Identifier
Created
Classification
Origin
06ANKARA2009
2006-04-13 04:17:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

TURKEY: BTC AND BOTAS AT ODDS OVER COST OVERRUNS

Tags:  EPET ENRG EINV TU AZ GG 
pdf how-to read a cable
VZCZCXRO1822
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHAK #2009/01 1030417
ZNY CCCCC ZZH
P 130417Z APR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 4775
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBS/USEU BRUSSELS
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NSC WASHDC
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEUITH/ODC ANKARA TU
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 002009 

SIPDIS

SIPDIS

USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
DOE FOR CHARLES WASHINGTON
EUR ALSO FOR MATT BRYZA AND STEVE MANN

E.O. 12958: DECL: 04/30/2016
TAGS: EPET ENRG EINV TU AZ GG
SUBJECT: TURKEY: BTC AND BOTAS AT ODDS OVER COST OVERRUNS

REF: A. ANKARA 1705


B. ANKARA 1527

Classified By: AMBASSADOR ROSS WILSON FOR REASONS 1.4 (B,D)

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 002009

SIPDIS

SIPDIS

USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
DOE FOR CHARLES WASHINGTON
EUR ALSO FOR MATT BRYZA AND STEVE MANN

E.O. 12958: DECL: 04/30/2016
TAGS: EPET ENRG EINV TU AZ GG
SUBJECT: TURKEY: BTC AND BOTAS AT ODDS OVER COST OVERRUNS

REF: A. ANKARA 1705


B. ANKARA 1527

Classified By: AMBASSADOR ROSS WILSON FOR REASONS 1.4 (B,D)


1. (C) SUMMARY: While construction of the BTC oil pipeline
is still reportedly on track for a first tanker loading at
Ceyhan on May 27 and a formal opening ceremony on July 13,
BP and the Turkish pipeline construction company BOTAS,
which has a lump sum, turnkey contract for construction of
the Turkish portion of the pipeline, are increasingly at
odds over how to allocated financial responsibility for
cost overruns for construction in Turkey. In conversations
in Ankara with a variety of GOT officials April 4-6, EUR
DAS Bryza emphasized the BTC project,s strategic importance
and
potential impact on the reputation of BOTAS and Turkey,
especially
in the context of other potential pipeline projects . While
it
seems unlikely that BOTAS bears no fault for BTC,s cost
overruns,
BOTAS, ability to take financial responsibility is
politically
hampered by an environment in Turkey of almost constant
investigation and accusations of corruption and poor
management at BOTAS. End Summary.

--------------
BTC AND BOTAS - HE SAID; SHE SAID...
--------------


2. (C) In meetings with GOT interlocutors, DAS Matt
Bryza raised concerns about cost over-runs and delays in
bringing the BTC pipeline into operation. (BP/BTC has made
what it describes as a generous and reasonable offer of
funding $250 million of the $330 million in BOTAS claims
that are not solely attributable to scope changes in the
pipeline, leaving BOTAS to cover $80 million -- see ref
B.) Bryza made the case that the most important objective
was timely completion of this critical and strategic
pipeline. He said he could not make a technical commercial
assessment of who was at fault for cost overruns, but
wondered
if international markets would accept that none of the
disputed
claims were attributable to BOTAS. Bryza noted that this

could
affect Turkey's and BOTAS' reputation for regional energy
projects
as well as the domestic energy investment environment.
Moreover, arbitration would be a contentious,
time-consuming, and expensive process. At the same time,
Bryza told his interlocutors that he understood that it
would be difficult for BOTAS or even the Minister of Energy
to take responsibility for such a decision, given a political
climate in which agreement to pay compensation to private
companies
might prompt allegations of corruption, as has often occurred
in the
recent past. Should BOTAS agree to pay a portion of the cost
overrun,
there might come a time when it will need to seek approval to
do so
from the Prime Minister. Senior BOTAS officials nodded their
heads
affirmatively.


