Document o f The World Bank FOROFFICIALUSEONLY Report No: 34140-TU PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OF US325 MILLION TO BORUHATLARIILEPETROLTASIMA A.S. (BOTAS) WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY FORA GAS SECTORDEVELOPMENT PROJECT OCTOBER31,2005 InfrastructureDepartment EuropeandCentralAsia Region This document has arestricted distribution and may be usedby recipients only inthe performance o f their official duties, Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective October 27,2005) Currency Unit = New Turkish Lira (YTL) 1.35 = US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan B C M Billion cubic meters BOOS BuildOwnand Operate Power Plants BOTAS BORUHATLARI ILEPETROLTASIMA A.S. (TurkishPipeline Company) BOTS BuildOperate andTransfer Power Plants BTC Baku-Tbilisi-Ceyhan (Crude oil import pipeline) CFAA Country Financial Accountability Assessment DSI Devlet Su igleri (State Hydraulic Works) E&C Engineeringand Contracts department of BOTAS EA Environmental Assessment EC European Commission ECSEE Energy Community of South EasternEurope EIA Environmental Impact Assessment EMP Environmental Management Plan E M R A Energy Market Regulatory Authority EPDK Enerji Piyasasi Duzenleme Kurumu(EMRA inTurkish) ERP Enterprise Resource Planning program EU European Union EUAS Elektrik UretimA.S. (Electricity Generation Corporation, Turkey) FAD Finance and Accounting Department FEA Finite ElementAnalysis IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IPE International Petroleum Exchange LNG Liquefied Natural Gas MENR Ministry o f Energy and Natural Resources MOEF Ministry of Environment & Forestry MOF MinistryofFinance NGML Natural Gas Market Law PPIAF Public-Private Infrastructure Advisory Facility SEE State Economic Enterprise SIL Specific Investment Loan TEIAS Turkiye Elektrik Iletim A.S. (Turkish Electricity Transmission Corporation) WACOG Weighted Average Cost Of Gas Vice President: Shigeo Katsu Country ManagerDirector: Andrew N.Vorkink Sector Manager: Lee Travers Task Team Leader: Ranjit J. Lamech TURKEY GAS SECTORDEVELOPMENT PROJECTAPPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSIE Date: October 31,2005 Team Leader: Ranjit J. Lamech Country Director: Andrew N.Vorkink Sectors: Oil and gas (100%) Sector Manager: Sumter Lee Travers Themes: Public expenditure, financial management andprocurement(P) Project ID: PO93765 Environmental screening category: Full Assessment Lending Instrument: Specific Investment Safeguard screening category: Limited Loan impact [XILoan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 325.00 DEVELOPMENT Total: 127.00 411.OO 538.00 Borrower: BOTAS BilkentPlaza, 4. Cadde A-2 Blok, Bilkent Ankara Turkey 06530 Tel: +90 312297 2295 Fax: +90 312 266 0619 Responsible Agency: BOTAS Turkey Project implementationperiod: Start March 15,2006 End: June 30,2015 Expectedeffectiveness date: February 28,2006 Expectedclosing date: December 31,2012 Does the project depart from the CAS incontent or other significant respects? Ref: PADA.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD D.7 [XIYes [ ]No Have these been approved by Bankmanagement? [XIYes [ ] N o I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [XIYes [ ]No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ]No Project development objective Re$ PAD B.2, TechnicalAnnex 3 The Project objective i s to increase the reliability and stability o f gas supply inTurkeyby implementing critically neededgas storage and network infrastructure, and support BOTAS in strengthening its operations as a financially stable and commercially managed corporation. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 1. The Tuz Golu underground gas storage facility which will include: (a) surface and sub-surface facilities including engineering and construction, solution mining,the gas pipelines andthe compressor facility; (b) The water andbrine discharge pipelines; (c) Cushion gas; and (d) Consulting services including an Owner's Engineer, environmentalmonitoring l andregulatory aspects. 2. Network expansion, which will include two compressor stations for BOTAS at Erzincan andCorum. Which safeguard policies are triggered, ifany? Re$ PAD 0.6, TechnicalAnnex 10 EnvironmentalAssessment (OP/BP/GP 4.01) Involuntary Resettlement (OP/BP 4.12) Safety o f Dams(OP/BP 4.37) Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: There are no conditions for Boardpresentation. Loadcredit effectiveness: There are no effectiveness conditions. Covenants applicable to project implementation: Financial Covenants (a) BOTAS will maintain a debt service coverage ratio o fnot less than 1.2 every year from 2006. (b) BOTASwill achieve a self financing ratio (hnds from internal resources as aproportion of the three-year average capital expenditure) o fnot less than 15% in2007, and not less than25% every year from2008. Regulatory Covenants (a) BOTASwill submitto E M Uby January 31,2009 aregulatoryproposalwhich will cover the following aspects: - Approach for setting tariffs for the storage business including an acceptable rate - o freturnon the regulated asset base; Determination o fthe regulated asset base for transmission and storage on a depreciated replacement cost basis which adequately compensates for domestic andinternationalinflation. (b) BOTAS shall makethe Weighted Average Cost o fGas (WACOG), available to the Bank on a monthly basis to be applicable for wholesale purchases. FinancialManagement Covenants (a) BOTAS will maintain a financial management system acceptable to the Bank. (b) BOTAS will install and make hnctionalthe enterprise resource planningprogram (ERP) byDecember 31,2007. TURKEY GAS SECTORDEVELOPMENT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 3 3. Higher level objectives to which the project contributes .................................................... 4 B. PROJECT DESCRIPTION ................................................................................................. 4 1. Lending instrument............................................................................................................. 4 2. Project development objective and keyindicators.............................................................. 4 3. Project components............................................................................................................. 5 4. Lessons learned and reflectedinthe project design............................................................ 6 5. Alternatives considered and reasons for rejection .............................................................. 7 C. IMPLEMENTATION .......................................................................................................... 8 1. Partnership arrangements.................................................................................................... 8 2. Institutionaland implementation arrangements.,................................................................ 8 3. Monitoring and evaluation o f outcomeshesults.................................................................. 9 4. Sustainability....................................................................................................................... . . . 9 5. Critical risks andpossible controversial aspects............................................................... 10 6. Loadcredit conditions and covenants............................................................................... 11 D APPRAISAL SUMMARY . ................................................................................................. 12 1. Economic and financial analyses...................................................................................... 12 2. Technical........................................................................................................................... 14 3. Fiduciary ........................................................................................................................... 15 4. Social................................................................................................................................. 15 5. Environment ...................................................................................................................... 16 6. Safeguard policies............................................................................................................. 18 7. Policy Exceptions and Readiness...................................................................................... 18 Annex 1: Country and Sector or ProgramBackground ......................................................... 20 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies .................25 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 26 Annex 4: DetailedProjectDescription ...................................................................................... 28 Annex 5: ProjectCosts ............................................................................................................... 33 Annex 6: ImplementationArrangements ................................................................................. 34 Annex 7: FinancialManagementandDisbursementArrangements ..................................... 36 Annex 8: ProcurementArrangements ...................................................................................... 44 Annex 9: Economic andFinancialAnalysis ............................................................................. 49 Annex 10: Frameworkfor RegulationofNaturalGas Storage .............................................. 64 Annex 11:SafeguardPolicyIssues ............................................................................................ 71 Annex 12: ProjectPreparationand Supervision ..................................................................... 89 Annex 13: Documentsinthe ProjectFile ................................................................................. 91 Annex 14: Statementof LoansandCredits .............................................................................. 92 Annex 15: Country at a Glance ................................................................................................. 95 Annex 16: Maps ........................................................................................................................... 97 MAP: IBRD34191 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Turkey has gone through a number of economic crises in the recent years, and consequentlyembarked upon a path of economic and financial recovery. Since 2001, GNP has grown at a fast pace, by 5.9% in 2003 and 9.6% in 2004. The inflation rate has been in single digits for the first time inmany years in2004. Other indicators o f economic performance such as the debt to GNP ratio are alsa,improving. Turkey i s also scheduled to beginnegotiations for accession to the European Union inOctober 2005, an indicator that its program o f reforms i s beingsustained. The energy sector, and particularly the natural gas sector, is a key driver in Turkey's economic recovery. Natural gas consumption has grown rapidly in Turkey over the past two decades - with an average annual growth rate of 24%. The largest user o f gas i s the electricity generation industry, but considerable amounts are also used in industry, commerce and increasingly, households. Growth has naturally stabilized as the market has grown and the current decade has seen demand growth average 10% per year. With increasing urbanization, and the resulting increase in the requirement for electricity and for heating, the demand for natural gas i s expected to continue to grow rapidly inthe mediumterm. At present about 70% of the Turkishpopulation lives inurbanareas, and this i s expected to grow to 85% over the medium term. Along with urbanization, more and more cities are beingconnected to the gas transmission grid. Untilrecently only 5 cities hadgas distribution systems (Ankara, Istanbul, Izmit, Bursa and Eskisehir). In the past year EMRA, the Energy Market Regulatory Authority, has awarded 26 licenses for gas distribution companies inhitherto unconnected cities. In addition to raising the demand for gas, this i s also likely to raise the need for gas at peak periods, the winter months, because a large part o f gas consumption i s for heatingpurposes. Turkey obtainsitsgas supplies through imports,primarilyfrom Russia throughtwo pipelines, one through Bulgaria and the second one under the Black Sea. Other major gas suppliers to Turkey are Iran(by pipeline) and Algeria and Nigeria (in the form o f LNG). Deliveries o f gas from Azerbaijan are expected to begin in late 2006. Turkey imported about 25 billion cubic meters (bcm) of natural gas and LNGin2004. Turkey, due to its unique geographical location, is well-placed to be a major gas transit country, exporting into mainlandEurope. Turkey is already innegotiations to construct large pipelineswhich will take Russian and other gas imports into Europe. Inadditionto the growing in-country demand for gas, this role for Turkey as a transit country i s likely to drive the economics o fthe natural gas market inthe mediumterm. Reforms in the Turkish natural gas sector are governed by the NaturalGas Market Law (No. 4646). The Law requires the sector to be restructured into a competitive market. As a result, BOTAS, the current monopoly importer, wholesaler and transmission system owner and operator, separated its gas distribution business into separate companies which have been privatized. In addition, EMRA, the regulatory authority, has awarded licenses to 26 new city distribution networks, and an additional 12 cities are scheduled to be awarded to private 1 investors in the near future. Under the Law, BOTAS i s expected to reduce its share in gas imports and wholesaling to 20% by 2009. As discussed in the Gas Sector Strategy Note prepared by the Bank in September 2004, the timeframe envisaged in the Law i s highly ambitious, and the program o f contract release may also not be the appropriate alternative for introducing competition'. Eventually over the mediumto long term, it i s likely that BOTASwill operate as a gas transmission company, and will no longer remain a monopoly player, with independent importers and suppliers operating in the market. The timeframe for this structure however, i s not certain yet. Despiteits size, and despite the rapid growth in demand, Turkey currently has no natural gas storage. Most developed countries normally maintain (or have access to) storage capacity adding up to a reasonable proportion o f their annual consumption (see table below). The Law requires Turkey to have storage within the country to the extent o f 10% o f annual consumption. The lack o f storage jeopardizes the security o f supply and reliability o f the gas system and also the power system, which depends on gas as a major fuel source. Given that Turkey i s a winter- peaking system, the lack o f storage leads to gas shortages inthe winter, or dependence on other fuels, or the purchase o f gas at highprices. Inresponse to the need to improve its security o f gas supply, Turkey has diversified its import sources as indicated above. However, this is likely to be insufficient, and adequate storage would contribute a vital component to the security and operational efficiency o f the gas system. A storage facility i s under construction at Kuzey Marmara, with a capacity o f 1.6 bcm. This however, has a low gas withdrawal rate and may not be adequateto meet peak demand. Turkey (2015) 42 2 2.4 6Yo The project therefore, aims to assist BOTAS in building storage capacity in the country. In addition to storage, the project will finance critically needed compressor stations, which are ' A contract release program is underway right now, although the final date for submission o f bids has been extended several times. 2 required to enable gas imports from existing and new sources to be transmitted through the system. 