BTC pipeline in Turkey still aiming for late

UNCLAS SECTION 01 OF 04 ANKARA 002380

SIPDIS

STATE ALSO FOR H
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO
DOE FOR CHARLES WASHINGTON
NSC FOR BRYZA

SENSITIVE

E.O. 12958: N/A
TAGS: EPET ENRG PHUM TU BTC
SUBJECT: BTC pipeline in Turkey still aiming for late
2005 first tanker load - Sub-Contractor woes addressed

Ref: A. Ankara 131


B. Ankara 1306

C. Ankara 1040

Sensitive But Unclassified. Please Handle Accordingly.


1. (SBU) Summary: While working to deliver the Baku-
Tbilisi-Ceyhan pipeline in Turkey has pushed Turkey's
state pipeline company BOTAS to operate much closer to
international standards, it has encountered great
difficulty managing the variety of sub-contracts on the
job. BOTAS has had to sequentially take over a number
of sub-contracts for non-performance, but is still
estimating first oil at Ceyhan in fourth quarter 2005.
While there may be some instances of slow payment on
compensation to land-owners, Embassy is not aware of
any systemic problems or irregularities, nor is there
any evidence of corruption or human rights violations.
End Summary.

The view from Erzurum - Pump Station #2 and Lot B
-------------- --------------


2. (SBU) In an April 20 visit to Erzurum, Energy
Officer visited Pump Station number two and portions of
Lot B of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline.
As reported in Ref A, BOTAS (Turkey's state pipeline
company and BTC general contractor) took over the Lot A
(from the Georgian border) subcontract in December 2004
because of inadequate performance from the sub-
contractor, TEPE-Nacap (a Turkish-Dutch JV). In
addition, BOTAS initiated greater oversight of the Lot
B sub-contract with another Turkish company, Alarko.
Most recently, on March 29, BOTAS also took over the
sub-contract for the four pump stations in Turkey from
TEPE, again for inadequate performance. Per Ref B, the
BTC consortium provided two loans totaling $160 million
to BOTAS to cover extra project completion costs in
Turkey, and to avoid making a sensitive call under the
Government of Turkey (GOT) guarantee for delivery of a
fixed cost and date contract for the project.
According to the turn-key contract with BOTAS, the
pipeline was to be complete by May 15, after which
daily penalty payments of $ 0.5 million would accrue.
BTC officials told Energy Officer that whether or not
this date would be enforced or adjusted was still an
open issue. Moreover, they said funding of the second
loan tranche was premised under a number of strict
conditions that might discourage its use.


3. (SBU) BTC Pump Station Manager Gary Allen was
upbeat about the ability of the project to deliver
first oil at Ceyhan in October 2005. He outlined a
number of key steps for realizing this goal. According
to Allen, starting May 2, the first 125 km from Baku
would be filled for detailed testing of the oil and its
viscosity, which would assess adequacy of plans for
dealing with the high wax content of the Azeri oil to
assure capacity for high elevation winter transit along
the route. He noted that there were still construction
issues in Georgia, including directional drilling
underway to put in place a significant river crossing.
Allen said that oil was to be ready at the Georgia-
Turkey border by June-July, when the pipeline in Turkey
was to be ready for final testing and filling. While
Allen was optimistic for first oil in October in
Ceyhan, he noted if there were a combination of further
construction delays and negative testing results on oil
waxing properties in cold temperatures, then first oil
could be delayed to 2006.


4. (SBU) Allen explained that Pump Stations 1 (near
the Georgia border) and 3 (east of Erzincan) would
provide the main pressure impetus to pump oil over
mountains in Turkey, while Pump Stations 2 (at Erzurum)
and 4 (near Sivas) would provide boosting capacity for
larger volumes, as well as completing the fiber optic
supported control network. Energy Officer observed
that Pump Station 2 still looked like an active
construction site, with a lot of work left to be
completed: final tie-in of the pipeline; final tie-in
of the gas spur from the Iran-Erzurum gas line; final
work on the four 4 MW engines, gear-boxes, and pump-
room.


5. (SBU) BTC Lot B Construction Manager Joe D'Amico
was optimistic for June completion of Lot B, the
longest of the three lots in Turkey at 470 km. He
admitted that this was a bullish schedule, given that
large portions of the route were still buried under
heavy snow. He said that the pipeline was welded and
back-filled, but hydro-static testing, installation of
block valves, and reinstatement (contouring,
replacement of top soil, and re-seeding) remained to be
done (he showed examples of all these to Energy
Officer). D'Amico explained the challenge of closely
paralleling the Natural Gas Pipeline (NGPL) from Iran
in parts of Lot A and B, where no reinstatement had
been done by BOTAS in constructing that line about five
years before. Not only could no dynamite be used in
BTC construction, but now the consortium faced the need
to do additional reinstatement of the NGPL to avoid
erosion risk to their own pipeline. D'Amico explained
that after reinstatement of the 28 meter BTC right-of-
way, the land owner (already compensated) would regain
rights to the land, apart some restrictions on building
or planting on the 8 meter center strip.

