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Cablegate: Btc Pipeline in Turkey Still Aiming for Late 2005

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 ANKARA 002606

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

Refs: 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 no reason to believe that BTC
management has engaged in any kind of corrupt practice. It
is 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. Embassy 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

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