3. (C) Energy Minister: Energy Minister Hilmi Guler
asserted to Bryza on April 5 that BOTAS was not responsible
for the disputed claims, claiming that they were due to
scope changes that came from the BTC Consortium. Guler
said that BOTAS was not doing this project for profit;
rather, Turkey and BOTAS supported BTC for prestige and
strategic reasons. He said that BP and the Consortium were
not acting like partners to BOTAS and Turkey. The Minister
argued that Turkey had been on track to finalize the
project early and on budget by the time of the elections in
Azerbaijan last year, but that BP had initiated significant
scope changes and had suddenly adopted an intransigent
position on paying claims, which delayed the project,s

ANKARA 00002009 002 OF 003


completion.
He said that BP now wanted to
buy BOTAS International Ltd (BIL),the separate operating
company for BTC, and had taken a different approach to the
company. Guler reaffirmed BOTAS' commitment and ability to
complete the project for the lump sum turnkey (LSTK) amount
of $1.4 billion. He asserted that Turkey had completed
two-thirds of the length at one-third of the total cost,
complaining that the Georgia portion had created delays and
lost money for the consortium. The Minister also claimed
that the consortium was adopting tactics to seek to avoid
having to pay a $300 million bonus due to BOTAS as a result
of
BOTAS (supposedly) fulfilling its contractual obligations.
(Comment: This claim contradicts BTC Corporation,s
arguments
that BOTAS, failure to fulfill its obligations resulted in
cost overruns, for which BOTAS is liable under BTC,s
lump-sum
turnkey contract. End comment.) Guler said
that he was closely following the project in monthly
meetings. Guler noted that BOTAS had been ready to send
oil from Pump Station 3 (ref A),but said the Consortium
arbitrarily delayed the progress of oil through the
pipeline for "pigging experiments." (Note: Both sides
accused the other of using "go slow" tactics. However,
given the high costs of delay for the BTC consortium, it
is illogical that the Consortium would intentionally delay
the project. End Note.) Finally, Guler defended the
expertise of BOTAS, noting that it had successfully built
over 4000 km of pipelines.


4. (C) The Ambassador noted that arbitration could be
messy and expensive, and would show lots of "dirty
laundry"; negotiating a solution would be a much better
path. Guler said his preference is to avoid arbitration.
Guler said that the Prime Minister was aware of the issues,
but the $80 million offer was not "worthy" of him. The
Minister added Turkey is committed to achieving first
tanker loading on May 24 -- and a formal celebration on
July 13.


5. (C) MFA Meetings: Bryza also raised the issue with
Foreign Minister Gul (septel) and with the Prime Minister's
foreign policy advisor Ahmet Davutoglu at separate
meetings. The Foreign Minister expressed appreciation for
the comments and the mutually strategic importance of the
project, but said that these issues should be raised with
the Minister of Energy. MFA Energy Deputy Director General
Mithat Rende, who was present for the meeting with the
Energy Minister did not express a position on the issue.
Finally, incoming MFA high-level Energy Coordinator
Ambassador Mithat Balkan expressed an understanding of the
broader strategic issues and perceptions, as well as the
political and fiscal difficulty for anyone at BOTAS or the
Energy Ministry to accept responsibility for any over-runs.
He promised to research the issue and brief his Minister.


6. (C) BOTAS: Bryza raised the disputed claims with BOTAS
acting DG Riza Ciftci and his staff in a separate April 5
meeting. Deputy Project Director Gokmen Cologlu was
adamant that the disputed claims of $330 million (he said
BOTAS had dropped $20 million from the true number of $350
million) were not the responsibility of BOTAS. He said
they stemmed from scope changes from the client and were
not the fault of BOTAS. Articulating a message very
similar to that of the Minister of Energy, he argued that
BOTAS was doing the project on a non-profit basis and
expressed great frustration with BTC management. He said,
"We have succeeded against nature and the BTC Consortium."


7. (C) Bryza responded to Ciftci that the most important
goal was to complete the project, noting that the LSTK
contract (and GOT Treasury guarantee) had been instrumental
to getting the deal done. He noted that the cost overrun
dispute and potential arbitration could affect the
international
reputation and investment environment of BOTAS and Turkey.
The BOTAS officials noted that U.S. firm Stone and Webster
did a feasibility study, which identified the cost in Turkey
at $1.2 billion. This study put in question

ANKARA 00002009 003 OF 003


the Consortium's assertion that the same scope project now
cost $1.7 billion. The BOTAS officials asserted that the
cost increase was due to changes in scope and standards.
As an example, they mentioned a significant change in the
specs for the pipe material to be able to handle sweet or
sour crude. (BP has not disputed responsibility for this
client-driven scope change.) The BOTAS officials argued
that BTC had initiated many work stoppages without
adequated cause. Thus, they concluded that BOTAS was
sincere. They remained hopeful for a settlement, but they
had approval to take the dispute to arbitration.


8. (C) DAS Bryza has cleared this message.


Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON