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 002380 
 
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 
 
Ref: 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 not seen reason to believe that BTC 
management has engaged in any kind of corrupt practice. 
It is though 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.  We 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