2. Rationalefor Bankinvolvement The Bank has been advising the Turkish Government on gas sector reforms and implementationstrategy. InSeptember 2004, inclose collaborationwith the Government, the Bank produced a Gas Sector Strategy Note and a Gas Distribution Strategy Note which provided key recommendations for the ongoing restructuring o f the gas sector. The Bank has played a major role in assisting the Athens Process and helping the countries o f South Eastern Europe including Turkey move towards open regional energy markets for electricity and gas. The Bank also prepared a paper entitled World Bank Framework for Development of Regional Energy Trade in South East Europe2which deals with the development o f these markets. Immediate challenges inthe Turkish gas sector include: (a) the lack o f gas storage to meet peak seasonal and daily demand which could lead to disruptions insupply; and (b) macroeconomic considerations o f inflation and primary surplus targets that make gas sector pricing a Government policy tool - making reform and regulatory considerations a secondorder priority. The Bank, by assisting in financing the Tuz Golu storage facility, will therefore address a key physical constraint in the sector and establish a policy dialogue that allows the balancing o f macroeconomic imperatives with reform imperatives. This project also has important regional implications. Turkey i s rapidly turning into a key player inthe European Gas Market through its potential as a key transit country. The first transit gas will come from Azerbaijan and will enter Turkey later this decade following the route through Azerbaijan and Georgia used by the BTC pipeline. Later, gas i s expected to come from the Middle East to Turkey. Much o f this gas will transit Turkey, initially to Greece but soon thereafter, with the construction o f the Nabucco pipeline, the gas will go to Bulgaria, Romania, Hungary and eventually Austria, thereby feeding into the main European transmission system. The storage facility i s expected to play a significant role in enabling Turkey to transit the gas to Europe, inaddition to assisting inmeeting the peak within the country. BOTAS has the potential to operate commercially and access financing independentlyin the future. BOTAS, like all other state economic enterprises (SEES),is controlled by the Government, and faces restrictions on borrowings and investments. It however, has the potential to operate commercially and over the medium-terngain access to financing on its own strength without government guarantees. This process will require both changes within BOTAS's financial and operating framework, as well as a focus on easing the macroeconomic policy restriction placed BOTAS by the Government. The Bank will assist on both fronts. From an internal BOTAS perspective the Bank i s providing financial advice which will prepare BOTAS * World Bank Paper No 12, March2004 by David Kennedy and John Besant-Jones. 3 for a credit rating. Work on the credit rating i s expected to start by October 2005. The Bank's support to BOTAS inthis regard and on the regulation o fthe storage and transmission businesses i s expected to enable BOTAS to operate in an increasingly commercial and financially independentmanner. 3. Higher level objectivesto which the projectcontributes The project i s consistent with the CAS (dated October 2, 2003). The CAS has identifiedthe lag inthe development ofmarkets for gas as an issue inTurkey. The Project will ultimately enable further development ofmarkets byimprovingthe reliability and stability o fthe gas sector. All o fthe countries o f South Eastern Europe have the prospect o f EUmembership. Bulgaria and Romania are expected to join in 2007, and Turkey and Croatia are candidate countries. The Thessaloniki Apenda for the Western Balkans: Moving towards European Integrationwhich was endorsed by the European Council in 2003 encourages the establishment of integrated energy markets in electricity and gas based on a common solidarity and consistent with the rules applicable within the European Union. The EC i s also tryingto ensure that all o f the countries in South East Europe have access to stable and continuous energy supply which they regard as essential for economic development and social stability. The Tuz Golu facility and the expansion o f compression capacity, through improving the reliability o f the Turkey gas market and by strengthening its ability to integrate into the European gas market, would assist with these higher level objectives. B. PROJECTDESCRIPTION 1. Lendinginstrument This project will use a Specific Investment Loan (SIL). BOTAS has chosen a commitment linked fixed spread loan (FSL) with 7-year grace and 13-year final maturity. The FSL instrument has beenchosen because it provides certainty on account of the fixed spread and also because it allows for a 7-year grace period which matches the project implementation schedule. 2. Projectdevelopmentobjectiveand key indicators The Project objective is to increase the reliability and stability of gas supply in Turkey by implementing critically needed gas storage and network infrastructure, and support BOTAS in strengthening its operations as a financially stable and commercially managed corporation. The key indicators that will be used to assess the performance o f the project during implementationand at the end o fthe project are as follows (see also Annex 3): .. Completion o fthe storage facility (inthree phases over the project period); Separation o f storage into a separatebusiness unit; Completion o fthe two compressor stations; and Financial performance indicators - profitability, debt service coverage, self-financing, receivables and payables. 4 3. Project components The Project has two components. The first and largest component is the Tuz Golu underground gas storage facility. The second component comprises two compressor stations that BOTAS needs for its gas transmission system - Erzincan and Corum compressor stations, and other network infrastructure to assist intransmitting increasedvolumes o f gas. I. The Gas Storage Facility The gas storage facility willbeinanundergroundsalt formation located close to Tuz Golu, a salt lake in South Central Turkey. The facility will have 12 caverns which will be "solution-mined" inphases o f four caverns each. The facility, upon completion, will have a storage capacity o f about 960 million cubic meters o f working gas and 460 million cubic meters of cushion gas3. The facility will have the capacity to deliver 40 million cubic meters o f gas per day up to 20 days and can be refilled at the rate o f 30 million cubic meters per day over a period o f 25 days. The cushion gas however, must remain in the caverns as long as the storage facility i s in operation inorder for the caverns to maintain their structural integrity, giventhe pressure from the surrounding salt. This component will finance the following investments: (a) The surface and sub-surface facilities including engineering and construction, solution mining, the gas pipelines and the compressor facility; (b) The water and brinedischarge pipelines; (c) 460 million cubic meters o f cushion gas (see Section 7); and (d) Consulting services including an Owner's Engineer (for assistance in supervision and monitoring o f implementation), environmental monitoring and regulatory aspects. This component i s estimated to take 10 years to complete. BOTAS was o f the view that a loan with a 10-year disbursement profile would entail high costs for BOTAS in the form of commitment fees. Further, BOTAS would in all likelihood start repaying the loan while it was still disbursing. Given these factors, it was agreed with BOTAS that the Bank would finance the first two phases (8 caverns) over 7 years from 2006 to 2012, and that BOTAS would obtain other sources o f financing for the remaininginvestments. The Bank may consider providing additional financing for the remaining investments,incase BOTAS required financing from the Bank. The cushion gas sub-component i s currently valued at US$ 80 million based on current gas prices. The actual value o fthis sub-component will be determined at the time o f reimbursement. While the value can increase from current estimates, it i s not likely to be large in relation to the cost o f the project, and it i s expected that BOTAS will be able to finance the incremental cost, if any* 11. Network Expansion The project will also finance two compressor stations for BOTAS at Erzincan and Corum and other network infrastructure. These stations are required to Working gas i s the portion o f natural gas in the caverns which can be withdrawn and injected back in, while cushion gas is the portion o f gas which i s required to remain inthe caverns for the duration of their economic life in order to maintain cavern integrity. 5 help transmit the increasing volumes of gas expected to b e imported into Turkey from existing and new sources. The Corum station will have a capacity of 30 MW and is required in order to enable increased supply from Russia, while the Erzincan Station will have 39 MW o f compression capacity and will enable the import of natural gas from Azerbaijan. 4. Lessons learned and reflected in the project design This project is the first gas storage for the Bank, and there is thus n o close precedent within the Bank to follow on the technical aspects. Development of gas storage in salt deposits using the process o f leaching (or solution mining) the caverns is however, a tested practice, and there is sufficient technical experience inthis regard. The project also has some unique features, such as the financing o f cushion gas. However, project design and preparation has benefited from the extensive experience that the Bank has in developing large infrastructure investment operations, and from the experience of specialized experts inthe field of gas storage insalt deposits. Focus on comprehensivefeasibility and technical review The main lesson learnt and reflected inproject designhas beenthe upfront attention to a comprehensive examinationofthe feasibility o f the project and the technical aspects. BOTAS contracted a highly skilled engineering consortium comprising E.ON Engineering (formerly PLE) and PODZEMGAZPROM(PGP) to prepare the feasibility study, which included using the findings from two wells drilled inthe salt formation to determine the salt strength and confirm seismic evaluations. A Finite Element Analysis (FEA) was carried out based on the salt cores and seismic data. The project feasibility and basic design in terms of cavern configuration (size, shape, depth, etc) and operating parameters (injection, withdrawal rates, etc) are based on in-depth analysis. The Bank has conducted a separate FEA analysis and has reviewed the feasibility study with its o w n experts. Independent risk analysis Apart from an independent review of the feasibility study and also a separate FEA, which confirmed the findings of BOTAS and their advisors, The Bank also carried out a review o f the seismic risks related to the project (Turkey is a highly seismic country, and though the chosen site is the least seismic area of Turkey, the Bank nevertheless had a study done to ensure that there were no serious seismic risks). This study was carried out by Dr.N a f i Toksoz, Director o f the Earth Resources Laboratory at the Massachusetts Institute of Technology (MIT). It confirms that the area has acceptable seismic risk and that the surface and subsurface facilities are adequately designed to withstand the anticipated seismic activity. The Project will also introduce monitoring equipment to monitor seismic activity (including induced seismicity) and its impact o n the structures. Upstream attention on safeguards The EIA prepared for BOTAS was reviewed by the Bank, and significantly revised and upgraded as a result of Bank suggestions. The Bank also requested a separate EIA for the water pipeline when the project design was altered as a result of public consultations. Since the leaching o f the caverns is dependent on using water from the Hirfanli Reservoir the Bank's Safety o f Dams (OP/BP 4.37) was triggered. The Hirfanli D a m was then inspected by D S I and by the Bank's own expert. In addition as part o f the project it has been agreed that the dam will be routinely monitored and appropriate actions will b e taken as required. 6 Regulatory issues Given the Bank's significant experience in regulatory issues across the world, but also specifically inthe Turkish gas sector, and given the importance o f establishing a reasonable regulatory framework for storage early in the process, the Bank has been in dialog with BOTAS and EMRA. As a result of the Bank's involvement, the regulatory framework is in the process o f being developed, and will be approved by EMRA prior to the commissioning of the storage facility. EMRA is inbroad agreement that storage will be accorded a reasonable rate ofreturnon assets and that the asset base will be the depreciated replacement cost. Flexibility inpolicy dialogue and recognition of macroeconomicpriorities The project has chosen flexibility in carrying out the policy dialog on reforms in the Turkey natural gas sector, as opposed to use o f hard conditions in the loan. This i s also in recognition o f the underlying dynamics external to the gas sector in Turkey where priority is being given to macroeconomic stabilization. The project will help continue the policy dialog with the Government and other stakeholders on reform implementation by ensuring that the objective of transitioning to a transparently regulated sector i s not postponed longer than justified by macroeconomic considerations. Prompt advicefrom Experts, Senior Management The project has benefitedsignificantly from the use o f prompt and timely senior management and expert resources. The team involved the Safeguard Coordinator and the Dam Safety Expert from an early stage, resulting in timely interventions and adequate focus on these important issues. The team also relied heavily on the Regional Procurement Advisor, the Senior Legal Counsel and OPCS, especially for difficult issues such as contractindpackaging, and financing of cushion gas. 5. Alternativesconsidered and reasonsfor rejection Choice of Lending Instrument: The project is ideally suited for an investment operation. A Specific Investment Loan was chosen early in the identification and concept stage. Options of using a sector adjustment loan (SECAL) were deemed unsuitable given the complex physical infrastructure being financed for the first time by the World Bank and the need for the Bank to engage closely inpreparationand implementation o fthese components. Public versus Private Financing: The team and the Government reviewed the possibility of using the private sector to construct and operate the storage facility. This approach was not feasible because the necessary conditions for private sector investment were not in place. Specifically, the framework for regulating gas storage has not been finalized, which would pose a significant risk to the private sector and would require a fkll sovereign guarantee to back the financing and operations of a private facility. Attempting to finalize this framework would have delayed construction greatly, thus delaying the significant benefits that would accrue from the project. Furthermore, the team determined that for the medium-term large-capacity central gas storage was a critical investment for supply security and that it would be more appropriate to let BOTAS, the transmission company, construct and operate the facility. 7 The team considered including strict conditionality on the implementation o f the reform program, but chose to adopt a more flexible approach. This approach i s based on experience with other projects which did not move fast enough and did not achieve the objectives because o f the overlay o f policy aspects. The team's current approach o f engaging the Government directly on policy aspects has worked well so far. Procurement Packaging for Gas Storage Component: The team and BOTAS reviewed in detail the benefits o f going with the single EPC (Engineering-Procurement-Construction package) for the gas storage facility versus separating the contracts for the subsurface and surface facilities. The separation o fthese two main contracts was chosen inconsultation with the experts, because the surface facility would have to be completed before the subsurface works could start. Furthermore, there were no major competitive gains to be had by combining these two contracts, since there are only a few experienced contractors for solution miningwork while a number o f companies can do the surface work. Though using separate contracts implies a slight risk of delays or problems in integration, these risks are thought to be small compared to the premiumthat contractors mightcharge for taking onbothsets ofrisks ina combinedcontract. C. IMPLEMENTATION 1. Partnershiparrangements PPIAF has provided a grant to the Bank which i s being applied towards preparing BOTAS for a credit rating and thereafter obtaining a credit rating. Inaddition, the EUhas provided a grant to BOTAS for preparing a regulatory framework for setting tariffs for BOTAS' businesses of transmission, storage and wholesale. The Bank has been advising BOTAS on these issues, and will coordinate with BOTAS to ensure that any assistance provided to BOTAS will be complementary to the work beingsponsored by the EU. 2. Institutionaland implementationarrangements The Tuz Golu storage project is beingprepared by BOTAS, and will be implementedby BOTAS under suitable contracts. BOTAS will be the borrower, with the loan guaranteed by Treasury. The project will also finance the Owner's Engineer, who will support BOTAS insupervising the design, tenderingand constructiono fthe project. During the feasibility phase, BOTAS has been assisted by two highly competent engineering firms, E.ON Engineering (formerly PLE) and PODZEMGAZPROM (PGP). BOTAS has substantial experience in building, operating and maintaining pipelines. BOTAS also has experienced geologists and engineers among its staff who are responsible for the Tuz Golu facility. BOTAS will manage the design and construction o f the compressor stations. BOTAS has significant experience in constructing and operating compressors and its Engineering and Contract (E&C) Department will manage the procurement and implementation. 8 A Project Management Team has been set up under the coordination o f the Engineering and Contracts (E&C) Department of BOTAS and will coordinate the implementation of the project, including monitoring o f procurement, disbursements and periodic reporting requirements for the Bank loan. This team has also overseen the preparation o f the feasibility study, the design and engineering o f the storage project, the preparation o f bidding documents for various project components and has also prepared the EINEMP and land acquisition plan. The team will be supported by experienced procurement staff duringthe procurement process. 3. Monitoringandevaluationof outcomeshesults BOTAS will submit to the Bank quarterly progress reports that will provide information on the progress towards achieving the outcomes and results that the Project aims to support BOTAS in achieving. Specifically, the reports will cover the following: (a) Progress inimplementation-procurement, disbursement,work completion; (b) Progress in the financial and operational efficiency o f BOTAS - financial ratios, operating ratios; and (c) Progress inseparating storage into a business unit. Inaddition, the Bank will also continue to work with BOTAS, the Government and EMRA in supporting the development of competition in the gas industry. To this end, the Bank will monitor the introduction o f competition inthe gas market by BOTAS andEMU. 4. Sustainability The Project is designed to meet medium-term gas storage needs, but more importantly to establish the necessary technical and site-specific capacity to enable fbrther development. The Tuz Golu facility i s expected to be an extremely versatile facility, with the ability to expand storage ina modular fashion well beyond the initial 960 millionm3. This facility i s the first o f its kind in Turkey, although underground gas storage i s very well understood from a technical design and operational perspective in other parts o f the world. Through this project, it i s very likely that BOTAS will gain the expertise and the ability to expand underground storage capacity at Tuz Golu, and elsewhere inthe country. The Project i s going to use internationally tested solution mining designs and technologies. BOTAS' advisors, E.ON Engineeringhave carried out finite element analyses (FEA) which have provided critical inputs into the cavern design. The Bank also carried out a parallel FEA which has confirmed the design. Before each cavern i s developed, test drilling will be done, which will enable BOTAS and their contractors to modify the cavern design to suit the specific conditions at that site. Itwill also enable themto choose alternative sites, if so required. The Project also carries low risk o f operational failure. Salt has a unique self-sealing property, which enables it to withstand significant pressures, such as those causedby seismic activity. The caverns themselves therefore are very robust and they are being designed to take into account 9 local seismicity. The Bank has undertaken an independent seismic review o f the area, by Dr. Nafi Toksoz, Director o f the Earth Resources Laboratory at MIT, which confirms that the area has acceptable seismic risk, and that the surface and subsurface facilities are adequately designed to withstand seismic activity. The Project will also introduce monitoring equipment to monitor seismic activity and its impact on the structures. The location o fthe compressor stations hasbeendecided based on hydraulic flow analyses under various supply and demand scenarios. The Corum station i s essential for enhancing the transmission system capacity to enable the Blue Stream (a pipeline under the Black Sea) to be utilized optimally. The Erzincan station i s requiredto enable gas from Azerbaijan to reach load centers inTurkey and elsewhere. All of these factors assist in ensuring the sustainability o f the investments being proposed for financing underthis Project, and also o fthe storage facility itself. 5. Critical risks and possible controversial aspects Risk IRiskrating I MitigationMeasure A. Regulatoryand Sector Policy Issues A.1RegulatoryRisk - M At the Concept Stage the team identified the regulatory risk stemming from a lack of Inadequate tariffs specific regulatory policy for storage. This has since been effectively handled through policy dialogue with BOTAS and EMU. The team has been working with BOTAS as well as EMRA to determine an appropriate tariff methodology for storage. EMRA agrees that storage will be regulated like transmission, and that it will be provided the same rate o f returnon assets (9.5%). EMRAhas also agreed to treat cushion gas as part of the asset base. At this point, the price caps established by EMRA are actually much higher than the prices actually charged by BOTAS - therefore, tariffor regulatory risks are considered low. A.2 Impact o f delays in N There is a likelihood that the introduction o f wholesale competition could be delayed beyond introductiono f the 2005-2009 timeframe envisaged under the Natural Gas Market Law owing to: (a) the competition lack o fprivate sector interest inthe Government's gas import contract release process which the Bank had advised against; (b) the adequacy o f existing import contracts to meet demand upto around 2012. However, the impacts o f such a delay are not likely to be significant or long-term in nature. The Bank is in dialog with the Government and is assisting in implementingthe Gas Strategy Paper o f 2004. The Gas Strategy Paper noted that several of the wholesale market implementation targets established in the N G M L were excessively ambitious and has recommended a revised implementation approach. B. Impactof MacroeconomicConstraints B.1Macroeconomic S The Government has tried to keep consumer prices for natural gas low (by not allowing gas strictures: Primary price increases to be passedthrough fully as a consequence o f oil price increases), which has balance and inflation adversely impacted BOTAS' profits especially in the current year, when gas prices are target requirements increasing. The Project itself i s unlikely to be affected by these constraints directly. However, the continued use o f BOTAS gas prices as policy tools to achieve inflation targets can severely impact the ability to implement the planned regulatory framework as well as impact BOTAS cash flows adversely. C. TechnicalRisks 10 Risk Risk rating Mitigation Measure C.1Delays inconstruction N The risk of delays is not considered significant, even though a delay is possible either because of unexpected geology or because of lack of integration between the two main contractors (surface and subsurface works). Construction will be contracted under internationalcompetitivetender, and it is expected that the best suited contractorswill be utilized. The contracts will also have suitableprovisionsprotectingBOTAS against delays. BOTASwill also be assistedby a competent supervisingconsultant,who will ensure that the two contracts are appropriatelyintegrated. The implementationplan also builds in a time gap between the surface and subsurface contracts, to ensure that there is enough time for integration. C.2 Seismic risk N Turkey is a seismically active country, but the project site is in the least seismically risky area of the country. BOTAS has designed the facility for very conservative and prudent levels of seismicity, and this has been verified by the two FEA's and also by the Bank's independentseismic expert. Monitoring equipment will also be put in place, to ensure that the structures are stable. The geological risk identified at the Concept Stage therefore, has been determined to be quite manageable based on these assessments. The risk of delays or disruptiondue to seismic activity is consideredlow. C.3 Damsafety N The Bank's dam safety expert has agreed an action plan with DSI and EUAS (the dam operator) for routinelymonitoring the safety of the Hirfanli dam. Both DSI and EUAS, and also BOTAS, are committedto ensuringthat the dam remains safe. Risks from dam breaks are therefore, considerednegligible. H=High; S =Substantial; M=Modes N=Negligible or Low 6. Loadcredit conditions and covenants There are no Board conditions. There are no Effectiveness conditions apart from the standard conditions relating to submission o f satisfactory legal opinions on loan agreements. The following covenants are proposed to be included in the loan agreement, in addition to the standard covenants relating to audits, accounts, procurement plans, mid-termreviews etc.: Financial Covenants (a) BOTAS will maintain a debt service coverage ratio o f not less than 1.2 every year from 2006. (b) BOTAS will achieve a self financing ratio (funds from internal resources as a proportion of the three-year average capital expenditure) o f not less than 15% in 2007, and not less than 25% every year from 2008. Regulatory Covenants (a) BOTAS will submit to EMRA by January 2009 a regulatory proposal which will cover the following aspects: - Approach for settingtariffs for the storage business including an acceptable rate of returnonthe regulated asset base; - Determination of the regulated asset base for transmission and storage on a depreciated replacement cost basis which adequately compensates for domestic and internationalinflation. 11 (b) BOTAS shall make the Weighted Average Cost o f Gas (WACOG) available to the Bank on a monthly basis, to be applicable for wholesale purchases. FinancialManagementCovenants (a) BOTAS will maintain a financial management systemacceptable to the Bank. (b) BOTAS will install and make functional the enterprise resource planning program (EM) by December 31,2007. D. APPRAISAL SUMMARY 1. Economic andfinancialanalyses Economic Natural gas storage has four useful roles inthe system that can be valued according to the benefits they yield or the costs they avoid. The economic analysis o f the storage facility has identified and quantifiedfour main roles for storage and their associated benefits (or avoided costs) as discussed briefly below. The first role for the Tuz Golu storage facility will be as a seasonal storage which allows more gas to bebought insummer, when it is readily available and generally cheaper, and withdrawn in winter, when gas may be in short supply and additional volumes will generally be very expensive. The second role i s improving operational efficiency since the proposed Tuz Golu storage facility will lead to a reduction in capital and operating costs for compressor stations and loop line investments by BOTAS which would be needed if Tuz Golu were not built. The third role for the facility is peak shaving. Storage facilities can be used to meet demand on above-average cold days, thereby avoiding a shortfall between average contracted import quantities and peak winter day demand. This shortfall would otherwise lead to actual shortages or shifting to more expensive fuels. The fourth role o f the Tuz Golu storage facility i s to provide security o f supply. Storage provides a contingency supply source that can be used to avoid short- or long-term gas supply shortfalls resulting from unplannedinterruptions insupply, e.g., loss ofimport capacity. Annex 9 evaluates the costs and benefits o f the proposed gas storage facility and presents the calculated economic rate o f return. The analysis i s carried out for two gas demand scenarios, a highcase and a low case. The analysis concludes that ineither case the facility would provide a satisfactory economic returnto Turkey o f 17-20%. The network expansion investments are part o f the least cost expansion plan for BOTAS. The compressor stations are required to help transmit the increasing volumes o f gas expected to be imported into Turkey from existing and new sources. The Corum station will have a capacity o f 30 MW and i s required in order to enable increased supply from Russia, while the Erzincan Station will have 39 MW o f compression capacity and will enable the import o fnatural gas from Azerbaijan. The economic rate o f returnon these investments i s shown inAnnex 9. The returns are quite high since the compressor stations are needed to import additional gas and if they are not built the most likely alternative fuel is gas oil (light fuel oil) which i s much more expensive. Also, the compressor stations are needed for BOTAS to meet its import requirements under existingcontracts. Ifit fails to do so, take or paypenalties may be imposedunder the contracts. 12 Financial Analysis (Annex 9 contains a detailed analysis of BOTAS' Jinances) BOTAS' tariffs are set by EMRA, which establishes price caps for the transmission, natural gas sales and storage businesses. BOTAS has traditionally kept its tariffs well below the EMRA price caps. Particularly in 2004, with costs rising with oil prices, BOTAS was unable to raise tariffs commensurately, both because o f the desire to keep retail gas and electricity prices down and also because o f the need to retain customers in the light o f the onset of competition in the near future. BOTAS overall however, has had comfortable cash flows inthe past, even though it has been constrained in increasing its tariffs to the price cap set by EMRA. BOTAS' cash flows have been robust largely because o f the highdepreciation that it has been allowed to apply (20% on most categories o f assets). Depreciationrates have been reduced to a more reasonable 4.54% for a number o f asset categories for investmentscapitalized starting 2005, which may affect cash flows in the future. BOTAS has in the past had problems collecting bills from govemment- owned consumers, primarily EUAS and municipalities. Outstanding receivables have risen to nearly 6 months' o f sales, or about US$ 2.2 billion, in 2004. O f this, about US$ 1.5 billion, or nearly 70% i s owed by EUAS and the three main municipalities (Ankara, Izmit and Istanbul). EUAS and municipalities arepaying their current bills to BOTAS intime andthe past receivable from these consumers i s projected to remain stable throughout the projection period. The collection efficiency i s expected to stay around 98% over the future. Inthe eventuality o f EUAS or the municipalities increasing their purchases from BOTAS, there i s a risk o f Wher increase in the outstanding receivables. The forecasts however, show adequate cash generations even with abuildupo freceivables. The main risks that BOTAS faces at present and inthe medium term come from the constraints on raising its prices in line with rising operating and gas purchase costs. The other factors that contribute to the uncertainties inBOTAS' finances relate to the evolving structure o fthe industry and the advent o f competition. This risk has not been quantifiedinthe forecasts, but it maypose a risk depending on the regulatory approach to transmission and storage tariffs. Current transmission charges appear low, largely due to the low asset base on which returns are calculated. For efficient operation o f the transmission and storage system, it is critical that the regulatory approach i s reasonable. BOTAS proposed the use o f depreciated replacement cost as the regulated asset base, and EMRA allowed this approach in 2005. This rate base calculation needs to be improved to capture the true current cost o f replacement. Inaddition, the regulatory treatment for storage needs to be clarified (see Annex 10). The loan agreement as a result, includes a covenant on establishing appropriate regulatory approaches towards transmission and storage. BOTAS' cash flow position may not continue to be as strong inthe short-term as a consequence o f an increase in investments and a reduction in depreciation. Annual depreciation reduces significantly because the existing assets are almost fully depreciated and because o f the revised lower depreciation rate for new assets. The cash flows improve after 2007 - the forecasts assume that BOTAS will break even on all costs over the next two years, and then will start generating internalresources for investments. BOTAS will require significant external financing for its investment program over the medium term. Forecasts show that, based on the tariff increases, BOTAS has the ability to borrow these amounts and service the debt comfortably (For forecast financial statements including the cash flow statement, refer to Table 9.3 inAnnex 9). 