee.[1] This has been confirmed to us by ECGD.[2] For the avoidance of doubt, we have therefore referred to the July 2004 Desktop Study as the "WorleyParsons Report" throughout this response, and to the March 2003 report from Parsons Energy and Consulting as the "Parsons report".

3. We should add that we are gravely concerned that the ECGD has sought to answer questions that have been posed by parliamentarians arising from the 2003 Parsons Report by referring to information in the 2004 WorleyParsons report without making it clear that the two reports are different and are separated by over a year. There should be no question of confusing the two reports: the 2004 WorleyParsons report plainly states that it was only "initiated after the 15 February 2004 London Sunday Times article."[3] We believe that the ECGD's elision of the two reports could have the effect of misleading parliamentarians into believing that the ECGD had undertaken certain due diligence issues prior to approving its support for BTC, when this was not in fact the case.[4]

4. Our detailed comments on Mr Weiss's evidence are set out below. They seek to address eight questions, under three headings:

(1) ECGD due diligence process

— Did the ECGD undertake adequate due diligence on the field joint coatings, both prior to and after approving the BTC project?

— Did BP withhold material information relating to the safety of BTC—in breach of the lending procedures of the ECGD?

— Does the ECGD rely too closely on information provided by the Project Sponsor?

(2) Failures in coating selection process and remediation

— Is the ECGD justified in claiming that the selection process, evaluation/testing and quality control for the SPC 2888 coating were rigorous and effective?

— Is ECGD justified in claiming that the failures of the field joint coating system have been remedied?

— Is ECGD right to claim that Derek Mortimore's concerns have been dealt with?

(3) Broader issues and lessons

— Are there other areas where ECGD's due diligence was inadequate?

— What policy lessons can be learned from such inadequacies?

5. Before proceeding, we would like to make an important clarification. There are two main problems with the SPC 2888 coating material, both brought to light by Derek Mortimore and by the Sunday Times. They have at times been conflated, but are separate:

— The first and major problem is that the SPC coating does not properly adhere to polyethylene, which is the main exterior layer for the BTC pipeline. Because the field joint coating does not permanently stick to the pipe section coating, it does not therefore provide full anti-corrosion protection. As a result, the total coating system cannot be impervious to water, as it needs to be to protect the pipeline from corrosion.

— The SPC coating also cracks at cold temperatures. Obviously, the cracks also let in water. This problem is due to the chemistry of SPC 2888 itself, whereas the first is due to its interaction with polyethylene.

Although the majority of the controversy over the coating has focused on the cracking, that is actually much the lesser of the two concerns. Methods can be used to mitigate the cracking of the coating, at least temporarily. By contrast, there is no way in which SPC 2888 can be guaranteed to adhere to the polyethylene exterior of the pipeline for the estimated design life of the pipeline (40 years), and it is therefore inevitable that the pipeline will corrode, with all the potential for leakages.

Significantly, the WorleyParsons report, and indeed all correspondence from ECGD on this subject, only acknowledges the second problem, and not the first.

1. ECGD'S DUE DILIGENCE PROCESS

A. Did ECGD undertake adequate technical due diligence?

6. Column 2 of the following Timeline sets out the due diligence (and lack of it) undertaken by ECGD on the technical specifications of the BTC pipeline from October 2002 (shortly after the department became involved in negotiations) to August 2004, as detailed by ECGD in correspondence with the Committee, NGOs and in responses to parliamentary questions. Shaded boxes cover actions taken prior to ECGD approving support for the project. Column 3 details the evolving construction problems on the pipeline.

7. Given that the ECGD was considering support of US$150 million[5] in taxpayers' money for the project (eventually reduced to $106 million[6]); that the project involved major environmental risks in the event of a leak of oil; that internal BP reports had questioned the selection of the field joint coating; and on BP's own admission, that the field joint system was entirely novel;[7] the public might legitimately expect that the coating system merited special due diligence on the part of the ECGD.[8]

8. From the timeline, it can be seen that the ECGD undertook two technical investigations prior to the decision to fund BTC: the 2003 Parsons report and the field investigations undertaken by Mott MacDonald prior to November 2003.

9. Five questions arise:

10. Did these technical investigations include an assessment of the concerns raised by Derek Mortimore, BP's own consultant, in 2002?

Answer: No.

The ECGD was not informed by BTC of Mr Mortimore's findings[9], nor was Parsons Energy and Chemicals.[10]

TIMELINE OF ECGD DUE DILIGENCE ON COATING

Date ECGD Due Diligence and Statements Emerging Construction Problems

May 2002 BP senior managers, who had already raised their concerns internally, commissioned Derek Mortimore, a leading pipeline integrity consultant, to assess the viability of a proposed epoxy coating to protect the pipeline joints in Azerbaijan and Georgia

5 September 2002 PEER Assist Review describes the chosen field joint system as "a step change in industry practice" [1]

October 2002 "Interim reports from [Parsons Energy and Chemicals] made available to ECGD." [2] The Parsons Reports were commissioned to assess technical specifications for the project.

10 November 2002 Mortimore submitted report to BP, concluding that the field joint coating specification "is utterly inappropriate as it does not confirm a protective system that can be successfully applied in all the conditions under which this pipeline will be constructed, nor does it confirm the integrity of the protection for the design life of the pipeline."

March 2003 "Final version of [2003 Parsons Report] was produced [2]

August 2003 BP's Frontiers magazine publishes article in which BP's engineering manager states that "This is the first time that such a system has been employed." [3]

24 September-
11 October 2003 Mott MacDonald Pre-Financial Closure Site Visit. No further in situ checks on the integrity of any sections of the pipeline after November 2003 prior to financial close. [4]

November 2003 Early to Mid-November 2003, "cracking of the field joint coating was reported in both Azerbaijan and Georgia. BP/BTC assembled a team to investigate the cracking" [5]

17 December 2003 ECGD agreed to provide cover for a line of credit facility to a value of US$150 million, subject to ECGD's prior approval of the Project's Environmental and Social Action Plan, the General Oil Spill Response Plan and the General Hydrostatic Testing Plan; and the establishment of final project documentation to the satisfaction of ECGD. [6]

3 February 2004 Project agreements signed by ECGD and Project Sponsors

15 February 2004 Sunday Times story published on problems with field joint coatings. ECGD first becomes aware of the coatings issue.

Unspecified date after
15 February 2004 ECGD requests WorleyParsons Energy Services to "complete" [7] desktop review of the BTC field joint coatings.

29 February-
24 March 2004 First post-financial closure site visit undertaken by D'Appolonia on behalf of ECGD and lenders' group

March 2004 ECGD states that it has no specific information on use of SPC 2888 on other pipelines coated with a three layer, high-density, polyethylene coating [8]

19 March 2004 ECGD Minister states that Parsons Energy "scrutinised" choice of coating in 2003 Parsons Report [9]

May 2004 WorleyParsons "planned routine site visit" [10]

June 2004 D'Appolonia report published.

August 2004 ECGD responds to request for further information from Trade an Industry Committee by releasing redacted WorleyParsons desktop review

Notes:

[1] WorleyParsons, p 8;

[2] Letter from ECGD to Corner House, 30 March 2004;

[3] BP, "Caspian Connection", Frontiers, August 2003, pp 18-25;

[4] Letter from ECGD to Corner House, 30 March 2004, "ECGD has not itself carried out any in situ checks on the integrity of any sections of the pipeline since November 2003";

[5] WorleyParsons 2004, p 4;

[6] ECGD, Note on BTC Decision, 17 December 2004. In the event, the sum agreed was $106 million (see John Weiss, Letter to Trade and Industry Committee, 19 July 2004);

[7] WorleyParsons 2004, p 2. The choice of the word "complete" is highly misleading since it suggests that the 2003 Parsons Report was incomplete. In fact, ECGD has confirmed that the 2003 Parsons Report was a final report (see Letter from ECGD to Corner House, 30 March 2004;

[8] Letter from ECGD to Corner House, 30 March 2004: ". . . ECGD does not have this specific information . . .";

[9] Letter from Minister for Trade to Corner House and others 17 March 2004;

[10] Worley Parsons, 2004. It is unknown when this visit took place or what its findings were. The WorleyParsons report does not discuss it further and refers to it in the future tense.

We find it profoundly unsatisfactory that ECGD did not make it its business to ensure that BP supply it with all reports of relevance to the selection of materials to be used on the pipeline, which would have included the Mortimore report. We would recommend that the ECGD's due diligence procedures be revised to require that all technical reports are requested from the project sponsors and investigated.

11. Given the experimental nature of the chosen field joint system, did ECGD put in place special measures to investigate its safety?

Answer: No.

From the outset BP has made it clear that the chosen field joint system was novel:

Nonetheless, despite the experimental nature of the field joint coating system, the ECGD appears to have required no special due diligence measures. In a letter to The Corner House, received 30 March 2004, the ECGD stated that "its consultants considered the track record of the specified coatings as part of the technical analysis."[13] However, in the same letter, the ECGD also denied that it had any specific information on other projects where SPC 2888 had been used on a pipeline coated with a three layer, high-density, polyethylene, like the BTC pipeline.[14] At the very least, the ECGD's inability to provide such information (despite the issue having supposedly been examined by its technical consultants) raises serious questions as to the thoroughness of its consultants' pre financial closure investigations.

Even now, after WorleyParsons has conducted a full desktop study, the ECGD is unable to give a clear-cut and definitive response. On the contrary, despite BP's admission that the coating system used in BTC is entirely new, the WorleyParsons report is at best equivocal on the issue:[15]

ECGD makes no acknowledgement of this uncertainty in its response to the committee. Instead, it continues to insist—as it has done since the Sunday Times' allegations—that SPC 2888 is widely used and has a good track record,[18] failing to mention that this track record is on pipelines that are materially different to BTC.

We believe this to be deliberately misleading. No-one has suggested that the SPC product has never been used[19], merely that it has no operational track record on pipelines coated with polyethylene. This is a crucial distinction, as the most important criticism of the SPC 2888 coating is that it does not adhere to polyethylene. In other words, it will let in water, and so not do its job as a corrosion protector.

We note that the same misleading interpretation has been made by the Minister of State for Trade, Investment and Foreign Affairs, Mike O'Brien, in answer to a Parliamentary Question on the coating issue[20]. Given that this reply was made after WorleyParsons had undertaken its desktop study, a key question is whether or not the Minister was aware that his statement was misleading.

12. Did the ECGD adequately scrutinise the evaluation, testing, selection and application of the field joint coating system for Azerbaijan and Georgia prior to approving support for the BTC project?

Answer: Disputed—but the evidence strongly suggests that it did not.

The Minister for Trade has stated: "The choice of coating was scrutinised and approved by Parsons E&C, the independent engineering company operating on behalf of the project lenders and ECAs."[21] The ECGD has also stated that its consultants "examined the track record of the specified coatings as part of the technical analysis". However, in a February 2004 interview conducted by investigative journalists Melissa Jones and Michael Gillard, Parsons reported that the assessment made in its 2003 was not an in-depth study. The reviewer was not a corrosion expert; he did no quality assurance exercise; and there was no testing undertaken of SPC 2888, the Canadian paint used as a coating.[22]

In our view, the conflict between the Minister's statement and Parsons' can only be resolved through release of the 2003 Parsons report and the correspondence between ECGD, Parsons and BTC on the coating. The Corner House and Friends of the Earth (FOE) have both requested the Parsons Report—under the Code of Practice on Open Government and the Environmental Information Regulations, respectively—but have been refused on the grounds of confidentiality. The ECGD has also claimed in correspondence with FOE that it is not a "relevant person" under the Environmental Information Regulations, a claim which, if true, would mean either that the ECGD no longer acknowledges that it is a government department or that it believes it has no environmental responsibilities.

13. Did the ECGD undertake any steps to investigate the integrity of the pipeline prior to financial closure?

Answer: No.

The only in-situ investigation was undertaken by Mott MacDonald in September-October 2003. It was charged with verifying, "the implementation of commitments established in the Environmental and Social Action Plan", and its remit did not include checking technical adequacy or pipeline integrity.

We find it of grave concern that no independent in-situ technical investigation was undertaken of the integrity of the pipeline, which was already well-advanced, prior to financial closure. We would recommend that this be corrected for future projects.

14. Are the construction monitoring procedures put in place by ECGD sufficiently rigorous to pick up materially significant technical problems?

Answer: Not on the evidence to date.

The ECGD's monitoring regime did not detect the problems. The ECGD only learned of them through the press.

In response to the Sunday Times' investigation into the field joint coating problems, the Minister of Trade has stated: "The problems with the application of the coating were detected by the inspection regime in place on the pipeline—evidence that the monitoring regime is doing its job." However, he is referring to BP's internal monitoring systems, not those of the ECGD. That BP had picked them up—but failed to inform ECGD—only reinforces the failure of the ECGD's monitoring regime, which, if it is to be effective, clearly needs to act independently of BP.

We note from the WorleyParsons report that there were major failures in BP's processes of selection, evaluation and quality control in relation to the coating, which we discuss in paragraphs 29-30 below. If ECGD had properly monitored the project, it should have identified these systemic failings.

Even after the coatings issue came to public attention through the media, ECGD did not properly scrutinise the problems or proposed solutions, instead relying heavily on information it received from BP (see paragraphs 21-28 below).

15. From the above (paragraphs 9-14), we would conclude that:

— ECGD failed to ensure that it was properly informed on the issues surrounding the coating's suitability;

— There is strong evidence to suggest that the 2003 Parsons Report was superficial in "scrutiny" of the choice of coating—an issue that can only be resolved by release of the report, which ECGD has refused;

— The ECGD failed to undertake necessary in-situ inspections prior to approving the project;

— The ECGD's agreed post-financing monitoring procedures are inadequate.

B. Did BP withhold material information relating to the safety of BTC—in breach of the lending procedures of the ECGD?

16. ECGD's lending procedures require project sponsors to inform them of all material issues that might affect a project.

17. The ECGD Minister has acknowledged that "BTC Co did not inform the ECGD about the problems with the field joint coating material."[23] However, he claims that BTC Co was not obliged to do so, ostensibly due to "the limited nature of the problem".[24] This assessment was made prior to any independent investigation of the problem and on the basis solely of information provided by BP.[25]

18. We would strongly contest the Minister's views based on both the content of the Mortimore report and the extent of the problem as revealed by WorleyParsons:

inter alia,

(iii) The WorleyParsons report reveals that BP is in dispute with its contractors over the liability for costs incurred as a result of the cracking problems, and that the cost to BTC Co of the debacle is unknown until those liability questions are resolved. Firstly, the fact that liability for costs is being debated is a clear indication that the problems are material, in any meaningful sense of the word: if they were not material, there would be nothing to debate. Secondly, if the cost to BTC Co is as yet unknown, the impact on ECGD's position, and hence on the British taxpayer, is also unknown. For both reasons, BP's failure to inform ECGD is indefensible.

19. We therefore do not accept the Minister's view that BP was under no obligation to report either the original Mortimore report or the cracking of the field joints in November 2003, and are surprised that he made this statement solely on the basis of information provided by the project sponsors without having made independent investigations. In our view, the failure of BP to inform ECGD constituted a clear breach of ECGD lending requirements, the more so given that ECGD was still assessing the project.

20. We believe that BP should be held to account. We further recommend that the ECGD lay down clear guidelines as to what levels of failure they view as materially significant.

