US embassy cable - 05ANKARA131

UNCLAS SECTION 01 OF 02 ANKARA 000131 
 
SIPDIS 
 
SENSITIVE 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON, EPET, TU 
SUBJECT: TURKEY'S BTC PIPELINE AIMING AT FIRST OIL AT 
CEYHAN SEPTEMBER 2005 
 
 
1.  (SBU) Summary: According to the BTC Consortium's Turkey 
office, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline is 95 
percent complete in Turkey.  After testing and line fill, the 
first tanker will be loaded at Ceyhan port by September 2005. 
  Given construction delays and problems with the 
subcontractors in the Lot A segment near the border with 
Georgia, the prime contractor, state pipeline firm BOTAS, has 
taken over control of construction completion.  End Summary. 
 
Lot A Woes Overcome - Inshallah 
------------------------------- 
 
2.  (SBU) Reinforcing statements by senior BP officials to 
Ambassador in December, BTC Turkey Director Yashar Latifov 
confirmed that construction problems in Lot A ) adjacent to 
Georgia ) required BOTAS to take over completion of the 
project from its Lot A subcontractor joint venture: Turkish 
TEPE and Dutch Nacap.  In a January 7 meeting, Latifov 
expressed confidence that BOTAS -with the oversight of 
project lead BP - will bring the project to completion 
substantially on time.  While the entire 1000 kilometer 
project in Turkey was 95 percent complete, he noted that Lot 
A was about 86 percent complete with about 70 kilometers of 
welded pipe still above ground.  He candidly noted that 
inadequate performance by the sub-contractors, fueled partly 
by disagreement between themselves and financial problems at 
TEPE, had reached an unacceptable level that had threatened 
timely construction completion.  All parties supported the 
overall contractor BOTAS taking over responsibility for 
completion.  BOTAS also took over completion of two pump 
stations from TEPE.  Despite snow and extreme cold in 
Turkey's high elevation east, Latifov said construction crews 
have been mobilized and are able to maintain progress. 
 
3.  (SBU) Latifov asserted that the pipeline in Turkey would 
be complete by the end of April 2005 (Ministry of Energy 
Pipelines Department Head Nilgun Acikalin made the same 
estimate on January 6.)   The BTC Director said that the 
project's upstream work was on schedule and first oil would 
be pumped at the wellhead in Azerbaijan in February and 
delivered to the Baku import terminal in March.  Line-fill 
would proceed in March and April in Azerbaijan and Georgia, 
respectively.   According to Latifov, by the end of first 
half 2005, all testing would be complete in Turkey and the 
pipeline would be ready for introduction of hydrocarbons at 
the Georgia border.   Filling of the pipeline would proceed 
over the next 2-3 months ) five million barrels of oil, so 
then the first tanker would fill with BTC oil at Ceyhan in 
September. 
 
Lessons Learned 
--------------- 
 
4.  (SBU) In briefly reviewing the project history, Latifov 
noted the lessons learned for all parties.  The linchpin of 
the deal was provision of the $1.4 billion fixed price, 
turnkey contract from the Government of Turkey  (GOT), in 
advance of detailed engineering and even route designation. 
Over 2001 to 2002, the detailed engineering, procurement, 
environmental assessment, and route/land survey indicated 
that the $1.4 billion cap was aggressive, but feasible. 
Because of the unusual GOT guarantee, the state sought to 
maintain project and procurement control through BOTAS 
functioning as general contractor.  Because BOTAS lacked the 
technical expertise, experience, and depth to execute the 
entire project in Turkey, the project was divided into three 
lots granted to sub-contractors, most functioning as 
joint-venture groups.  With the new GOT government in early 
2003, BOTAS was slow in getting the project fired up.  With 
the attention of project sponsors and the USG, BOTAS overcame 
this hurdle, and construction has generally been 
substantially on track.   Latifov noted a number of key 
lessons: 
 
-Some of the sub-contractors lacked adequate technical 
experience (i.e., TEPE exhibited only adequate civil 
construction track-record, but failed to even erect good 
construction camps).  Latifov suggested that inadequate 
attention to subcontractor financial wherewithal and/or 
under-bidding contributed to the ultimate problems. 
-BOTAS gained incredible general contractor experience, 
heretofore lacking.  Obtaining a lump sum turnkey contract 
before engineering is a unique experience. 
-The special role of the international financial institutions 
contributed to overall three-country cost overruns of up to 
$400 million on the $2.9 billion project (also reported 
widely in the press).   Financing, due diligence, and 
consulting costs were unexpectedly burdensome, in Latifov,s 
opinion. 
-Latifov noted that the project was to be built to BP and 
international standards (the highest common denominator), but 
in effect BOTAS expected to utilize standards required by 
Turkish law (the lowest common denominator).   BOTAS has 
argued that BP intercessions to require high standards should 
be treated as change of scope requirements.  These arguments 
will continue to play out in assigning responsibility for 
construction delays and cost overruns, but, unlike in 
Georgia, have not delayed construction in Turkey. 
-The pipeline fill will be about twice as costly as 
projected, given current oil prices. 
 
5.  (SBU)  Latifov noted that construction was the relatively 
easy part; now the project had to be managed successfully 
over the forty year project life, again testing BOTAS, 
expertise and experience.  Moreover, the governments involved 
had to assure security and an appropriate operating 
environment.   Latifov observed that the lessons learned 
would be valuable for the next big project: the Shah Deniz 
gas pipeline, which would generally parallel BTC, including 
about 200 kilometers in Turkey to Erzurum.  The Director said 
that construction had started in Azerbaijan and public 
tenders had been advertised one month ago.  He expected major 
construction to start this summer to allow projected gas flow 
at the end of 2006. 
 
6.  (SBU) COMMENT: It is not surprising that such a large and 
unique international project would have some unexpected 
challenges, delays, and cost overruns.  BTC's Turkey Office's 
characterization of construction and oil flow timing appear 
credible to us, although we are not in a position to directly 
eyeball the final construction zone.  We also are not in a 
position to evaluate both BTC and our Ministry of Energy 
contacts' suggestions that some construction and security 
issues remain in Georgia. 
EDELMAN