13 The forecasts are based on a compound annual growth in gas demand o f about 8% from 2004 to 2012. Particularly in 2006, gas demand is forecast to increase by 30% as new city distribution services are forecast to commence. Tariffs are anticipated to increase by about 15% in2005, and thereafter change with the change in oil prices. Tariff increase requirements would be affected by the lowering of the depreciation rate, but the enhancement in the regulated asset base would offset the adverse impact. BOTAS' investment program is significant in the medium term, focusing on strengthening the existing transmission network within the country, the start of the Tuz Golu storage project and completion o f distribution investments in several cities. In the future, Turkey is expecting very significant investments in cross-border pipelines such as the Nabucco and Greece pipelines, but these investments are not likely to b e o n BOTAS' balance sheet. The projections therefore, factor inrelatively small expenditure on these investments. 2. Technical The technology proposed for adoption for solution mining the caverns is a proven technology and has been successklly employed elsewhere in the world. The design and feasibility of the storage facility has been prepared by experienced and renowned engineering and technical firms, and the Bank's review has determined the work to be satisfactory. The Tuz Golu storage site is located inone o f the least seismically active regions in Turkey. The two FEA (Finite Element Analysis) studies on cavern shape and integrity confirmed that the facilities can b e safely built and the risk o f serious damage from earthquakes is minimal. The Bank's seismic review has also confirmed that the surface facilities are designed and constructed takinginto account adequate specified peak groundacceleration values (which are relatively low for Turkey). The water for the solution miningwill be obtained from the HirflanliReservoir on the Kizilirmak River. It will b e supplied to the site by a fresh water pipeline of about 115 km in length. The brine resulting from the solution mining will b e transferred to the Tuz Golu salt lake, using gravity flow, by a brine disposal pipeline o f 39 km. A gas pipeline connection will b e built from the storage facility to the Kayseri-Konya-Seydisehir line, which is one o f BOTAS' main trunk lines. This connector line will b e 19 kminlength. BOTAS also has sufficient experience inbuildingtransmission capacity, including compressor stations. There are no serious technical issues related to this component. Project costs are summarized in Annex 5. Cost estimates have been derived from BOTAS' pre- feasibility study, and have been confirmed by the feasibility study carried out by BOTAS' consultants. The cost estimates are considered conservative, which is appropriate for a facility o f this magnitude, and accordingly, include reasonable price as well as physical contingencies. 14 3. Fiduciary The Bank's standard fiduciary requirements apply to this project. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The one exception to this i s the cushion gas which will be procured as described in Section 7 below (See Annex 8 for the full details o f the procurement arrangements). An assessmento f the financial management arrangements for the project was undertaken in July 2005. The assessment determined that BOTAS has financial management arrangements acceptable to the Bank and these systems will be relied upon for project financial management purposes. However the main system will be supplementedby excel sheets for project reporting and monitoring on a foreign currency basis. There will be a special account for the project to assist disbursements from the World Bank loan. This account will be inU S dollars, and will be located in a govemment-owned commercial bank. The commercial bank will be selected by BOTAS and will submit a comfort letter to the World Bank. Payments to the contractors, suppliers and consultants for the project will be made from this account (except direct payments). See Annex 7 for further details on financial management aspects. Cushion Gas The underground storage facility will require cushion gas (currently estimated at 460 million m3),and the cost of this cushion gas will be reimbursedfrom the loan (see Section D.7 on Policy Exceptions). The cost for this reimbursement will be based on WACOG and the actual measured quantity o f gas injected into the caverns. The volume o f gas used for cushion gas will be based on meteredinflow for each billing period until the minimum gas pressure is achieved inthe cavern. BOTAS will finance taxes (except the withholding tax on consulting services), interest during construction, land and contingencies. The Bank loan will finance about 60% o f the total project cost since the loan will cover 7 years o f the 10-year project, and since BOTAS will finance the taxes, VAT, interest during construction, and other local expenses such as land (See Annex 5 for detailed Project Costs). This project finances less than 20% o f total investments by BOTAS in any year, andoverall, less than 15% duringthe project implementationperiod. 4. Social The overall social impact o f this project will be positive since the main component, the gas storage at Tuz Golu, will increase the availability o fnatural gas duringthe winter heating season and reduce the possibility o f interruptions in supply. The project will also expand the transmission capacity o f the Turkish gas transmission system thus allowing the increased imports anduse o fnatural gas which tends to replace muchmore polluting fuels. Landowners, both private and public, will be affected directly by the construction o f pipelines, pump stations and storage tanks andthe gas storage field, butthe overall impact will be minimal. 15 The pipelines travel through the territory o f 27 villages, but will be located away from the settlements, thus causing no resettlement. The area i s sparsely populated, overall, and the pipeline route is virtually unpopulated. The population lives in small compact settlements separatedby vast open spaces used for extensive grain cultivation or grazing, where agricultural productioni s viable, or simply not used at all, particularly southeast and south o f Tuz Golu. Landowners will experience one or more o fthree types o f direct impact: .. Temporary easement for access during pipeline construction, after which the land i s restored to its original condition; . Permanent easement (from 10 to 38 m. wide), disrupted during construction, after which it is returnedto its original condition, but carrying permanent restrictions on land use to avoid damage to the pipe; Land acquisition -small parcels for pump stations, storage tanks, compressor stations, and larger tracts for the storage area. Private owners will be compensated differently for easements and land purchase; the need for compensation for state and Treasury lands depends on the status o fthe landand its use requirements. LandAcquisitionPlan BOTAS prepared a Land Acquisition Plan for the project. It was reviewed and found acceptable to the Bank, and was disclosed through discussions in affected villages. BOTAS will implement the Land Acquisition Plan and will directly manage the process o f acquiring easements and land and thereafter monitoring the work o f contractors to ensure that they stay within the agreed tracts. BOTAS will utilize professional assessors to valuate the parcels and crops, which will be used as the basis for direct discussions with owners. Private owners are paid quickly upon reaching agreement and official transactions (transfer o f title and/or registration o f easement restrictions on titles) must be completed before civil works can begin. BOTAS gained considerable experience working under provisions o f OP/BP 4.12 during the design and construction of the Baku-Tbilisi-Ceyhan Pipeline, thus the Bank team is confident that the planwill be implementedwell. The gas compressor stations at Corum and Erzincan respectively will each require a site o f approximately 30 by 40 meters. This land acquisition, and others currently unforeseen, will be covered by the Resettlement/Land Acquisition Policy Framework that BOTAS prepared and disclosed prior to completion o f appraisal. MonitoringandEvaluationBOTAS will report quarterly on land acquisition progress and problems and Bank staff will conduct field visits regularly during supervision. The pipeline will have insignificant impact on individual households, so precise household-level monitoring and evaluation i s not appropriate. The status o f landowners inthe storage area will be assessedwhen the site design i s completed and land ownership i s clarified, however, although it appears that few private owners will be affected. 5. Environment The Tuz Golu Storage Project is designed to facilitate the use o f natural gas inTurkey and will ensure availability o f gas especially at times o f peak demand. As discussed in Annex 9, currently, since Turkey i s a winter-peaking system, the country faces peak gas shortages in the 16 winter inthe absence o f storage. At such times, gas-fired power plants switch to the use o f other fuels such as fuel oil. Further, a large proportion o f the peak demand arises from residential and commercial heating requirements, which again depend on sources o f heating such as coal briquettes, fuel oil or wood. Thus, by providing natural gas at times o f peak demand, the project will enable the reduction inthe use o f such fuels that are currently used inthe absence o fnatural gas. In terms o f the Bank's Operational Policy 10.04 (Economic Evaluation o f Investment Operations) therefore, the project has no negative global or cross-border externalities. Since natural gas produces less greenhouse gases per unit o f energy upon combustion than oil or coal, the project i s expected to enable the reduction o f greenhouse gas emissions. Furthermore, in terms o f local and regional air quality, combustion o f natural gas, particularly in winter months should lead to reductions in ambient levels o f particulates and sulfur dioxide and thus contribute reduced exposure o f affected populations to these pollutants. The project i s in full compliance with environmental laws and regulations o f the Government o f Turkey and environmental policies and procedures o f the World Bank. In accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment) the project was assigned Category A, and a detailed Environmental Impact Assessment (EM) report was required. Prior to World Bank involvement, BOTAS contracted an independent consultant to prepare an EL4 report to meet Turkish Environmental Assessment (EA) requirements. The EIA report was approved by the Turkish Government in2003. The EIA report was reviewed by both the Task Team environmental specialist and the ECA Regional Safeguards Unit when the Government o f Turkey requested World Bank support. Based upon this World Bank review, a numberof issues were raisedwhich the project sponsor satisfactorily addressedinanAddendum to the original EIA document. The full EL4 and Addendum were sent to the Infoshop on July 8, 2005 and the Executive Summary was sent to the Executive Board on July 11, 2005. The Turkish language EIA and Supplement were disclosed in Aksaray Provincial Directorate of Environment andForestry and the BOTAS Website on June 1,2005. Key environmental and safety issues associated with project construction include: seismic stability o f the salt dome storage facilities and general project area (water supply pipeline, brine discharge area, gas distribution pipeline route), dam safety4, environmental impacts from brine discharge into the Tuz Golu salt marsh area, and the nominal issues (dust, noise, solid waste management, etc.) associated with pipeline (water supply, and gas distribution) construction. Duringoperation, the chiefconcern is public safety alongthe gaspipeline route. All these issues were satisfactorily addressed in a comprehensive environmental management plan (EMP) prepared by the Borrower and which i s summarized inAnnex 11. The Borrower has agreed to implement this plan and has proposed to engage the services o f an Independent Environmental Monitoring Company to support them in effectively meeting their responsibilities for implementing the EMP. The Independent Environmental Monitoring Company will coordinate closely with the BOTAS Environmental Engineer. The detailed EMP i s included in the Project Files. 4 Water for the salt dome leaching operation i s to be supplied from the existing Hirfanli Dam. Since project construction will depend on the integrity o f this dam World Bank policy on dam safety i s triggered. 17 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.11) [ I [XI Involuntary Resettlement (OP/BP 4.12) [XI [ I IndigenousPeoples (OD 4.20, beingrevisedas OP 4.10) [I [XI Forests (OP/BP 4.36) [ I [XI Safety o fDams (OP/BP 4.37) [XI [ I Projects inDisputedAreas (OP/BP/GP 7.60) [I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [I [XI Damsafety The project will use water to leach the underground caverns from the Hirfanli Dam, which is operated by EUAS. Since the project, during construction, will depend on the Hirfanlidam, the Bank's operational policy (OP 4.37) on Safety o f Dams is triggered. DSI, the Government- owned agency which designs, constructs and operates dams in Turkey, carried out a site visit to Hirfanli and submitted its report on May 9, 2005. This report assessed the dam structure to be sound, although there i s no monitoring equipment at the dam to take systematic measurements. The Bank's dam safety expert completed his assessment, and agreed on a framework o f regular monitoring with DSI and EUAS. Both these agencies have agreed to take the necessary measures required for ensuring dam safety (Refer Annex 11 for more details). N o further documentation i s considered necessary. 7. Policy Exceptions andReadiness The Bank has provided a waiver o f the requirement o f application o f Procurement Guidelines in financing cushion gas as part o f the project. Cushion gas financing will be treated on a reimbursable cost basis. For regulatory and accounting purposes, cushion gas is often treated as a capital asset. Cushion gas remains within the caverns untilthe facility is inoperation, and may or may not be recoverable at the end. In Tuz Golu, cushion gas will be a significant cost component, currently valued at US$ 80 million. Based on these factors, the Bank has agreed to finance the cushion gas as part o fthe project. The waiver from application o f procurement guidelines i s justified because under these guidelines, cushion gas would have had to be procured under international competitive bidding procedures, and the Bank would have required prior review o f the gas supply contracts and would have had to establish the reasonableness o f these contracts. BOTAS will procure the gas under existinglong term supply contracts some o f which have been contracted many years ago. It is also not feasible or economic for BOTAS to procure the gas outside o f these existing contracts through competitive processes. Internationally, natural gas purchase and contracting i s dependent on the proximity o f available supply sources and the need to establish dedicated supply networks. Long term contracting is central to the construction o f cross-border pipelines 18 or dedicated LNG supplies. While there i s a limitedinternational spot market in existence, it is used only at the margin when a shortfall is faced that cannot be met by long term supplies. Natural gas i s therefore procured under long term contracts rather than through competitive bidding. Gas markets and the prices prevailing inthese markets cannot be directly benchmarked, as i s the case for oil. This is because these markets, and their prices, are highly localized, with differential transport costs playing a key role in price determination. Even in the case of competitive markets such as in Europe, prices are different and do not have fixed relationships with each other. The price at which cushion gas will be valued will be established based on the weighted average cost o f gas (WACOG). WACOG i s the current regulatorypractice for determining the wholesale price o f gas inTurkey. The volume o f gas used for cushion gas will be based on metered inflow for each billing period untilthe minimumgas pressure i s achieved inthe cavern. It is expected that the filling of each set o f four caverns could take as long six months. This slow filling rate occurs due to the combineduse o fbrinedischarge facilities for both: (a) emptyingthe completed caverns; and (b) discharging brine from on-going solution miningo f the next phase o f caverns. In addition, emptying the brine from completed caverns i s deemed to be a technically delicate process that, for reasons o f cavern stability, should be done slowly. 