C. Does the ECGD rely too closely on information provided by the project sponsor?

21. In our previous submission we made the case that ECGD relies too heavily on information provided by the project sponsors—rather than its own investigations—to "ground truth" claims of the project's compliance with international best practice. We also provided a number of examples, including evidence that ECGD had refused to meet with ex-workers who have reported major construction failures, including faulty welds being passed as satisfactory.

22. In response to that criticism, ECGD has referred the Committee to independent field assessments carried out on behalf of the lenders' group.

23. In the case of the WorleyParsons report, all data were acquired only from BP/BTC, and no external sources (including Mr Mortimore) were consulted. As it admits in the introduction, "this desktop study was prepared utilising documents and information furnished by BP/BTC".[29] Furthermore, no independent checks were made on the quality of the data.[30] This is alarming, given that the role of that report was to check on due diligence. The report appears to accept BP's explanations without scrutiny; for example:

"BTC indicated that no cracks were found that were associated with application of the field joint coating following these procedures. They indicated that the small cracks that where (sic) found were caused by other reasons."

24. We would also point out that the studies commissioned by ECGD—though of high quality—are of extremely limited scope, monitor performance only within very narrow parameters, and have no investigative remit.

For example, the 2003 Parsons Energy & Chemical report did not identify problems with the choice of field joint coating—whether it actually scrutinised the selection and evaluation process is not known, due to ECGD's continued refusal to disclose that report. We have also noted that the lenders' construction-monitoring consultant Mott MacDonald did not scrutinise the application method for field joint coatings on its site visit in October 2003.

In addition, even after the field joint coatings problems had become known to ECGD, the lenders' new environmental monitoring consultant D'Appolonia did not investigate the issue on its field visit in March/April 2004. In contrast to the 2004 WorleyParsons report, which was based only on a desktop study, D'Appolonia was on site and thus ought to have examined the implications of the coatings problem for compliance with BTC's environmental commitments, and whether or not the new coating procedures would ensure the environmental safety of the pipeline. It did not; in fact, there is not a single mention of field joint coatings in D'Appolonia's report.[32]

25. With regard to ECGD's continuing refusal to meet with Mr Derek Mortimore, whose original report first raised many of the concerns about the coating, we wish to convey to the Committee our extreme regret that ECGD should now seek to justify this refusal by citing a passage in the WorleyParsons report which repeats BP's reaction to his criticisms.[33] We note that this passage is not backed by any evidence and that neither WorleyParsons nor ECGD made any attempt to verify its content with Mr Mortimore. That BP dismisses Mr Mortimore's concerns by personal attack is disappointing; that WorleyParsons and ECGD take BP's dismissal as grounds for not consulting him is wholly unacceptable.[34]

26. It is of particular concern that ECGD made no independent investigation of the allegation in the Sunday Times of procurement fraud in the selection of the coating. Instead the ECGD simply accepted the findings of the company's own internal investigation,[35] the thoroughness of which has been challenged.[36]

27. We note that, even beyond the WorleyParsons report, the evidence strongly suggests that ECGD is too willing to accept BP's word at face value, without subjecting it to the scrutiny that due diligence requires. Whilst we accept that BP is a major company with a reputation to protect, this does not justify ECGD's failure to exercise independent and rigorous assessment, particularly where wrongdoing has been alleged.

28. Indeed, in many cases, the company's desire to protect its reputation serves not as the guarantor of high standards which many have claimed, but as a motive to obscure and cover-up concerns over its work before they have been appropriately resolved. This factor can perhaps be seen in BP's failure to inform ECGD about the cracking on the coating.

2. ENFAILURES IN COATING SELECTION PROCESS AND REMEDIATION

A. Were the selection process, evaluation/testing and quality control for the SPC 2888 Coating rigorous and effective?

29. While we are disappointed that ECGD has declined once again to disclose the 2003 Parsons report, the 2004 WorleyParsons report is nonetheless helpful in providing further information to shed light on the events leading up to the selection of the faulty SPC 2888 coating. We are therefore very grateful to the committee for making this report available to us.

30. However, far from reassuring us that the coating is reliable, appropriate and safe, some of the information provided by WorleyParsons gives us further cause for concern: [37]

(i) Acknowledgement of the Experimental Nature of SPC 2888 on Polyethylene Pipes

(ii) Adhesion Problems

The particular concern relating to use on coated pipelines is partially acknowledged in the WorleyParsons report:

Where it discusses the specific tests on adhesion,[41] WorleyParsons does not report or comment on the results relating to the adequacy of the coating's adhesion to the polyethylene pipe coating (except that it was improved by grit blasting and worsened by use of primer), only to the bare steel and to the epoxy "toe"[42][43]

(iii) Cutting Costs as a reason for the choice of SPC 2888

We do not suggest that BP should not attempt to carry out its projects cost-effectively. However, there is a clear tension in some cases between cost reduction and achievement of a high safety performance. This is especially the case when such great store has been set by BP and others on finishing this project on schedule. We contend that where cost-cutting innovations are made, there must be a rigorous process to ensure that safety is not compromised.

