TECHNICAL ANNEX TURKEY AUGUST 19, 1996

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank TECHNICAL ANNEX TURKEY Report No. T-6970 TU BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT AUGUST 19, 1996 Industry, Trade and Finance Operations Division Country Department 1 Europe and Central Asia Region

2 CURRENCY AND EOUIVALENT UNITS Currency Unit = Turkish Lira (TL) June 30, 1995: US$1.00 = 43,888 TL January 30, 1996: US$1.00 = 62,387 TL June 30, 1996: US$1.00 = 81,224 TL WEIGHTS AND MEASURES 1 barrel (bbl) = cubic meters 1 metric ton of oil (0.85 specific gravity) = 7.4 bbl 1 ton crude oil equivalent (toe) = 1 ton of crude oil = 41.2 MCF of natural gas = cubic meter of natural gas 1 cubic meter (cm) = 35.3 cubic ft. 1 BCM = 1 billion cubic meters ABBREVIATIONS AND ACRONYMS AIOC = Azerbaijan International Operating Companies BOTAS = Boru Hatlari ile Petrol Tasima A.S. CAR = Central Asia Region CEAS = Cukurova Electric Company DSI = State Hydraulic Authority EIE = Electricity Survey Administration FSU = Former Soviet Union GOT = Government of Turkey KEPEZ A.S = Kepez Electric Company LNG = Liquidfied Natural Gas MENR = Ministry of Energy and Natural Resources MT = Million Metric Tons MTA = Mineral Research Institute PIU = Project Implementation Unit PSA = Production Sharing Agreements SEE = State Economic Enterprises SFYP = Seventh Five-Year Development Plan SOCAR = Azerbaijan National Oil Company SPO = State Planning Organization TEAS = Turkish Power Generation and Transmission Company TEDAS = Turkish Power Distribution Company TKI = Turkish Lignite Enterprise TPAO = Turkiye Petrolleri Anonim Ortakligi TTK = Turkish Hard Coal Enterprise TUPRAS = Turkish Petroleum Refineries Corporation TURKEY - FISCAL YEAR January 1 - December 31

3 TURKEY BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT TECHNICAL ANNEX CONTENTS Page No. I. COUNTRY AND SECTOR BACKGROUND 1 A. Country and Energy Sector Background 1 B. Energy Sector Institutions and Regulatory Environment 2 C. BOTAS: The Petroleum Pipeline Corporation 3 II. THE PROJECT 6 A. Project Background 6 B. Project Objectives and Scope 8 C. Project Cost and Financing 8 D. Project Implementation and Procurement Arrangements 9 E. Disbursements and Audits of Accounts 11 F. Project Reporting, Monitoring and Supervision Arrangements 12 ANNEXES 1 BOTAS Organizations 14 2 Project Cost Estimate 15 3 Procurement Plan and Disbursement Schedule 16 4 Key Project Activities, Implementation Schedule and Project Performance Indicators 17 5 Supervision Plan 18