19 Annex 1: Country and Sector or ProgramBackground TURKEY: GAS SECTORDEVELOPMENT Summary: Turkey does not have significant domestic natural gasreserves and 99% ofits gas is currently imported. However, despite the lack o f domestic reserves, natural gas consumption has grown rapidly in Turkey over the past two decades-with an average annual growth rate o f 24%. The largest user o f gas i s the electricity generation industry, but considerable amounts are also usedinindustry, commerce and increasingly, households. Growth has naturally stabilized as the market has grown and the current decade has seen demand growth average 10% per year. With increasing urbanization, and the resulting increase in the requirement for electricity and for heating, the demand for natural gas i s expected to continue to grow rapidly inthe mediumterm. Turkey obtains its gas supplies through imports, primarily from Russia through two pipelines, one through Bulgaria and the second one under the Black Sea. Other major gas suppliers to Turkey are Iran (by pipeline) and Algeria and Nigeria (in the form o f LNG). Deliveries o f gas from Azerbaijan are expected to begin in late 2006. Turkey imported about 25 billion cubic meters (bcm) o fnatural gas and LNGin2004. Turkey, due to its unique geographical location, is well-placed to be a major gas transit country, exporting into mainland Europe (this i s described further below). Turkey i s already in negotiations to construct large pipelines which will take Russian and other gas imports into Europe. In addition to the growing in-country demand for gas, this role for Turkey as a transit country i s likely to drive the economics o fthe natural gas market inthe mediumterm. Despite its size, and despite the rapid growth in demand, Turkey currently has no natural gas storage. Most developed countries normally maintain (or have access to) storage capacity adding up to a reasonable proportion o ftheir annual consumption (Table A.l below). The Law requires Turkey to have storage within the country to the extent o f 10% o f annual consumption. The lack o f storagejeopardizes the security o f supply and reliability o f the gas system and also the power system, which depends on gas as a major fuel source. Given that Turkey is a winter-peaking system, the lack o f storage leads to gas shortages inthe winter, or dependence on other fuels, or the purchase o f gas at highprices. Inresponse to the need to improve its security o f gas supply, Turkey has diversified its import sources as indicated above. However, this is likely to be insufficient, and adequate storage would contribute a vital component to the security and operational efficiency o f the gas system. A storage facility i s under construction at Kuzey Marmara, with a capacity o f 1.6 bcm. This however, has a low gas withdrawal rate and may not be adequate to meet peak demand. The Tuz Golu facility will add another 0.96 bcm o f storage, andis more flexible, havingwithdrawal rates upto 4 times faster. 20 Table 1.1 Underground Gas Storage in Various Countries 2002 Total Numberof Total Storage Storage Capacity/ Consumption Storage Capacity Total Consumption (BCM) Facilities (BCM) I I I I , I USA. 622 417 110 18% Russia 338 23 90 27% Ukraine 69 13 34 49% Germany 98 41 19 19% France 59 15 12 20% I 57 I 10 I 12 I 30% I Turkey 18 0 0 0 Turkey (2015) 42 2 2.4 6Yo The Turkish gas transmission system also needs to be expanded by buildingmore transmission lines, looping existing lines and buildingcompressor stations. This i s needed inorder to increase imports to meet the rapid rise in domestic demand and also to provide for the growth in gas transit. Demand for natural gas has increased from 522 million cubic meters in 1987 to 22.1 billion cubic meters in 2004 - a 42 fold increase over the 17 years. The main source o f increased demand over this period has been for gas usedinelectricity generation. In2004 about 60% o f all natural gas used in Turkey was used in electrical generation. Gas fired power plants have a major advantage relative to other power plants inthat they are relatively less expensive to build, are cleaner, and can be constructed much more rapidly than other plants. Also since Turkey has very limited domestic energy resources (only hydropower and modest amounts o f low grade lignite), there are limited alternatives. Inthe future, according to the forecasts prepared by the Government, most o f the new generating capacity is likely to be based on natural gas. Inaddition to natural gas usedinpower plants, there has also beenrapid growth innatural gas usage in industry, fertilizer plants and households. In 2004, industry represented about 17% o f demand, fertilizer plants 2% and households (including commercial usage) about 20%. In the next few years, household and commercial usage o f natural gas i s expected to accelerate. At present about 70% o f the Turkish population lives inurban areas, and this i s expected to grow to 85% over the mediumterm. Along with urbanization, more and more cities are being connected to the gas transmission grid. Untilrecently only 5 cities had gas distribution systems (Ankara, Istanbul, Izmit, Bursa and Eskisehir). Within the past year EMRA, the Energy Market Regulatory Authority, has awarded 26 licenses for gas distribution companies in hitherto unconnected cities, with another 12 cities scheduled to be awarded to private investors in the near hture. This rapid increase in the number o f gas distribution systems will result in an acceleration of gas usage in the residential and commercial sectors and an increased seasonal impact on gas consumption as gas used in distribution systems i s used extensively to meet the 21 winter heating load. Gas usedby the residential and commercial sector is much more seasonal thanis the casewith gas usedinelectricity generation where usagebythe gas firedpower plants tends to be fairly evenly spread over the course o f the year'. Table 1.2 below shows the gas demand from 1990 through 2004 and BOTAS' forecast for 2010. The 2010 forecast i s likely to be conservative since BOTAS has not factored in new gas fired power plants while the official electricity demand-supply forecasts, produced by the Turkish electricity transmission company, indicate that new capacity is needed by about 2009-10 and would be mostly fired with natural gas. Table 1.2 Gas Demand (bcm) I Year I 1990 I 1995 1 2000 1 2004 1 2010lest) I Electricity Generation 2.6 3.8 9.7 13.0 18.0 ResidentiallCommercial 0.1 1.o 2.8 4.4 9.6 Other 0.7 2.0 2.1 4.7 13.3 Total 3.4 6.8 14.6 22.1 40.9 Supply Currently BOTAS has 7 contracts to import gas from 5 countries. Most o f the gas comes from Russia mainly through the Balkans but also under the Black Sea through the Blue Stream pipeline. Turkey has one LNG terminal which receives liquefied natural gas from Algeria and Nigeria. There i s also a gas pipeline connection with Iran and a gas pipeline connection to Azerbaijan will be commissioned by end-2006. The major gas supply contracts, their plateau quantities and starting and endingdates are shown inTable 1.3. Table 1.3 Gas Supply Contracts Supplying Countries Plateau Quantity of Gas Operating Dates Supplied Start End Russia (West) 6.0 bcm/year 1987 2011 Russia (West, Turusgaz) 8.0 bcm/year 1998 2020 Russia (Blue Stream) 16.0 bcm/year 2003 2025 Algeria (LNG) 4.0 bcm/year 1994 2011 - 1.2 bcm/year 1999 2020 IINigeria (LNG) Iran 10.0 bcmlyear I2001 2025 Azerbaijan II 6.6 bcm/year I2006 2020 1I Total 51.8 bcm/year Inaddition to the above, BOTAS has a contract with Turkmenistanto import up to 16 bcm per year, which however has not been implemented, and i s unlikely to be implemented in the absence o f a pipeline connection between the two countries. The Turkish Government i s also Demand for gas for power-generation is normally stable since most o f the larger gas fired plants are BOTSor BOOSand operate at close to full capacity year round for contractual reasons. 22 considering new supply contracts with Egypt, Syria and Iraq. However, this additional gas i s not neededby Turkey inthe near term and will probably not be imported until it can be transited to Europe, probably through the Nabucco line (see below). The gas supply contracts between BOTAS and the various gas suppliers such as Gazprom (Russia) and Sontrach (Algeria) have base prices which are indexed to crude oil and petroleum product prices. Thus the price of natural gas moves up and down, usually quarterly, with oil prices although it i s normally below oil prices on a heat equivalent basis. Transit Lines Turkey is likely to play a rapidly increasing role in the gas transit business. Because o f its geographical situation betweenthe gas markets o f Europe on the one hand and the gas supplying areas o f the Middle East and Caspian on the other hand, this role fits it well. This role i s also likely to be quite economically attractive generating transit revenues, trading opportunities (particularly if combined with storage), economic activity (construction, jobs), increased supply security and lower transmission costs. Currently a gas transit line to Greece i s under construction. Turkey is also actively involved inthe Nabucco project to transit gas from the Caspian (andeventually the MiddleEast) to Austria and Germany. Storage As discussed above, Turkey does not currently have natural gas storage capacity. The seasonal increase in gas demand inthe winter i s met by a combination o f drawing down the line pack, increasing imports when available and cutting off customers such as the government- owned gas fired power plants, auto producers and others with interruptible contracts. The Government has recognized, however, that as the seasonal swing in gas demand gets stronger and gas demand continues to grow, this policy would become more difficult to implement and more questionable and that therefore gas storage i s needed. A gas storage facility is under construction at Kuzey Marmara by TPAO, the state oil company, andwill be leased and operated by BOTAS. It consists o ftwo depletedgas field which are mostly underthe Sea o fMarmara and which are expected to be in operation by end-2006. This facility will provide about 1.6 bcm of working gas storage but the rate at which gas can be withdrawn i s only about 11million cubic meters per day. It is therefore not adequate to meet peak gas demand because o f the low withdrawal rate. Organization/ Gas Markets Currently BOTAS imports all o f the natural gas used in Turkey and transmits it through its pipelines. It is also the sole wholesaler o f gas inthe country. Under the governing Natural Gas Market Law (Law 4646) passed in 2001, BOTAS i s required to reduce its role in gas imports and gas wholesaling to 20% o f each market by 2009. BOTAS i s also expected to transfer its gas import contracts to private firms to reach the 20% targets. This can be either as volume release or as contract release. An ongoing contract release program aims to transfer 16 bcm worth o f contracts to the private sector - this will represent about 64% o f the total present supply under these contracts. The target o f 20% and the timelines for achieving the same are considered ambitious (refer the Gas Strategy Note, September 2004) and the Bank has argued that a more realistic and graduated timeframe be adopted. The Bank, inthe Strategy Note, has also stated that it may not be possible to transfer existing gas contracts to private firms since the suppliers may not agree and BOTAS can provide very little information on these contracts to potential buyers because o f the 23 confidentiality clauses in the supply contracts. As a result o f these difficulties, the Bank has recommended a volume releaseprogram. BOTAS has already transferred its distribution business into separate companies which have since been privatized. BOTAS i s now preparingfor the separation o f its activities -transmission o f natural gas, storage o f gas, supply, and petroleum activities (Iraq crude lines, BTC) - into separate companies. The accounts o f BOTAS have been configured into these separate businesses starting with 2004. Transmission o f natural gas would remain with BOTAS. While there are countries which have privately owned storage, in the interim, it may be more appropriate to retain storage with the transmission company for system security and reliability purposes. 24 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies TURKEY: GAS SECTORDEVELOPMENT Overview This will be the Bank's first project inthe natural gas sector inTurkey although IFC currently has some projects (see below). This i s the Bank's first natural gas storage project anywhere in the world, although the Bank has done other types o f gas projects inother countries such as gas production, transmission and distribution. Energy Sector Projects The Bank has undertaken a large number o f other energy sector projects in the country primarily concentrating on the electricity sub-sector. Currently three electricity sector projects are effective, with two additional projects currently under preparation. These projects are: National Transmission Grid Project This project consists of two separate loans. The first loan is to TEIAS, the Turkish national electricity transmission company, and provides financing for construction, equipment, a SCADA upgrade, and technical assistance. This loan i s for US$ 250 million. The second loan i s to the Government o f Turkey for technical assistance in establishing an electricity market, privatization and support for the Energy Market Regulatory Authority. This loan is for US$ 20 million. Both loans are rated satisfactory. RenewableEnergyProject This is a project to support the development o f electricity generation from renewable energy sources by private companies. The loan i s to Treasury which on lends the funds to the Turkiye Sinai Kalkinma Bankasi (TSKB) which is a private development bank and the Turkiye Kalkinma Bankasi (TKB).which is a Government-owned development bank. These two development banks in turn on lend the funds to private developers. The Loan is for US$ 202.03 million and is rated satisfactory. ECSEE APL2 This is part o f a US$ 1 billion regional program (ECSEE APL) to promote cooperation and integration in the electricity markets o f South East Europe and inter alia to support the Stability Pact. The loan to Turkey (APL2) for US$ 66 Millioni s part o f the second group o f loans which also includes Serbia and Montenegro. It was signed inJune 2005 and has recently become effective. IFC has lent to two natural gas distribution companies for constructing gas distribution systems with a standby loanto the parent company incase it is interested indeveloping other distribution systems. These total US$ 12 million. The rapid expansion o f natural gas distribution systems, such as those financed by IFC, substantially increases peak demand for gas and the need for storage to meet it. 25 Annex 3: Results FrameworkandMonitoring TURKEY: GAS SECTORDEVELOPMENT Results Framework PDO ProjectOutcomeIndicators Use of ProjectOutcome Information The Project objective is to increase Functioning Gas Storage Facility More reliable gas supplies for gas the reliability and stability o f gas built inthree phases with anultimate users and fewer interruptions ingas supplyinTurkey by implementing storage capacity o f about 0.90-0.96 supplies forcing customers to shift to critically needed gas storage and bcm. alternate fuels. network infrastructure, and support BOTASinstrengthening its Increased carrying capacity o f the More imported gas available in operations as a financially stable and Turkishgas transmission system Turkey and gas transiting Turkey to commercially managedcorporation. through the completion o f two Europe. compressor stations. Storage operates as separate business unit. IntermediateOutcomes IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring Construction o fphase Io f storage Storage capacity i s built: Increasing storage will reduce capacity. Phase 1: 320 mcm(2009) supply interruptions and allow Phase 2: 640 mcm (2012) BOTASto capture seasonal Phase 3: 960 mcm(2015) differential inprices. Network infrastructure under Compressor capacity o f system System can carry more natural gas to construction. increasing domestic and foreign markets. The storage function inBOTAS i s Comprehensive costs available for Information on costs of storage and established as a separate cost center storage on a "stand alone" basis. its status. with its own accounts. 26 v). 