(iv) Irregularities in Testing and Approval Process

In light of the above, it is worrying that despite the experimental nature of the coating selection, the testing and approval process contained a number of irregularities, revealed in the WorleyParsons report:

Thus, far from the rigorous selection process claimed by ECGD[56] and the Minister[57], all of the major elements of the selection process were flawed in some important way.

(v) Inadequate Quality Control

Despite the experimental nature of the coating system, and its lack of rigorous and relevant testing, BTC did not employ full-time coating inspectors, to check the application process, quality and performance of the coatings when applied in the field to the pipeline, until after the cracking problems were reported.[59] Inspectors are a key part of a quality control process even for a tested technology; it is deeply disturbing that they were not used in this case.

B. Is the ECGD justified in claiming that the failures of the field joint coating system have been remedied?

31. To clarify once again, there are two main problems with the SPC 2888 coating:

— It does not stick to the polyethylene coating on the pipe sections; and

— It cracks in cold weather.

Both problems can lead to the ingress of water, and consequent corrosion of the pipeline, thus undermining its safety and leading to a risk of leaks or ruptures.

32. The WorleyParsons report makes no mention of any field testing of the coatings' adhesion performance—even though concerns about adhesion with polyethylene were raised both by Mr Mortimore and by BP's own tests[60] (see paragraph 30 [ii], above). Prior to January 2004, there were no full-time coating inspectors on site in Azerbaijan and Georgia.[61]

33. We are gravely concerned that by focussing solely on the cracking problem, the non-adhesion has been ignored—creating an environmental timebomb. We believe that ECGD must urgently review the adhesion performance,[62] and make the results available to Parliament and to the public.

34. ECGD claims that the problems that led to the cracking of the field joint coating have been adequately corrected.[63] However, the information presented in the WorleyParsons report does not reassure us that this is the case.

35. According to the WorleyParsons report, the only weld coatings tested[64] for cracking were those that had been applied after early November, when the problem was first observed.[65] The full extent of the problem is therefore not yet known:

(ii) The WorleyParsons report does not indicate how the acknowledged 1,560 faulty joints were recoated. We understand that it is technically difficult to remove the field joint coating without damaging the polyethylene coating on the pipe sections. We are surprised that no comment is made in the report on the methodology.

C. BP's and WorleyParsons' rebuttal of Derek Mortimore's report

36. As noted above, we are gravely disappointed at ECGD's dismissal of Derek Mortimore's efforts in bringing serious safety concerns to light, and at its acceptance of the unfounded personal attack on him in the WorleyParsons report.[72] We believe the inclusion of the personal comments on Mr Mortimore in the WorleyParsons report can have had only one purpose: to blacken Mr Mortimore, and thereby his report. We believe that, in doing so, WorleyParsons and ECGD have rendered a grave injustice to a brave and honourable professional whose views deserve respect, not baseless denigration.

37. We also consider that many of the responses to Mr Mortimore's criticisms of the selection process for SPC 2888 provided in the WorleyParsons report by both BP/BTC Co. and WorleyParsons themselves are inadequate and do not serve as credible rebuttals to serious concerns. Thus:

(i) BP's response to Mr. Mortimore's point that "no pipeline owner has been identified who specifies this product for this exact purpose, anywhere in the world," is:

This wholly fails to even address the question; instead of a reasoned explanation for choosing SPC 2888 on its merits, it provides only a hortatory suggestion that it is worth taking a risk on an unproven material for the sake of "progress". Likewise, the WorleyParsons answer focuses on an almost ideological belief that this coating is "very important" and "a positive step change"; no proof is offered that it is, however, safe.

BP/BTC does not make any response to this point at all; WorleyParsons "disagree", but only on the grounds that "we do not believe it is acceptable to let the pipeline contractor select the field joint coating to be used." Again, this is simply irrelevant; the suggestion is not that the contractor be allowed to select the coating personally, but that BP ought to have nominated several materials to ensure a more robust and controversy-free selection process, something that plainly did not occur.

3. BROADER ISSUES AND LESSONS

A. Are there other areas where ECGD's due diligence was inadequate?

38. ECGD's Failure to Respond to EIA Comments and Concerns

As the Committee will know from its previous inquiries into the ECGD's handling of the Ilisu Dam, the ECGD set a precedent by releasing its own consultants' assessments of both the Resettlement Action Plan for Ilisu and the project's environmental impact assessment (EIA). Both can be found on the Department's website.

In the case of BTC, concerned NGOs submitted extensive and detailed comments on the project's EIA, identifying over 170 violations of World Bank and other international standards.[76]

Despite being presented with this analysis, the Department has failed to offer a detailed response to the concerns raised, merely issuing a statement that they had been taken into account. Moreover, unlike with Ilisu, the Department's assessment of the EIA for BTC has not been released.

This stepping back from the Ilisu precedent can only be regarded as an unfortunate regression from the increasing standards of openness promised by the Government. We understand it was motivated by concern that the NGOs might initiate a judicial review of the project. If so, this might reasonably be held to imply that the Department was less than confident of its grounds for rejecting NGO criticisms of the project and that publication of a detailed response would indeed contain grounds for a judicial review. It might therefore be argued that the ECGD acted in a way that was detrimental to the government's stated policy of improving the accountability of public institutions.

We believe that this concern can only be laid to rest by the ECGD releasing the report prepared on the project by the Business Principles Unit for the Underwriting Committee. We would urge the Committee to request this report and to validate both that it addressed the concerns raised by NGOs and that its recommendations were adopted in full by the Underwriting Committee.

39. Environmental and Technical Risks in Turkey

ECGD's failure of due diligence on the SPC 2888 field joint coating in Azerbaijan and Georgia is matched by equally disturbing failures on reports of systemic technical mismanagement in the Turkey section. In this respect, we would refer the committee to our submissions of 14 July 2004.

The concerns regarding the technical failures in Turkey were first reported in the Independent of 26 June. They were based on the statements of four senior pipeline professionals who had worked on the pipeline, and who reported that the project is:

— not hiring proper specialists to advise on engineering, including on crossing seismic faults in the earthquake-prone region;

— using inappropriate materials and construction methods, which will not perform the function they are needed for;

— not following construction design specifications and procedures;

— failing to carry out checks or keep records on construction quality;

— using staff without proper training or qualifications;

— ignoring environmental or health and safety requirements.

These failures undermine the safety and technical integrity of the pipeline, and risk causing a major spill. The problems are of a systemic nature, going to the heart of the project's management systems, and indicate that BP has completely lost control of the Turkish section of the project.

The Baku Ceyhan Campaign wrote to ECGD, and to the Minister for Trade and other ministers, on 15 July. It enclosed the statements of the four professionals, and called on ECGD to carry out an independent audit of the problems. Now, more than six weeks after the letter was sent, neither ECGD nor the minister have even replied to the letter.

There are disturbing parallels with the field joint coatings case discussed in this submission, both in the nature of the issue, and in ECGD's handling of it. As with the field joint coatings, the problems were not picked up by ECGD's own monitoring. But whereas in this submission we have criticised ECGD's investigation for its inadequacy, in the Turkey case, ECGD has shown no sign whatsoever of investigating the reports, let alone taking action. Again, we offered to facilitate meetings with the professionals concerned (including one of them before ECGD had made its decision to approve support for the project)[77], offers which again were not taken up.

We submit that the evidence provided by the four professionals raises serious questions over the ECGD's due diligence both prior to approving support for the BTC pipeline and subsequently—the more so since ECGD was warned of the problems, not least by BP's own advisory panel,[78] well in advance of its final decision to support the project in February 2004. There is reasonable suspicion that ECGD has again relied on the promises and reassurances of BP rather than investigating thoroughly and independently the concerns raised by experts who have worked on the pipeline. We believe this approach to be unacceptable.

40. Human Rights Due Diligence

The Kurdish Human Rights Project (KHRP) and The Corner House have submitted evidence to the Committee separately on concerns over the due diligence undertaken by the ECGD on the human rights impacts of the project. We would refer the committee to this evidence, noting in particular:

(i) The concern that ECGD failed to take account of the wider human rights context in which the project was taking place, notably the implications of the lack of freedom of expression in both Turkey and Azerbaijan.

(ii) The concern that the Foreign Office (FCO) may have misled the ECGD over advice it received from Amnesty International over the case of Ferhat Kaya, the Turkish human rights defender who was arrested and allegedly tortured as a result of his work on the BTC project.

(iii) Although Amnesty told the FCO that KHRP was the organisation most closely following the case, the FCO did not contact KHRP for further information. This parallels the due diligence failures we have outlined in relation to technical concerns.

(iv) The concern that ECGD failed to seek any documentation relating to the 38 cases relating to the project that have now been taken to the European Court of Human Rights by affected villagers in Turkey.

(iv) The concern that the Foreign Office has failed to investigate the bugging of emails from campaigners working on BTC by the Azeri government.

B. What policy lessons can be learned from such inadequacies?

41. Notwithstanding our wider concerns that the BTC project fails to fit with the ECGD's stated commitment to sustainable development, we believe that the project holds important lessons for the ECGD.

42. On the evidence available to us, we would conclude that:

— The ECGD's monitoring procedures failed to alert ECGD to a range of problems that should have been picked up, notably the problems that have arisen with the field joint coating system;

— The human rights due diligence took insufficient account of the context in which the project was being implemented and the abuses that were likely to result;

43. We would recommend that immediate steps be taken to address these institutional failures and that the project loans be suspended until a full independent assessment of the project's safety has been completed.

Baku Ceyhan Campaign

Corner House

Friends of the Earth (England, Wales and Northern Ireland)

Kurdish Human Rights Project

PLATFORM

6 September 2004

For summary, see Appendix B of Baku Ceyhan Campaign's first submission to Committee, March 2004.

Letter from the Kurdish Human Rights Project and The Corner House to the Trade and Industry Committee

Further to the Memorandum submitted by Corner House and the Kurdish Human Rights Project on 6 July 2004 regarding the quality of the human rights advice supplied by the Foreign Office to the ECGD on the BTC pipeline project, we are attaching an exchange of letters with the Foreign Office on this issue. We would like to submit the correspondence as additional evidence to the Committee's inquiry into the BTC pipeline project.

As you will note from the exchange of letters, the Foreign Office has as yet made no response to the concerns we raised over the misrepresentation of the advice received from Amnesty by Mr MacShane with regard to Ferhat Kaya, the human rights defender arrested and allegedly tortured as a result of his work on the BTC project.

We have also challenged the FCO's position with regard to the bugging of emails from NGOs by the Azeri government and believe that the Foreign Office has been evasive in its replies to other questions on which we sought assurance, notably with regard to consideration of the wider human rights context in which the BTC project is taking place

We hope that the additional evidence will be of assistance to the Committee in its inquiry.

Kerim Yildiz

Kurdish Human Rights Project

Nicholas Hildyard

The Corner House

7 September 2004

Letter from The Minister of State, Foreign & Commonwealth Office to The Corner House

Thank you for your letter of 6 July to the Foreign Secretary and Mike O'Brien MP. Dr MacShane is Minister responsible for Turkey and I am replying as Duty Minister in his absence.

I am surprised that your letter refers back to the letter from the Kurdish Human Rights Project (KHRP) dated 8 January 2004 when the KHRP wrote to Mike O'Brien MP on the same subject on 7 May 2004. This latest letter repeats many of the issues raised in the letter of 7 May to which I responded on 24 June 2004. I enclose copies of both these letters for your information.

As I stated in my June letter, our Embassy in Ankara has investigated the case of Mr Kaya. Mr Kaya's lawyer did indeed tell our Embassy in May that Mr Kaya believed that the police wanted to arrest him for his involvement in human rights campaigning over the BTC pipeline and this is reflected in the statement from Mr Kaya attached to your letter. A senior DEHAP official has recently told us that he believes Mr Kaya's claims. Other sources we consulted took a different view. We have still not seen clear evidence to suggest that Erzurum Court's request for information on Mr Kaya and his subsequent detention were linked to the BTC pipeline. The indictments against Mr Kaya make no reference to his activities in connection with the BTC pipeline. We will continue to monitor Mr Kaya's situation closely, particularly in relation to the allegations of torture. Senior officials have raised the case of Mr Kaya with the Turkish authorities, most recently at the last round of our Human Rights Dialogue with Turkey on 15 July in London. You will be aware that the trial of 11 police accused of beating and torturing Ferhat Kaya on 5 May began on 20 June.

I note that you state there are a number of applications pending at the European Court of Human Rights that relate to the BTC project. To date ECGD has received no substantiated evidence that the project implementers are not meeting their commitments regarding compensation and protection of human rights. Indeed the second review of the independent Social and Resettlement Action Plan Expert Panel dated February 2004 (www.caspiandevelopmentandexport.comiASP/PD_BTC.asp) assessed that the BTC project implementers were meeting their commitments as defined in the Resettlement Action Plan and the Contractor Control Plans, although it recommended the strengthening of project performance in a number of specific areas.

Your letter alleges that the Azerbaijan authorities are monitoring the email correspondence of Mr Gulaliyev (employed as a monitor of the implementation of the BTC pipeline): This is a matter that you may wish to take up with the Azeri Government. Under Article I of the ECHR the UK is obliged to secure to everyone within its jurisdiction the rights and freedoms set out in the Convention. But this does not extend to a general obligation to ensure that other States are complying with their ECHR obligations. Whether they are doing so can of course be tested in the European Court of Human Rights, as is now occurring.

I understand from the ECGD that they did take account of the requirements of the ECHR in their decision to provide support for the BTC project in December 2003. For the purpose of reaching a decision, advice had previously been sought from and provided by, amongst others, the FCO. This advice covered a wide range of issues including those mentioned in your letter. In all cases the advice was that, if the project was implemented in accordance with the commitments made by the project sponsor, there was no reason for the ECGD to withhold support on human rights grounds. A note of the ECGD's decision can be accessed on its website (www.ecgd.gov.uk). I do not intend to provide you with copies of the documents and other exchanges requested in your letter, as the ECGD and the FCO consider that the information contained in these falls within exemption no.2 (Internal discussion and. advice) of the Code of Practice on Access to Government Information and it would not be in the public interest to disclose it.

The Government welcomes. NGO and other public contributions to its assessments of projects. It is also welcome that this scrutiny extends to the construction phase. However the Government is not responsible for ongoing project issues that are properly the responsibility of the project managers. Once cover has been issued the ECGD's role is to monitor a project's implementation to ensure that the agreed project standards are being met. I am confident that, in conjunction with the wider BTC lender group and with the assistance of its independent consultants, it is rigorously carrying out this role with respect to the BTC pipeline project.

Baroness Symons

2 August 2004

Letter from the Minister for Europe, Foreign & Commonwealth Office to Kurdish Human Rights Project

Thank you for your letter of 7 May to Mike O'Brien, copied to other Whitehall Departments, as well as officials from the EBRD, the ECGD and the World Bank. I am replying as the Minister for Europe.

I welcome the adoption by Turkey over the last two years of a series of constitutional and legislative reforms that have resulted in substantial improvement in the human rights situation in Turkey. I am encouraged by recent changes including the release of Leyla Zana, the commencement of broadcasting in minority languages, and the passing of a new press law which contains further measures to increase the freedom of the press. I believe that the pre-accession process continues to underpin substantial reform in the country. However, I would agree that yet more needs to be done to translate the reforms passed into change on the ground. We take every opportunity to urge the Turkish government to make rapid and demonstrable progress in the practical implementation of the reforms they have passed to safeguard human rights. The Prime Minister stressed the importance of effective implementation of reforms at the first UK/Turkey Summit on 17 May in Ankara, and Lord Falconer raised concerns about human rights with Prime Minister Erdogan during his visit to the UK at the end of May.