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5 TURKEY BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT TECHMCAL ANNEX I. COUNTRY AND SECTOR BACKGROUND A. Country and Energy Sector Background 1. Background. Turkey's domestic production of oil and gas is insufficient to meet its fast growing demand and as a result its dependence on imported energy, particularly oil and gas, has increased significantly over the last two decades. It is expected to remain high in the foreseeable future. Under the Seventh Five-Year Development Plan (SFYP), , the growth of demand for primary energy is forecast to increase at an average annual rate of 5.3 percent and shall reach 85.8 million tons of oil equivalent (mtoe) by the year The demand for electricity is expected to reach 122 billion Kwh by the end of the plan period at an average annual increase of 8 percent. Imports of gas are expected to displace higher value petroleum products and lignite whose consumption is being reduced because of environmental concerns. 2. Turkey's most important domestic source of energy is hydroelectricity, which accounts for 40 percent of total electric power generation and 8 percent of primary energy supply. The exploitable hydropower potential is estimated at 31,000 MW, of which 10,500 MW has been developed and another 3,200 MW is under construction or planned to be developed by Abundant deposits of low quality lignite also exist -- estimated at 8.2 billion tons, half of which are of low calorific value and high sulphur content -- accounting for 36 percent of power generation and of primary energy. There are also limited quantities of low-quality high-sulphur hard coal and of oil and gas; proven hydrocarbon reserves consist of 250 million barrels of oil and 0.5 billion cubic feet of natural gas. Domestic production of hydrocarbon at about 70,000 bbl per day or 2.9 million tons/yr accounted for 10 percent of the domestic demand in This proportion is not expected to increase substantially because of the limited prospectivity of Turkey's geology. A greater utilization of domestic lignite and coal is severely constrained by environmental considerations. The balance of domestic energy demand is met, and is likely to be met in the future, by fuel imports, especially crude oil and petroleum products (estimated at 33 million tons by the year 2000), as well as natural gas (12 billion cubic meters in year 2000) which together would constitute 45 percent of primary energy supply. 3. One of the objectives of the SFYP is to meet the energy demand and the overall development of the economy at the least cost possible. In line with this objective, the Government of Turkey (GOT) has entered into long-term gas sales and purchase agreements between the countries of the Former Soviet Union (FSU) and Algeria for the supply of 6 billion cubic meters (bcm) per year and 2 bcm per year, respectively. The gas from Algeria is in the form of Liquid Natural Gas (LNG) to be received at the recently completed LNG receiving terminal at the Marmara Sea, while the gas from FSU is through an intracountry pipeline from

6 -2- Ukraine in transit through Romania and Bulgaria to Turkey. Additionally, GOT has initiated new gas supply contracts with Russia and Algeria as well as Turkmenistan, Nigeria and Qatar. 4. With regard to crude oil, Turkey had depended on a major source of supply from Iraq through the Iraq-Turkey crude oil pipeline which was constructed in 1976, and later expanded to carry about 73 million metric tons of Iraqi crude for export through the Port of Ceyhan. Following the suspension of the pipeline operations in August 1990 under a resolution of the United Nations regarding the embargo on Iraq, Turkey had lost not only revenue from the transportation of Iraq's crude oil, but also a secured source of supply of a major portion of its crude oil requirements. As a result, Turkey decided to pursue alternative sources for reliable crude supply. 5. The countries of Azerbaijan, Kazakhstan and Turkmenistan in the Central Asia Region (CAR) have significant proven reserves of oil and gas. Due to their landlocked nature, and the constraints in capacity of the existing infrastructure for transporting oil, the opportunity for the export of their crude to international markets, particularly Western markets, in large quantities has been limited. As a result, it has been difficult for them to rapidly develop these resources for export and to use the revenues from the sale of the oil and gas for economic development. A practical way to overcome this problem is to construct dedicated export pipelines which would transit through several countries (such as Azerbaijan, Armenia, Georgia, Iran, etc. ). 6. Based on Turkey's strategic geographical location and the existence of excess crude oil handling capacity at its port of Ceyhan on the Mediterranean coast, a dedicated transit pipeline through Turkey for the export of crude from Azerbaijan and the CAR countries could be a viable option for the resolution of this problem. In this regard, Turkey has decided to undertake a feasibility study that would evaluate the viability of such an option. If found viable, the proposed transit pipeline would resolve a variety of issues. First, it would provide an alternative option for the export of crude from Azerbaijan and the CAR countries, and hence stimulate the rapid development of crude oil reserves in these countries; second, it would provide Turkey a reliable source of crude oil for its consumption, and also provide the region with a viable route which would be attractive to the producers and financeable by private investors; and last, it would reduce the bottleneck of oil and other products through the congested Straits (Istanbul Strait, Marmara Sea and Canakkale Strait) 1 that link the Black Sea to the Aegean Sea. B. Energy Sector Institutions and Regulatory Environment 7. Energy Sector Institutions. Energy development in Turkey is dominated by the public sector. The Ministry of Energy and Natural Resources (MENR) is responsible for the planning, 1/ The Straits connecting the Black Sea to the Mediterranean Sea were defined in November 24, 1994, by the Rules and Recommendations of the International Maritime Organization to consist of Istanbul Strait, Marmara Sea and Canakkale Strait.