2 0 m W .a L Y 0 .I El 0 E d c, VI 2 e h P& Y VIE, x A m 2E c *a N 5*h 0 0 L U Annex 4: Detailed Project Description TURKEY: GAS SECTOR DEVELOPMENT The Project has two components. The first component i s the underground gas storage facility located close to Tuz Golu, a salt lake in South Central Turkey. The second component i s two compressor stations located close to the cities o fErzincan and Corum. I. TheGasStorageFacility(EstimatedCost6US$365.7million) The gas storage facility will be in an underground salt formation located close to Tuz Golu, a salt lake in South Central Turkey. The facility will have 12 caverns which will be "solution-mined" inphases o f four caverns each. The facility, upon completion, will have a storage capacity o f about 960 Million cubic meters o f working gas and 460 million cubic meters o f cushion gas7. The facility will have the capacity to deliver 40 Millioncubic meters o f gas per day for up to 20 days and can be refilled at the rate o f 30 Million cubic meters per day for a period o f up to about 25 days. The cushion gas however, must remain inthe caverns as long as the storage facility i s inoperation in order for the caverns to maintain their structural integrity, given the pressure from the surrounding salt. This component will consist o fthe following sub-components: (a) The surface and sub-surface facilities (US$ 230.3 million) including engineering and construction, solution mining o f 12 caverns, the gas pipelines and the compressor facility; (b) The water andbrinedischarge pipelines (US$42.4 million); (c) 460 millioncubic meters o f cushion gas (US$ 80 million); and (d) Consulting services (US$ 13 million) including an Owner's Engineer (for assistance in supervision and monitoring o f implementation), environmental monitoring, regulatory aspects, and other support to the Project Management Team. This component i s estimated to take 10 years to complete. BOTAS was o f the view that a loan with a 10-year disbursement profile would entail high costs for BOTAS in the form o f commitment fees. Further, BOTAS would in all likelihood start repaying the loan while it was still disbursing. Giventhese factors, it was agreed with BOTAS that the Bank would finance the first two phases (8 caverns) over 7 years from 2006 to 2012, and that BOTAS would obtain other sources o f financing for the remaining investments. The Bank also agreed to consider providing additional financing for the remaining investments, in case BOTAS required financing from the Bank. All costs mentioned inthis Annex are inclusive ofVAT, taxes, duties and other local expenses. 'Working gas i s the portion o f natural gas in the caverns which can be withdrawn and injected back in, while cushion gas is the portion o f gas which i s required to remain inthe caverns for the duration o f their economic life in order to maintain cavern integrity. 28 11. NetworkExpansion(EstimatedCost US$88.5 million) The project will also finance two compressor stations for BOTAS at Erzincan and Corum and other network infrastructure as required. These stations are requiredto help transmit the increasing volumes o f gas expected to be imported into Turkey from existing and new sources. The Corum stationwill have a capacity of 30 MW and is required in order to enable increased supply from Russia through the Blue Stream, while the Erzincan Station will have 39 MW of compression capacity and will enable increased imports from Iran and new imports from Azerbaijan. Table 4.1 ForecastProjectDisbursement'Schedule(US$ Million) Year Year Semester Gas Storage Cushion Gas Compressor Stations Total (Calendar) Erzincan Corum 2006 Year 1 1 18 4 22 2 12 8 20 2007 Year 2 3 22.5 20 3.5 46 4 18 8 7 33 2008 Year 3 5 26.5 17.5 44 6 20 7 27 2009 Year 4 7 15 15 8 15 27 42 2010 Year 5 9 10 2011 Year 6 11 12 2012 Year 7 13 22 22 14 25 25 Financinn from the - loan 223 27 40 35 325 2013 Year 8 15 4 4 16 4 27 31 2014 Year 9 17 4 4 18 4 4 2015 Year 10 19 3 3 20 2 27 29 Total Financing 244 81 40 35 400 These forecasts exclude VAT, taxes, duties, other local expenses and contingencies. 29 Construction of the Gas Storage Facility The gas storage facility will be constructed using a solution mining process. This consists o f injecting fresh water into the salt formation and dissolving the salt in order to create a cavern. Figure4.1, below shows this initial process o f leaching the salt. Figure 4.1 Water Supply and Leaching of Caverns The second stage o f solution miningi s to replace the brine inthe caverns with natural gas. Gas is injected at highpressure and the brine i s forced out with the brine which i s then evacuated to the Tuz Golu Salt Lake. This process o fremoving the brine and injecting the gas is shown inthe diagram below. 30 igure 4.2 Gas Injection and Brine Removal SEC'OYD S I,\C;C 1% S41.l C4\ C It\ 61C)R4(xE: CONSTRUCTIONOF STORAGESURFACEFACILITIES COMPRESSORS STORAGE FIELD INJECTIONWITHDRAW CAVERNWELLS I PIPELINE INLET SEPERATOR The twelve caverns will contain about 960 million cubic meters o f working gas and 460 million cubic meters o f cushion gas. The storage facility will have the capacity to deliver 40 million cubic meters o f gas per day of working gas for up to 20 days and can be refilled at the rate o f 30 million cubic meters per day for a period of up to about 25 days. The cushion gas, however, mustremain inthe caverns as long as the storage facility is inoperation inorder for the caverns to maintaintheir structural integrity, given the pressure from the surrounding salt. The water for the solution miningwill be obtained from the HirfanliReservoir on the Kizilirmak River. It will be supplied to the site by a fresh water pipeline o f about 115 km in length which will mostly follow the same right o f way as an existing natural gas pipeline. The brine resulting from the solution mining will be transferred to the Tuz Golu salt lake, using gravity flow, by a brine disposal pipeline of 39 km. The salt inthe brine i s essentially identical to the salt which i s already in Toz Golu since they come from the same formation. A schematic diagram o f the water supply system, leaching process and brine disposal systemi s shown inFigure 4.3. 31 Figure 4.3 Schematic Diagram of Cavern Construction I I RlNE LINE FRESH WATER FACILITIES 115 km fresh water piDeline 1.I20 mVhr LEACHING FACILITY SCHEMATIC DIAGRAM 7 A gas pipeline connection will be built from the storage facility to the Kayseri-Konya-Seydisehir line, which i s one of BOTAS' main trunk lines. This connector line will be 19kminlength. 32 Annex 5: Project Costs TURKEY: GAS SECTORDEVELOPMENT Local Foreign Total Project Cost By Component and/or Activity US $million US $million US $million 1. Underground Storage 86.3 278.8 365.7 GI Water and Brine Lines 18.7 23.8 42.5 GI-I Pipeline Laying and Commissioning (Pumps, 28" 18.7 23.8 42.5 and 24" pipes, PVC pipes, Equipment and Construction) G2 Natural Gas Storage Facility 66.1 164.0 230.1 G2-1 Sub-surface Facilities (Engineering & 43.7 92.0 135.7 Construction, Solution Mining Plant, 4x3 Wells Solution Mining) G2-2 Surface Facilities (Compressor Facility, Gas 22.4 72.0 94.4 Pipelines) G3 Cushion Gas (460 million m3of natural gas in 0.0 80.0 80.0 three stages) G4 Consulting Services 1.5 11.0 12.5 G4-1 Owner's Engineer 0.0 8.5 8.5 G4-2 Environmental Monitoring 1.o 1.5 2.5 G4-3 Regulation of Gas Storage 0.0 0.5 0.5 G4-4 Support to Project Management Team 0.5 0.5 1.o 2. Network Expansion 21.0 67.5 88.5 G5-1 Corum Compressor Station [3x10 MW] 9.8 31.5 41.3 G5-2 Erzincan Compressor Station [3x13 MW] 11.2 36.0 47.2 Total Baseline Cost 107.3 346.3 453.6 Physical Contingencies 10.7 34.6 45.4 Price Contingencies 5.4 17.3 22.7 Total Project Costs` 123.4 398.2 521.6 Interest during construction 3.7 11.9 15.6 Front-end Fee 0.0 0.8 0.8 Total Financing Required 127.1 411.O 538.1 `The cost estimates include VAT, taxes and duties, and other local expenses. The Loan therefore, finances about 60% of the Project. 33 Annex 6: ImplementationArrangements TURKEY: GAS SECTORDEVELOPMENT The project will be implemented by BOTAS, the government-owned utility responsible for developing, operating and maintaining the natural gas import, transmission and (hitherto) distribution system in Turkey. BOTAS was established in 1974 to construct and operate the Iraq-Turkey crude oil pipeline. Starting from a crude oil transporter, BOTAS has evolved and diversified over time, and is now a large profitable oil and gas conglomerate with a monopoly over gas imports and transportation. It has since increased its crude oil pipelinecapacity from 35 million tons to 80 million tons, while its trade innatural gas has grown more than 40 times since 1987 to reach 21.2 billion m3. BOTAS' monopoly has now been removed, per the Natural Gas Market Law 2001. It has sold its distribution activities to the private sector but kept its transmission and supply roles. Over time, BOTAS is expected to become a gas transmission company with the trading andmarketing functions increasingly beingseparated andprivatized. In 2004, BOTAS operated about 2300 km of crude pipelines and 5,000 km of natural gas pipelines. BOTAS had long term gas import agreements for about 68 B C M in 2003 (some o f these agreements are not currently operational and others are not operating at full capacity), and transported 21.6 millionm3to electricity, fertilizer and other consumers. The planning and design o f the underground storage project has been carried out by the Engineering and Contracts (E&C) department o f BOTAS. BOTAS used the services o f a reputed engineering consortium comprising E.ON Engineering (formerly PLE), PODZEMGAZPROM (PGP) and ENVY (for seismic and environmental studies) for the feasibility, design and engineering and the technical specifications for the tender documents for the underground storage project. The compressor stations have been designed by BOTAS, and procurement and implementation will be managed by BOTAS. BOTAS has significant experience in constructing and operating compressors, and will be able to manage this process without external assistance. Cushion gas will be procured through ongoing long-term natural gas and LNG supply contracts from Russia, Iran, Nigeria, Algeria and Azerbaijan in three installments. The valuation o f this gas will be done based on the weightedaverage cost o f gas at the time o f injection o f the gas into the caverns. A reimbursement procedure has been prepared, which includes the process o f measurement and verification o f the volume and value o f gas injected into the caverns. The E&C department has a separate Underground Storage Unit staffed with geologists and engineers who will have primary responsibility over the procurement and implementation o f the gas storage facility. The E&C department will have oversight over the entire project, and a Project Management team has been set up for this project under the coordination o f this department. The loan will finance supervision consultants, the Owner's Engineer, to assist BOTAS in managing the implementation o f the underground storage project. The main aspect where the 34 consultant i s expected to play a role, apart from routine monitoring and supervision, will be the integration o f the Sub-surface and Surface Facility packages, which are being contracted separately. The project i s expected to be completed in 10 years. The caverns will be commissioned in 3 batches of4 caverns each, the first batchbeingcompleted in4 years, with the subsequent batches taking about 3 years each. The compressor stations will require 18 months to commission, and will begin respectively in June and December 2006. The entire project is expected to be completed by 2015. A procurement and implementation plan has been prepared (See Annex 8) and is considered reasonable. 35 Annex 7: FinancialManagementandDisbursementArrangements TURKEY: GAS SECTORDEVELOPMENT An assessment o f the financial management arrangements for the project was undertaken inJuly 2005 and updated in October 2005. BOTAS has financial management arrangements acceptable to the Bank and these systems will be relied upon for project financial management purposes. However the main system will be supplemented by excel sheets for project reporting and monitoring on foreign currency basis. A summary o fthe conclusions for the project financial management purposes are as follows: RATING COMMENTS 1. Implementing Entity Satisfactory I BOTAS will be implementing the project. 2. Fundsflow ISatisfactory I The Bank loan will finance about 60% o f the total project costs. 3. Staffing - 1Satisfactory I1Qualifications and experience o f BOTAS staff are satisfactory. 4.Accounting Policies and procedures Marginally Accounting policies and procedures for Satisfactory the project should be documented. 5. Internal Audit NA No reliance on internal audit 6. External Audit Satisfactory BOTAS has been engaging the services auditors for the last 3 years. 7. Reporting and Monitoring Satisfactory. The formats and contents o f the FMRs determined and agreed with the Bank. 8. Informationsystems Satisfactory BOTAS will be using integratedexcel worksheets for the project accounting and reporting inforeign currency. OVERALLFMRATING Satisfactory CountryIssues Until 2001-02, public financial management in Turkey was dominated by an outdated legal fiamework. Enactment o f the PFMC Law in 2003 was a defining moment for public financial management inTurkey. The Public Financial Management and Control (PFMC) Law (No. 5018) was enacted by the Parliament in December 2003. The law set up the framework for the modernization o f public financial management in Turkey and significantly improved the financial management environment inthe Country. State Economic Enterprises (SEES) in Turkey are subject to basic accounting and auditing obligations which apply to companies in Turkey. These are laid down in the Commercial Code, which was last revised in 1956. More detailed requirements were introduced in the Tax Procedures Law o f 1950 (which has since been consolidated into the Tax Procedures Code). Under the powers granted to it by the Code, the Ministry o f Finance (MOF) introduced a Uniform Chart o f Accounts which became effective on January 1, 1994. The purpose o f these 36 requirements i s to provide information to the taxation authorities, there i s no obligation to publish the financial statements, nor are they subject to a mandatory financial statement audit. Large companies are required to have their financiaMax statements certified by a Sworn CertiJied Public Accountant (see below), but this process of certification is concerned with tax compliance issues, and i s not a financial statement audit. SEEs however are not subject to the obligatory audit of the Sworn Certified Public Accountants. Audits o f the SEEs are conducted by the Higher Audit Boardunderthe Prime Minister's Department. The energy sector in Turkey i s regulated by EMRA. The regulation published by EMRA in the official Gazette dated October 3, 2003 sets the standards for audits in the energy sector companies. It also refers to the regulations o f EMRA on accounting and reporting in these companies. However these regulations are still underpreparation by EMRA. Risk Analysis A summary o fthe risk assessmentfor the project is as follows: Risk Comments INHERENTRISK 1. Country FinancialManagement Risk High Based on CFAA report 2. Project Financial Management Issues Moderate Overall Inherent Risk Moderate CONTROLRISK RISKMITIGATIONSTRATEGY Country financial management risk - the project will be implementation will be centralized at BOTAS. Control Risk BOTAS will have the ERP implemented so that full integration o f the project - financial management into BOTAS systems i s possible, byDecember 2007. 