As part of the UK's support for Turkey's EU accession bid, we hold a bilateral Human Rights dialogue to encourage further progress in particular areas and to raise individual cases. The next round of the dialogue will be held in July this year. In addition, the British Embassy in Ankara monitors human rights closely, attends key trials and raises individual cases with the Turkish authorities.

Our Embassy in Ankara has investigated the case of Mr Kaya. We have not yet seen clear evidence to suggest that Erzurum Court's request for information on Mr Kaya and his subsequent detention are connected to the BTC pipeline. Furthermore, BOTAS/DSA have advised our contacts in Turkey that they had arranged no meeting with Mr Kaya for May 2004. BTC representatives have also advised that no meeting had been arranged with them in May 2004. We will, however, continue to monitor Mr Kaya's situation closely, particularly in relation to the allegations of torture.

The BTC pipeline is subject to a strict monitoring regime by external organisations to ensure that it is constructed to the highest standards. Land expropriation and compensation is being monitored by the Social and Resettlement Action Plan (SRAP) Expert Panel, whose recent report on its review conducted in February 2004 is available on the project website (www.caspiandevelopmentandexport.com). The review included visiting the pipeline route in the Ardahan province in Turkey and the report states that: "Land acquisition activities in Turkey were observed by the SRAP Monitoring Panel to be carried out in compliance with the Resettlement Action Plan, applicable Turkish laws and World Bank Group policies".

Denis MacShane

Minister for Europe

24 June 2004

Letter from Kurdish Human Rights Project and The Corner House to Mike O'Brien MP, Minister of State for Trade, Investment and Foreign Affairs, Foreign and Commonwealth Office

BTC CAMPAIGNER—ALLEGED TORTURE OR ILL-TREATMENT IN TURKEY

We are writing to express our gravest concern over the detention and alleged torture or ill-treatment of a prominent human rights defender following his work to protect the rights of Turkish citizens affected by BP's UK-funded Baku-Tbilisi-Ceyhan oil pipeline. There is strong and direct evidence of a link between his intimidation and detention and his work in connection with the pipeline.

It is our understanding that Mr Ferhat Kaya, a former deputy chair of DEHAP in the central district of Ardahan, had been working to document the case of an individual whose land was being used for the pipeline without having been legally expropriated or compensation having been paid on 5 May 2004 he informed BOTAS, the company building the pipeline under contract to BP, of his concerns and he had been promised a meeting on Monday 10 May 2004. However, he was then arrested and now remains in detention in Ardahan. Witnesses and relatives yesterday observed blood on his clothes and deep cuts on his arms and elsewhere following one day in detention. According to information obtained by KHRP, a medical report is consistent with allegations of torture. He was also derided as a "terrorist" by the court prosecutor.

As you will know, witnesses, human rights and environmental groups believe this is Mr Kaya's second detention in connection with his work to highlight concerns over the pipeline. Last year, he received death threats prior to meeting with the Italian Export Credit Agency to inform them about social and environmental concerns associated with the pipeline. He was later detained. Assurances from Mr MacShane, the Foreign Office minister, that Amnesty International had found no evidence of a connection between this detention and his work in relation to the BTC pipeline have since been found to be unwarranted: Amnesty International has not even investigated the case.

Mr Kaya has been involved for some time in mitigating the impacts of the BTC project by ensuring that local people obtain the compensation to which they are entitled and that their rights under the European Convention on Human Rights are respected. He has assisted 38 villagers in bringing cases to the European Court of Human Rights complaining of multiple violations of the ECHR. This also reflects the ongoing failure of BP to fulfil its legal responsibilities to people affected by the pipeline and to make good on its pledges that nobody would be disadvantaged as a result of the project.

We believe that it is incumbent on the British government, as a sponsor of the BTC pipeline, to ensure that those like Mr Kaya who seek to improve the project are not victimised for speaking out. BP has specifically requested that local people help in identifying problems with the project's implementation. For this to result in detention and allegations of torture, as in this case, is not only unacceptable but a savage indictment of the project and of Turkey's commitment to human rights. Turkey is required to achieve the "stability of institutions guaranteeing democracy, human rights and respect for a protection of minorities" in order to meet EU accession requirements; its accession bid is due to be reconsidered in December 2004. Incidents such as the arrest and alleged torture of Mr Kaya strongly indicate that legislative reforms aimed at securing human rights in Turkey have failed to be implemented on the ground.

We urge you to use your best offices to investigate the circumstances of his detention and alleged torture or ill-treatment; to obtain a guarantee that his human rights are respected; and to press for his immediate release.

Kerim Yildiz

Executive Director, Kurdish Human Rights Projects

Nicholas Hildyard

Corner House

7 May 2004

cc. Secretary of State for Foreign and Commonwealth Affairs

Secretary of State for the Environment, Food and Rural Affairs

Secretary of State for International Development

Chief Secretary to the Treasury

Trade and Industry Committee

Environmental Audit Committee

Secretary General, EBRD