7 -3- coordination and development of energy resources in Turkey. The Turkish Hard Coal Enterprise (TTK), the Turkish Lignite Enterprise (TKI), the Turkish Petroleum Corporation (TPAO) and the Mineral Research Institute (MTA) have responsibility for the extraction of fossil fuels and radioactive materials. Design and construction of public sector hydroelectric projects is entrusted to the State Hydraulics Authority (DSI). Turkish Power Generation and Transmission Company (TEAS) is responsible for the generation and transmission of almost all the electricity produced in Turkey and for implementing the Government's program of rural electrification and the construction of all public sector generation and transmission facilities, with the exception of all public sector hydroelectric plants for which DSI has responsibility. The Turkish Power Distribution Company (TEDAS) has responsibility for distributing electricity produced by TEAS. The production, transport and marketing of petroleum products are undertaken respectively by Turkish Petroleum Refineries Corporation (TUPRAS), Boru Hatlari ile Petrol Tasima A.S. (BOTAS) and Petrol Ofisi (marketing and distribution). The Electricity Survey Administration (EIE) is responsible for renewable energy, hydropower surveys and implementation of the national energy conservation program. 8. Participation of the private sector in the energy sector in Turkey has been limited. It consists of two small electricity utilities, Cukurova Electric Company and Kepez Electric Company (CEAS and KEPEZ), some small coal mines, one refinery, joint ventures in petroleum exploration and some petroleum product marketing and distribution activities. 9. Regulatory Environment. BOTAS' operations and key long-term policies are dictated to a large extent by several public agencies which are mandated to implement the various policies of the Government. BOTAS' investments, like all investments in the energy sector, must be approved by the State Planning Organization (SPO) and MENR, to ensure consistency with the country's integrated long-term planning for energy consumption. The environmental aspects associated with BOTAS' operations are regulated by the Ministry of Environment. The financial affairs of BOTAS are governed by the Turkish Commercial Code. However, as regards the pricing of natural gas, BOTAS has been given complete responsibility for establishing the pricing in accordance with Decree No C. BOTAS: The Petroleum Pipeline Corporation 10. Organization. BOTAS was originally established on August 15, 1974 as an affiliate of TPAO to transport Iraqi crude oil to the port of Ceyhan in the Gulf of Iskenderun. Its mandate was later expanded to include: (a) transportation of crude oil (including locally produced crude) and natural gas; and (b) purchase and sale of natural gas. BOTAS is a state monopoly and, as such, has complete jurisdiction over the importation, distribution, and sale of natural gas as per Decree No BOTAS is also responsible for setting natural gas prices and transmission tariffs. Up to 1994, BOTAS was a subsidiary of TPAO. By Decree 95/6526 of February 8, 1995, it was spun off from TPAO and became a State Economic Enterprise (SEE). This decree allows BOTAS to engage in such activities as exploration and production, transportation, storage and refining of crude oil and natural gas outside Turkey. The operations of BOTAS are also governed by Law 233 which defines the operations of SEEs.