37 ImplementingEntity The project will be implemented by BOTAS. BOTAS previously an equity participation o f Turkish Petroleum A.S. became an SOE in 1995 with articles o f association published on the official gazette 22261. BOTAS i s responsible for building pipelines for petroleum and natural gas both in and outside Turkey, taking over, buying or renting already constructed pipelines, transferring petroleum, petroleumproducts and natural gas with the pipelines and purchasingand selling the petroleum and natural gas transferred by these pipelines and also doing business analysis overseas for the purchase o f petroleum and natural gas. BOTAS headquarters is in Ankara and there are five regional establishments (including the Baku Ceyhan Tibilisi (BTC) pipeline operations). A Project Management Team within BOTAS has been established for the project. The project activities will be coordinated by one o f the Assistant General Managers and related departments within the institution will be responsible for the bidding, construction supervision, approval, payment and reporting functions. The financial management functions underthe project will be camed out bythe Finance and Accounting Department (FAD). The risk associatedwith the implementingentity i s assessed as negligible. Funds Flow There will be a special account (SA) for the project opened and maintained by BOTAS. The account will be denominated in U S Dollars and will be opened in a government owned commercial bank under terms and conditions acceptable to the Bank. The commercial bank will be selected by BOTAS andwill submit a comfort letter to the World Bank. The risk associatedwith funds flow is considered as negligible. The financial management arrangements for the project will be the responsibility o f the FAD o f BOTAS. The staffs working at the department are adequately qualified and experienced. The risk associatedwith staffing i s considered as negligible. Accounting Policies and Procedures The project accounting will be maintained by the FAD. The main transactions, that are the movements o f the special account, loan account and project expenditures will be in the main accounting system o f the company and could be accessed any time on YTL basis. The current accounting system i s developed by the IT department o f BOTAS and there i s an online connection between the general directorate and the regional offices. However the system i s old and it i s not technically possible to generate the reports form the current system. The auditors also had observations relating to the inadequacies o f the current system in their management letter and they have recommended replacing the current IT infrastructure with one that will address the requirements o f the organization. BOTAS aware o f these inadequacies i s in the process o f tendering o f the new Enterprise Reporting Program (ERP). Once the ERP project 38 becomes functional all technical and software infrastructure o f BOTAS will be updated. However since ERP i s not expected to become functional when the project becomes effective, BOTAS will use integrated excel worksheets to monitor the project on foreign currency basis. These excel worksheets will also be used for generating project reports. These sheets will be reconciledregularly to the main accounting records. Accounting procedures for the project will be set out in the project financial management manual. The manual will cover (a) the financial and accounting policies and procedures for the project (b) organization of the financial management (c) the financial management information system (d) disbursements (e) budgeting and financial forecasting (0 project reporting and (g) project planningprocedures. The risk associated with accounting policies andprocedures is considered as negligible. Internal Audit BOTAS has an investigationdepartment which investigates irregularities noted inthe institution. There i s not a separate Internal Audit department and therefore no reliance will be placed on internal audit. Reporting and Monitoring BOTAS will maintain records and will ensure appropriate accounting for the funds provided. Financial statements for the project will be prepared by BOTAS. The Financial Monitoring Reports (FMR) will be prepared quarterly and will be submitted to the Bank no later than 45 days after the end o f the semi-annual period. The formats o f the FMRs have been agreed with BOTAS. The financial management manual o f the project will include a section on the FMRs and formats of these reports will be includedinthe manual. The risk associatedwith reporting andmonitoringis assessed as negligible. Information Systems BOTAS will use integrated excel sheet that comply with the main accounting records for project accounting and reporting in foreign currency. It is not technically possible to integrate detailed project accounting andreporting into the Company's main accounting system. The risk associated with information systems i s assessed as moderate. BOTAS will implement the ERP which will facilitate full integration o f project financial management to the company's systems by December 2007. 39 Strengths and Weaknesses The significant strength that provides the basis o f reliance on the project financial management system i s that BOTAS has experience inthe implementation ofprojects financed by international organizations. The particular weakness inthe project is that the current accounting system o f BOTAS is old and therefore integration o f the project financial management fully to the BOTAS system is not possible and integrated excel worksheets will be relied upon until ERP an Enterprise Reporting Program becomes functional. BOTAS is committed to have the ERP functional in December 2007 and this will be monitored closely by the Bank by providing the necessary technical resources. Action Plan It is concluded that the financial management environment o f BOTAS is satisfactory but additional actions should be taken to address the project financial management issues. Following action plan i s proposed to address the issues relating to the project until ERP is functional and project financial management i s fully integrated into BOTAS systems: Action Deadline 1.BOTASprepares project financial management October 30, 2005 manual 2. BOTAS engages the auditor for the audit o f its December 15,2005 financial statements for the years ended December 3 1,2004 and 2005. BOTAS has also agreedto the following: 1. BOTAS will maintain a financial management system acceptable to the Bank. 2. BOTAS financial statements will include sufficient disclosures relating to the project and will be audited by independentauditors acceptable to the Bank and on terms o f reference acceptable to the Bank. The acceptable accounting and auditing standards for the Bank are IFRS and ISA. The annual audited statements and audit report o f BOTAS and the Project will be provided to the Bank within six months o f the end o f each fiscal year. 3. BOTAS will install and make functional the enterprise resource planning program (ERP) byDecember 31,2007. SupervisionPlan During project implementation, the Bank will supervise the project's financial management arrangements as follows; (i) project's quarterly financial management reports as well as the project's annual audited financial statements and auditor's management letter will be reviewed; (ii)during the Bank's supervision missions financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank's minimum requirements, 40 and (iii)reliance on the company systems for project accounting and reporting will be undertaken once the ERP becomes functional. As required, a Bank-accredited Financial Management Specialist will assist inthe supervision process. External Audit BOTAS financial statements as well as the project financial statements will be audited by independent auditors acceptable to the Bank. BOTAS financial statements for the years ended December 31, 2001, 2002 and 2003 were audited inaccordance with IFRS and ISA by Deloitte. BOTAS i s currently tendering the audit o f its financial statements for the years ended December 31,2004 and 2005. They expect to assign auditors by December 15,2005. The auditors have issued a qualified audit opinion on the financial statements o f BOTAS for the years ended December 31,2001,2002 and 2003. The qualifications were as follows: 0 The financial statements o fBOTAS for the year ended December 31,2000 have not been audited. The auditors qualified the fact that any errors brought forward from previous years would affect the results for the years ended 31 December 2001,2002 and 2003. 0 The auditors were unable to attend thephysicalinspections o fthe assetsperformed bythe Company as at December 31,2003,2002 and 2001. 0 Two equity participations 100% owned by the company were privatized in year 2004. Since IFRS audited financial statements were not available, these companies were not consolidated in accordance with IAS 27 and 28 in the audited financial statements. In addition no inflation adjustment in accordance with IAS 29 were made in the financial statements as at December 31, 2002 for the loss amounting to TL 13,575,119 million generated andrecorded as a result ofthese privatizations. 0 The company sells natural gas to EUAS and has receivables subject to conflicts and legal follow up from EUASrelating to these sales. 0 BOTAS's 35% shareholding inone o f its subsidiaries is shown from indexed cost rather than the equity method as required by IFRS since IFRS financial statements were not available for the company. 0 The Company's fixed assets should be reviewed for impairment. The indexed net book values o f the property, plant and equipment inthe audited financial statements have been calculated based on the available initial acquisition costs and acquisition dates. Appraisal values o f the properties could be substantially different than their indexed net book values. 0 The deferred tax calculation base differed for the years 2003, 2002 and 2001, due to the impacts o fthe local legislationrelating to inflation accounting. 41 0 The auditors were unable to obtain confirmation letters for the bank loans inthe financial statements. The main observations o f the auditors inthe management letter related to the inadequacies o f the current accounting system and they have recommended replacing the current I T infrastructure with one that will addressthe requirementsofthe organization. The Higher Audit Board (YDK) report for the year ended December 31, 2003 has been reviewed. There were no major recommendations relating to the internal control procedures of BOTAS. The risk associated with external audit i s assessed as negligible.BOTAS has been engaging the services o f auditors and it i s required that they will assign the auditor for the years ended December 31,2004 and 2005 no later than December 15,2005. Disbursement Arrangements The authorized allocation will be established at US$40,000,000 except that for the initial period o f project implementation, the allocation will be limited to US$20,000,000 until total disbursement under the loan exceeds US$120,000,000. Loan proceeds will flow from the World Bank to the SA but direct payment requests and special commitments will also be available in accordance with standard Bank guidelines for disbursement. The Project will use traditional disbursement methods inaccordance with BOTAS's preference. Use of statements of expenditure(SOEs): The Statement o f Expenditures (SOE) procedure will beusedfor expenditures incurred inrespect o f all contracts which do not require the Bank's prior review, Le., for expenditures for: (i)contracts for goods costing less than US$1,500,000 equivalent each, (ii)for services o f individual consultants costing less than US$lOO,OOO equivalent per contract, (iii) for services o f consulting firms under contracts costing less than US$500,000 equivalent per contract, and (iv) for cushion gas (except the first three payments which will be subjected to Bank review), all under terms and conditions specified by the Bank. For all other contracts, disbursement will be made on the basis of the Summary Sheet with full documentation. BOTAS will maintain all original source documentation supporting SOEs and Summary Sheets and make them available for review by auditors and the Bank staff until one year from the receipt o fthe final Project audit report. Construction completion reports will first be checked at the construction sites. The reports will then be evaluated by the related group within Construction Department at the General Directorate. It will then be sent to the FAD with the approval o f the Department and Assistant General Manager. The FAD department will process and make the payment from the special account. BOTAS has authorized signatories in the FAD and the payments from the special account will be made with the signatures o ftwo o f these authorized signatories. BOTAS has submitted its investment proposal to SPO in September 2005. BOTAS budget allocation proposals for the project are Y T L 36 Billion (approximately US$27 million), YTL 58 Billion (approximately US$43.9 million) and Y T L 67 Billion (approximately US$ 50.8 million) 42 for the years 2006, 2007 and 2008 respectively. Approval o f the budget will be finalized in December 2005. Cushion Gas financing: Procedures to finance expenditure for the cushion gas component will be as follows: Cushion gas will be financed from the Loan at the Weighted Average Cost o f Gas (WACOG) on a monthly basis and based on the actual measured quantity o f gas injected into the caverns. Utilization of Loan Proceeds: BOTAS will finance taxes (excluding withholding taxes for consulting services which will be financed out o f the loan), interest during construction, land and contingencies. The Bank loanwill finance about 60% o f the total project cost since the loan will cover 7 years o f the 10-year project, and since BOTAS will finance the taxes, VAT, interest duringconstruction, andother local expenses such as land. This project finances less than 20% o f total investments by BOTAS in any year, and overall, less than 15% during the project implementationperiod. Category Loan % of Expenditureto be financed Allocation (US$ million) 1. Goods (includingsupply and installation) 286.1875 100 % of foreign expenditures, 1OO%of local expenditures (ex-factorycost) and 85% of other items procuredlocally 2. Consultants'services 9.0 100% 3. Cushion Gas 27.0 100% 4. Front-endFee o.8125 Amount due under Section 2.04 of the Loan Agreement 5. Premiafor Interest Rate Caps and Interest 0.0 Amount due under Section 2.09 (c) of Rate Collars the Loan Agreement 6. Unallocated 2.0 Total 325.0 Withdrawals, in an aggregate amount not exceeding US$5,000,000 may be made in respect o f Categories (1) and (2) set forth inthe table above on account o f payments made for expenditures before the date o fthe LoanAgreement,but after September 30,2005. 43 Annex 8: ProcurementArrangements TURKEY: GAS SECTORDEVELOPMENT A. General Procurement for the proposed project would be carried out inaccordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated inthe Legal Agreement. The general descriptions o f various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team and listed in the Procurement Plan. The Procurement Plan will be updated regularly to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurementof Works: No Works contracts are foreseen inthe Project. Procurement of Goods/Supply and Installation: Goods procured under this project would include: Supply and Installation o f Water and Brine Lines; Supply and Installation o f Gas Storage Plant including Surface and Sub-surface facilities; Supply and Installation o f Compressor Stations; Supply o f steel and PVC pipes. Because o f the size and complexity o f the Gas Storage Plant, prequalification o f bidders will be done in accordance with the provisions o f paragraphs 2.9 and 2.10 o f the Procurement Guidelines. The procurement o f readily available off-the-shelf goods having a small value may also be necessary duringthe implementation o f the project. The envisaged methods for the procurement o f Goods/Supply Installation contracts in this Project are; -International Competitive Bidding(ICB); and -Shopping (S) for goods estimated to cost less thanUS$lOO,OOO. The procurements will be conducted usingthe Bank's latest Standard BiddingDocuments for all International Competitivebidding. Goods/Supply and Installation Contracts estimated to cost above US$1,500,000 per contract, and the first contracts for each bidding method, regardless of the estimated cost, will be subject to prior reviewby the Bank. Procurement of non-consulting services: No non-consulting services are foreseen in the Project. Selection of Consultants: Consulting firms would be required for supervision, environmental monitoring, and regulation o f gas storage. Short lists o f consultants for services estimated to cost 44 less than $200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. Individual consultants may also be required for highly specialized subjects and for support to the Project Management Team. The envisaged procurement methods for the Selection o f Consultants inthis project are: - Quality and Cost Based Selection (QCBS); - Selection Based on the Consultants Qualifications (CQS) for the services estimated to cost less than $200,000; - Individual Consultants. Consultancy services estimated to cost above US$500,000 per contract and Individual Consultants estimated to cost above US$lOO,OOO per contract will be subject to prior review by the Bank. Regardless o f the estimated cost, the first contracts for each selection method and the Terms of References o f all individual contracts will be subject to prior reviewby the Bank. OperationalCosts: The projectwill not finance any operational cost. CushionGas: The cost of CushionGas with an approximate amount of about 200 millionmeter cubic will be reimbursed from the Loan at the Weighted Average Cost o f Gas (WACOG) based on the actual measured quantity of gas injected into the caverns. The Bank's Management provided a waiver from the application o f the Bank's procurement Guidelines as gas purchasing does not lend itself to competitive procurement owing to the nature o f the gas market internationally and inTurkey (see Section D.7 o fthe main text inthis regard). B. Assessment of the agency'scapacityto implementprocurement Procurement activities will be carried out by BOTAS. Assessments o f the capacity o f the ImplementingAgency to implement procurement actions for the project have been carried out by the Bank team on February01,2005, April 06, 2005, April 25-28, 2005 and July 14, 2005. The assessments reviewed the organizational structure and procedures for implementingthe project. BOTAS has established a Project Management Team under the coordination o f Engineeringand Contracts Department. The Project Management team consists o f the Department Head, Underground Storage Manager, one Petroleum Engineer, one Mechanical Engineer, one Architect and one Environmental Engineer. The team will be supported by the procurement staff experienced in public procurement and other international procurement procedures during the procurement process. BOTAS as an institution has experience in the procurement and implementation o f large international contracts such as the Blue Stream gas pipeline (from Russia to Turkey under the Black Sea) and the BTC oil pipeline. However, BOTAS does not have experience under the 45 Bank's procurement Guidelines (except the selection o f consultants under Gas Storage Trust Fund). Considering that the BOTAS staff has little experience inthe Bank's procurement procedures the following action planfor reducingprocurement riskwas agreed: 1. Duringthe project preparation stage in early April 2005, the Project Management team staff was informed about the Bank's procurement Guidelines, Standard Bidding documents and the procedures. 