Norilsk fuel spill in Siberia boosts ESG concerns: analysts

London — The fuel spill this week at a power plant owned by nickel and PGM producer Nornickel in Russia's Arctic region may serve to boost environmental, social and governance concerns in the country, with potential also for construction rethinks in the global Far North, according to analysts and industry watchers.

Products spilled from a reserve fuel tank at a power plant near the city of Norilsk on May 29, resulting in damage both onshore and offshore in the local area.

The tank contained 21,163 mt of diesel, Sergei Lipin, head of plant owner NTEK, a subsidiary of Norilsk Nickel, said June 3, during a government meeting on the spill. Russian President Vladimir Putin declared a statement of emergency following the leak.

Nornickel has attributed the spill to soil subsidence underneath the storage tank due to a thawing of the permafrost amid abnormally mild temperatures in recent years.

A spokeswoman for Nornickel said that the accident hasn't affected the city or community of Norilsk, or Nornickel's own production. She added that the fuel was kept as a reserve for emergency power generator, while the power plant itself runs on gas.

She declined to provide estimates for spillage clean-up costs, saying it is too early to give any guidance on this.

Analysts at BCS Investment Group said that restoration costs could vary from tens to hundreds of millions of dollars, but added that they did not expect it to exceed $200 million.

Maxim Khudalov, senior director at Moscow-based analytical credit ratings agency ACRA, estimated that skimming diesel from water could cost Rb1 billion ($14.5 million), with remediation of soil adding a further Rb2 billion-4 billion. He added that the company could also face a fine in the region of Rb1 billion, saying that a potential total of Rb6 billion would not be overly material for Nornickel.

He also said the response would be unlikely to affect operations of extractive industries and processors of resources in the area. But he added that it will serve to bring environmental issues more into focus, along with issues surrounding climate change.

"It could be an old poorly maintained tank that gave a leak. But what if it is indeed the permafrost thaw that caused that ill-fated subsidence...then the safety of a vast number of infrastructure facilities built in Far North regions and not only in Russia, but also in Canada and other countries having territories in the Arctic Circle, becomes outright debatable," Khudalov said.

"We are used to think ever-frozen land serves a solid foundation and building on it is as safe as it can get but if the assumption proves dated, it means rethinking and reequipping many of those structures with costly gear such as abyssal temperature detecting sensors, will become essential. And metals and extracting industries with assets in the north may forever incur a new cost element," he added.

Oil spills are heavily penalized but fines are also highly contested in courts,a he said.

"Norilsk was among the most progressive companies on the ESG side with among the largest ESG related investment projects worth $2.0-2.5 billion," BCS Investment Group said. "However, investors are likely to focus on the accident for quite some time, as we can see with [Russian mining and steel company] Severstal –- a blast at a mine in 2016 continues to weigh down on its ESG rating."