8 BOTAS is overseen by a Board of Directors which comprises six members, the Chairman, two representatives from MENR, one from Treasury and two Assistant General Managers. The Board is elected for a three-year period. BOTAS' management comprises a General Manager, who is also the Chairman of the Board of Directors, and four Assistant General Managers each responsible for Construction, Operations & Administration; Project, Planning, and Management Information Systems; Natural Gas Activities; and Procurement and Petroleum Activities. The four Assistant General Managers are supported by nine Department Heads and their staff. The managers of the Ankara and Ceyhan districts and the heads of such auxiliary functions as legal, public relations and security report directly to the General Manager. The organization chart of BOTAS is shown in Annex Personnel and Staffing. BOTAS' personnel policies are governed by the general Labor Law 1475, applicable to both public and private enterprises in Turkey. Under this Law, all labor contracts are subject to collective bargaining without government intervention. The results of the collective bargaining are subsequently approved by the Government. As of December 31, 1995, BOTAS employed 1,917 staff. The staff of BOTAS participate in various training programs to build their technical and administrative capabilities. These programs take place externally in various training centers in Turkey and abroad. 13. Facilities and Operations: (a) Crude Oil Transportation. BOTAS is responsible for the transportation of crude through four pipelines with a total annual capacity of about 80 million tons: (i) the Iraq-Turkey crude oil pipeline is 1,297 km long (in Turkish territory) and has a total annual capacity of 70.9 million tons; (ii) Batman-Dortyol pipeline is 511 km long with an annual capacity of 3.5 million tons; (iii) Selmo-Batman pipeline is 42 km long with an annual capacity of 0.8 million tons; and (iv) Ceyhan-Kirikkale pipeline is 448 km long and has an annual capacity of 5 million tons. These pipelines are supported by 9 pumping stations, 2 pigging stations, 43 storage tanks, 4 relief tanks, 3 ballast water treatment facilities, 1 slop tank and a marine terminal. As a result of the embargo imposed on Iraq by the United Nations in August 1990, the operation of the Iraq-Turkey pipeline has been suspended. The pipeline is expected to begin operations later this year as the United Nations has permitted Iraq to export about US$2 billion of crude to meet emergency needs. About 6.4 million tons were transported by the three other pipelines in 1994, representing a capacity utilization of over 65 percent. The construction of these pipelines along with the Russian-Turkey gas pipeline was managed by BOTAS 14. (b) Natural Gas Transportation and Trade. The natural gas transmission pipeline linking the Russian Federation (Russia) gas export system to Turkey is 842 km long from Bulgaria border to Ankara. The high-pressure pipeline (75 bar) is comprised of linepipes ranging from inches in diameter. It is also supported by 31 line valves, 9 pigging stations and 1 compressor station. Construction of a second compressor station started in Construction of an LNG import terminal in Marmara Ereglisi was completed in The terminal is used for receiving, storing and regasifying LNG for injection to the pipeline system. The terminal is designed to receive imports of up to 2 billion m 3 of LNG annually.

9 In February 1986, BOTAS and Russia through SOYUZGAZEXPORT, entered into a Purchase and Sale Agreement for a period of 25 years for the supply of up to 6 billion m 3 of natural gas per year. BOTAS also has an agreement with Algeria to purchase up to 2 billion m 3 of natural gas per year. A total of 5.4 billion m 3 of natural gas was imported from Russia and Algeria in In 1995, BOTAS signed a contract with Nigeria for the supply of 0.9 billion m 3 starting More recently, it has reached agreement with Turkmenistan for the supply of 15 billion m 3 of natural gas over a period of 30 years, starting in In order to secure a further supply of gas, BOTAS is investigating the possibility of procuring natural gas and/or LNG from Iran and Qatar. 16. Turkey initially started using natural gas in 1987 for power generation; residential and commercial usage followed primarily in two big cities, Istanbul and Ankara. Industrial usage of natural gas started in Efforts are being made to encourage the establishment of more regional and local natural gas distribution companies to facilitate industrial, commercial and residential usage. 17. Long-Term Plan and Investment Program. BOTAS' long-term plan is based on SPO's detailed projections of the country's natural gas consumption, which is expected to grow at about 12 percent annually and to reach 40 billion m 3 by the year 2010 and 63 billion m 3 by the year In order to meet the demand for natural gas, plans are being made for extending the current pipeline routes, increasing storage capacities and for establishing natural gas distribution companies within the cities. The construction of the Eskisehir and Kosekoy Distribution Lines which would carry the gas from the main import pipeline to the industries in the Thrace, Izmit Bay, Bursa, Bilecik, Eskisehir and Ankara regions is ongoing. 18. Studies are ongoing for: (a) extending the Russian-Turkey natural gas pipeline to the Aegean and Southern parts of Turkey; (b) constructing a Georgia-Turkey pipeline which would supply natural gas to the Eastern part of Turkey, especially Erzurum; (c) building an Iran- Turkey-Europe natural gas pipeline; and (d) assessing the possibility of using the gas reserves in Silivri and the domes in the Salt Lake as underground storage in order to allow for a more efficient management of supplies during the peak demand periods. Finally, evaluation of the feasibility study for building a new LNG import terminal in Iskenderun and/or Izmir is ongoing. 19. As regards crude oil, in addition to the study to be financed under the proposed loan, other projects are being considered. The Governments of Turkey and Turkmenistan are undertaking a study which will review the possibility of transporting crude oil by pipeline from Turkmenistan to Europe via Turkey. In addition, a study is ongoing for transporting crude oil from the Ceyhan marine terminal to Ukraine and/or other Black Sea countries via Samsun.