Community Investment Program
--------------


6. (SBU) BTC Community Investment Program implementer
Faik Kantar (Ataturk University Agriculture Faculty)
briefed Energy Officer on the extensive agriculture and
community development programs being implemented under
a 3-year $150 million budget for sixty villages around
Erzurum. In a meeting with the Ilica Kaymakam (sub-
Governor),five village muhtars (elected village
officials) spoke highly of the program, but spent more
time complaining about problems associated with
construction in Lot B. The sub-contractor, Alarko, had
taken over the contract from an earlier incarnation,
STA, which had rushed to complete its work during the
short summer season, and had not repaired some damage
to irrigation ditches and access roads. The local
irrigation council had taken the case to the court
system. Note: while all parties hope for a timely
settlement, in this particular area, the lack of
closure on these construction problems risks to erode
the good-will BTC hopes to generate by its community
program. BTC officials told Energy Officer that this
was an exceptional case, but it was out of their hands
pending resolution of the court process. End Note.


7. (SBU) Both the Mayor and Chamber of Commerce
President of Erzurum were strongly supportive of BTC
and the "East-West Energy Corridor" as a positive
contributor to the city and region. They also
expressed pride in the recent municipal natural gas
contract - only partially implemented to date - to
replace wide use of dirty coal. They also embraced
plans for expanding Erzurum's skiing facilities,
including dreams of hosting a winter Olympics in the
future.

Non-performance of Sub-Contractors - Not Corruption
-------------- --------------


8. (SBU) An April 14 story in the Radikal newspaper
reported on a Prime Ministry inspection report that
highlighted alleged overpayments by BOTAS to its sub-
contractors, including TEPE-Nacap. The article claimed
that in TEPE-Nacap's scramble to retain its contract
for Lot A, it had demanded extra payments from BOTAS.
In addition, according to the article, BOTAS made a
high priced contract to Fernas Company to set up an
"emergency team" to complete work, because of proximity
of available construction equipment. Per Ref C,
Fernas Company is one of a number of firms (including
BOTAS) under investigation under the current energy
probe for payment irregularities, harking back to the
so-called "White Energy Scandal". BTC officials told
Energy Officer that the consortium had approval
authority over principal sub-contractors, but claimed
that BOTAS had acted on its own in apparently engaging
Fernas. Officials also lamented that in general sub-
contractors had bid too low, took their cut, and then
threatened to walk unless more money was paid. Or, in
the same vein, they resort to arguments about scope and
design (BOTAS and TEPE are engaged in such an argument
related to both lot A and the pump stations contracts).
An April 27 article in the Aksam newspaper reported
that the Ministry of Energy had begun an inspection of
alleged overpayments by former BOTAS officials to sub-
contractors, and was considering initiating a court
case.

Comment - Glitches, but not Systemic Abuses
--------------


9. (SBU) Given the scope of the three-country project
through rugged, mountainous terrain, it was inevitable
that there would be some delays and cost over-runs in
the BTC pipeline. BOTAS has been forced to adopt
international business standards, but is still not all
the way there. According to BTC officials, the naming
of a new BOTAS BTC manager, Osman Gokcel, fourteen
months ago, brought a serious management perspective,
replacing the previous political bureaucrat mind-set.
There may ultimately be more allegations of
mismanagement among BOTAS and sub-contractors, but
Embassy has not seen reason to believe that BTC
management has engaged in any kind of corrupt practice.
It is though unfortunate to see for the first time one
of the BTC sub-contractors named specifically as
allegedly involved with improper payments. In the
confusion of attempting to deal with non-performance by
some of its sub-contractors, BOTAS may have not adhered
to appropriate procedures or good business practices,
and may be exposed to criticism of poor management by
inspection audits. Unfortunately, the plethora of sub-
contracts, some apparently chosen for political
connections, more than technical competence, has led to
the ultimate need for BOTAS to take over the contracts.
The inability to adequately police sub-contractor
performance may have contributed to excessive
collateral damage, which may remain a lingering issue.
BOTAS will have gained valuable lessons learned for
managing large, multi-country projects for future
development.

10. (SBU) In addition, Embassy finds no credence in
claims by some outside groups of alleged human rights
abuses. For example, while a London-based Kurdish
group has alleged human rights violations in Turkey
related to the pipeline, domestic groups have made no
such claims. Some of the outside claims incorrectly
refer to Kurds living in the North-East, next to
Georgia. We notes the vigilance of both World Bank IFC
and the Caspian Development Advisory Panel providing
regular oversight on human rights and community
development issues, countering the shrill claims of
some web-sites outside of Turkey. At a meeting last
fall with former State official Stuart Eizenstat and
the Caspian Advisory Group, Embassy and reps discussed
training and controls related to human rights for the
Jandarmarie Corps, responsible for BTC security in
Turkey. Embassy observes that BTC appears to have a
robust and detailed program for seeking "buy-in" from
local populations by co-financing investment in
cooperatives, agriculture, animal husbandry,
irrigation, and women's education, in addition to
resolving construction-related complaints.
Edelman