US embassy cable - 05ANKARA2606

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