10 -6- II. THE PROJECT A. The Project Background 20. The Government of Turkey has requested a World Bank technical assistance loan to undertake a feasibility study and a general environmental audit of several route options for an oil export pipeline which would pass through Turkey starting from Baku in Azerbaijan and ending at Ceyhan Marine Terminal in Turkey. The proposed pipeline transmitting through Turkey would transit through several countries. If found viable, the pipeline would provide for Turkey, a reliable and diversified source of crude supply as well as revenue from the transport of the crude. Furthermore, it would provide a reliable alternative route for the export of crude oil from Azerbaijan and other countries in the CAR to international markets, as well as contribute to enhancing the regional cooperation and accelerating the development of the oil resources of the region. Hence, BOTAS on its own and in association with major oil companies active in Azerbaijan, has undertaken preliminary screening of the possible routes for exporting crude oil from the land-locked region to the International markets and has concluded that the inland routes from Baku to Ceyhan through either Georgia or Armenia are the most attractive options and should be studied in greater depth and detail. 21. A World Bank mission that visited Ankara from February 15 to 17, 1996, examined the route analysis done by BOTAS, and recommended that prior to undertaking a detailed design and engineering study of a particular route, a feasibility study to evaluate the technical viability and environmental sustainability of several route options should first be undertaken. The mission and the Turkish authorities agreed that the proposed study to be financed by the World Bank should be undertaken with the assistance of internationally-reputable consultants. The consultants shall review and update the prefeasibility studies already done by BOTAS, taking into consideration such evaluation parameters as pipeline capacity, technical and economic viability, environmental sustainability, least cost to the oil shippers and other factors that may be pertinent. On the basis of this review, the consultants would recommend an optimum route which is technically viable, cost effective and environmentally sustainable. 22. Regional Development. In 1991, Azerbaijan started the tender rounds for development of the Azeri, Chirag and deep water portion of Gunashli oil fields. After some extended negotiations, on September 20, 1994, a Production Sharing Agreement (PSA) for development of these fields was signed between the State Oil Company of Azerbaijan (SOCAR) and eleven foreign oil companies (BP, AMOCO, LUKOIL, UNOCAL, STATOIL, ITOCHI, TPAO, EXXON, PENZOIL, RAMCO and DNKL). The PSA was then ratified by Azerbaijan Parliament and became effective on December 12, The PSA requires that the foreign oil companies finalize, as soon as possible, the arrangements for financing, constructing and operating of a main export pipeline capable of transporting the envisaged volume of oil to its members. 23. Azerbaijan International Operating Company (AIOC) is a joint venture company formed by the eleven foreign oil companies in order to provide the consortium with a vehicle to carry

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