2. The Project Management Team Staff participated in the procurement training given on June 24,2005 bythe Bank's procurement specialist inthe Bank's Ankara office. 3. Since BOTAS intends to initiate the procurements before the Loan negotiations, in the preparation o f the bidding documents BOTAS' staff and the Bank's procurement specialist agreed to work closely. 4. BOTAS agreed to send two staff to a procurement seminar on the Bank's procurement procedures before the LoanNegotiations. 5. BOTAS staff will participate in regular monthly procurement meetings arranged by the Bank's procurement specialist. The overall project risk for procurement is high. C. ProcurementPlan The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on October 6, 2005 and is available at the Project Management Team's office in BOTAS. It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team to reflect the actual project implementation needs and improvements ininstitutional capacity. D. Frequencyof ProcurementSupervision In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the ImplementingAgency has recommended semi-annual supervision missions to visit the field to carry out post review o fprocurement actions. The Project Management Team in BOTAS will keep a complete and up-to-date record o f all procurement documentation and relevant correspondence in its files which will be reviewed by the Bank staff duringsupervision missions. Monitoring reports on procurement progress in the form o f completed-ongoing-planned procurements will be submitted semi-annually as an integral part o f the Financial Management report on Project implementation. 46 E. Other BOTASmay initiate the procurements scheduledin2005 (or before the Loaneffectiveness date) in accordance with the Bank's Procurement Guidelines [(Refer to paragraph 1.9 o f the Procurement Guidelines and paragraph 1.12 o f the Consultant Guidelines]. The contracts which will have been reviewed by the Bank may retroactively be financed by the Bank as described in the Loan Agreement. 47 m 0 - r - Annex 9: Economic andFinancialAnalysis TURKEY: GAS SECTORDEVELOPMENT EconomicAnalysisof Storage Component A. Introduction Although Turkey's gas transmission system and supply have grown rapidly in recent years, the country does not have a long-term or strategic storage facility'. This jeopardizes the security o f supply andreliability of the gas system, the power system which depends on gas as a major fuel source, and the wider downstream economy. Inresponse to the need to improve its security of gas supply, Turkey has diversified its import sources. However, this i s insufficient and a seasonal storage would contribute a vital component to the security and operational efficiency o f the gas system. As demand from residential distribution customers i s likely to be the fastest growing sector, and residential customers have very `peaky' demand, the future peak winter day gas requirement is likely to increase. This will create a further need for Turkey to have sufficient gas storage capability inits gas system. This annex evaluates the economic and financial aspects o f a proposed gas storage facility at Tuz Golu incentral Turkey, and presents the calculated economic rate o f return. It does so under two different gas demand scenarios, a high-demand case and a low-demand case. It finds that in either case the facility would provide a satisfactory economic returnto Turkey. B. Benefitsof Storage Storage has four useful roles inthe system that can be valued according to the benefits they yield or the costs they avoid: These four main benefits are givenbriefly below. Further below there i s a more detailed analysis of how these benefits are estimated for the Tuz Golu project. 1. Seasonal storage: Storage allows more gas to be bought in summer, when it is readily available and generally cheaper, injected into storage and withdrawn inwinter, when gas may be in short supply and additional volumes will generally be very expensive. Although there i s no seasonal gas market with differential summer and winter prices in Turkeytoday, aprice difference is expected to emerge inthe future. 2. Operational efficiency: The proposed Tuz Golu storage facility will lead to a reduction in compressor costs and loopline investment. These would be needed if Tuz Golu were not built, to support gas supply and pressure in the south western part o f the transmission system. The saved costs are benefits to the storage project. 3. Peak shaving: Storage can be usedto meet demand on above average cold days, thereby avoiding a shortfall between average contracted import quantities and peak winter day There is a minor amount o f storage inthe form o f the line pack inthe transmission lines and whatever LNGm a y b e inthe tanks at the LNGterminal. 49 demand. Dependingon weather patterns, the typical (normal) winter might have 30 days whenpeak demandwould needto bemet from storage, otherwise some customers' supply (e.g. EUAS power plants) would be interrupted. The benefit o f using storage is the savings in avoided cost of interruption, which can be valued at the higher price o f alternate (oil) fuels. 4. Security of supply and reliability: Storage provides a contingency supply source that can be used to avoid short- or long-tern gas supply shortfalls resulting from unplanned interruptions insupply, e.g. loss o f import capacity. This benefit can be valued at the cost o f an interruption (e.g. the higher price o f substitute fuels, and other costs) and the probabilistic analysis o fthe loss of each main import supply. C. Seasonal Storage Seasonal storage would allow BOTAS to better match its customers' seasonal demand swingwith its relatively flat annual import profile. `Flat' contracts, i.e. contracts with limited flexibility in the nomination o f variations in delivered volumes, are generally cheaper than contracts with a large amount o f flexibility (large `swing'). In addition, gas i s more readily available in summer whereas additional volumes to meet extra demand inwinter may not be available. The peak winter requirement, and corresponding lower demand in summer, is mainly caused by small and residential customers, although there i s some seasonality inpower sector demand. To achieve a completely flat import profile, with the current seasonal demand profile and annual imports at about 25 bcdyear, could require up to 5 bcm (say 20% o f demand) o f working storage capacity (dependingon how the winter-summer pattern evolves). This i s significantly more than the capacity o f the NorthMarmara and Tuz Golu facilities. However, these two storage facilities will contribute significantly to flattening Turkey's seasonal swing. An example o f how the North Marmara and Tuz Golu storage facilities may be used to help monthly balancing of seasonal demandi s shown inFigure 9.1. Total demand is a projection for 2015. 50 I Figure 9.1 Exampleof seasonal balancingfrom storage 1 5,000 2 4,500 4,000 3,500 3,000 2,500 E 2,000 1,500 1,000 500 0 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct OProjected Demandmet by imports -TG Withdrawal NM Withdrawal a T G Injecbon NM Injection -Average Source: BOTAS technical data, ECA storage simulations Valuation of Seasonal Storage: Seasonal storage is proposed to be valued at the difference betweenthe value of summer and winter gas, often referred to as the value o f `swing'. Although there are no seasonal prices inTurkey today, the various contracts have different price formulae which can produce a different price insummer andwinter as the mix changes. . Firstly, having satisfied the minimumsummer contract requirements on higher priced contracts, Turkey can thenbuy storage gas from the lowest priced contract (up to the . maximum take) for release inthe winter. Secondly, having met its minimum summer contract quantities, Turkey can seek new contracts for additional `flat' gas at prices below its existingcontracts. It appears that lower prices have beenoffered to Turkey insummer (but with the lack o f storage they could not have taken it). Turkey's market will also become more competitive: (a) with the gas release auctions currently beingimplemented, and (b) linkage of demand andprices to Europethrough, first, the Greece-Turkeypipeline to be in operation next year, and later the Nabucco pipelinepost 2009. These factors will lead to the development o f an actual market for swing in Turkey indue course. However, in the meantime, the main approach to estimating the value o f swing i s international comparisons. A comparison o f UK natural gas futures prices on the International Petroleum Exchange (IPE) in London, which trades up to three years ahead, shows how the value o f 51 seasonal gas varies by around a factor o f 1.5 from winter to summer. Looked at another way, futures prices for winter gas are about 20% above the annual average price and futures prices for summer gas are about 20% below the annual average price. Using the most recent figures with an average price o f around US$200/thousand m3this would indicate that the swing between summer andwinter prices is around 40% or US$SOperthousand m3. A further indication ofthe winter-summerprice differential under competitive market conditions is providedby the United States. The price differential inthe US i s less thanthe UK since there i s already a higher proportion o f storage (underground storage accounts for 18% o f total and 48% o f residential consumption, but only around 10%inthe UK) but still the swing amounts to approximately US$30 per thousand m3. Based on the above examples, we conclude that, inthe near future, buyers in Turkey ought to be willing to pay between US$30-80/thousand m3more for winter gas compared to summer gas. To be conservative, US$40/thousand m3was usedas an estimate o fthe seasonal value o f storage. On this basis, the estimate ofthe annual seasonal value of storage starts at US$12.8 millionper year (US$40 * 320Million m3)rising to US$38.4 million per year when the storage i s completed. Annualized over the project lifetime gives an equivalent benefit value o f US$29.5 million per year. Ifinstead, we use US$SO/thousandm3as an estimate o f the seasonal value o f storage, the annualized benefit works out to US$36 million per year, providing an IRR o f 19% as opposed to 17% inthe moderate demand case (refer to table 9.1b below). A direct comparison betweenthe value attributed to seasonal storage and the potential tariff from Tuz Golu may not be appropriate for several reasons. The potential tariff o f US$48/thousand m3 i s based on one annual turnover o f the working gas, whereas in reality, the storage will see more than one turnover, in which case the tariff will be lower. Further, BOTAS will sell storage services and not the use o f the facility, and therefore, its price for the service would be the blend o f Kuzey Marmara and Tuz Golu, which would be a lower tariff. A simulation was used to check that the total seasonal storage capacity of Tuz Golu would be used each year. It was found to be fully usedinboth demand scenarios, hence the benefit value is the same ineach. D. Operational Efficiency Whenthe Tuz Golu Storage Facility is delivering gas into the transmission system, which it does at high pressure, it i s supporting pressure in the pipeline system and thus avoiding the need for some compressor capacity elsewhere in the system. The savings from having Tuz Golu would therefore be the capital expenditure o f the compressor stations which would be required if Tuz Golu were not built and their compressor fuel and other operating expenditures. Tuz Golu is also expected to avoid the cost o f a loopline that BOTAS would otherwise need to build. BOTAS has carried out a hydraulic analysis of the transmission system in order to determine improvements that would need to be made in order to meet the expected increase in future demand. Simulations o f hourly peak conditions have been carried out using the SYNERGEE 52 software" for the configuration of the system with and without Tuz Golu. Inthe absence of Tuz Golu, this analysis found that investment would be needed in new compression and a loopline. Specifically, BOTAS found that the most likely investment requirements without Tuz Golu would be: N e w compressors o f24MW at Afyon; New compressors o f48MW at Horasan; and D New loopline o f length 161kmbetween Eskisehir and valve LV 129. These investments would cost, intotal, US148 million'' and should be made between 2009 and 2014. The ability of Tuz Golu to deliver highvolumes at highpressure would enable the system to avoid these investments as well as the associated operating costs mostly fuel. Inthe moderate demand case, the net present value of operational efficiency benefits (avoided capital and operating costs) were calculated to be approximately US$124 million, equivalent to an annualised value o fUS$22milliodyear. Inthe alternative demand case the NPV was US$144 million, with an annualised value of US$25milliodyear. E. Peak Shaving Tuz Golu storage can be used to meet the peak demand on the coldest days in a 'normal' winter, by withdrawing extra gas on those days (typically, peak shaving in an average cold year will be used for 30-45 days) and then either re-injecting gas on warmer days, and/or withdrawing gas at a slower rate on warmer days. This peak shaving roles i s possible because not all the deliverability capacity of the storage facility would be used for normal winter supplies. The average withdrawal rate ifspread over the four coldest winter months would be 8 million cubic meters per day, whereas the maximum deliverability is 40 million cubic meters per day (but only sustainable at that rate for 24 days). Deliverability not used for normal winter supplies i s available to provide additional peak shaving capability. The value o fpeak shaving could be estimated by costing any o f the alternatives. Inthis case, and because interruptions have occurred recently (to EUAS power plants), we use the approach of valuing the cost o f avoided interruption. This i s estimated as: Estimated extra volume requirement on very highdemand days, which would be at risk ofintemptioninthe absence o fstorage, multiplied by: rn The cost o f interruption, estimated as the cost o f replacement fuel, which i s most likelyto begas oil (for EUASpower plants). I OSupplied by Stoner COT. I' However, we have assumed that further optimization o f the system expansion plan could have found ways to reduce this cost; we have therefore applied a 25% discount to the estimate o f the benefit value. 53 This gave an estimated net present value o f the Tuz Golu peak shaving benefit o f US$49 million, annualised as US$8.5 milliodyear, in the moderate demand case. In the alternative demand scenario the NPV was US$6lmillion, annualised as US$10.5 million. F. Security of Supply The use o f storage for security o f supply purposes i s to avoid gas shortfall due to exceptional or unexpected events such as: rn Unplanned supply restriction, e.g. failure o f import supply through one of the import pipelines or LNGterminals - the greatest risk o f this is currently perceived to be from Iran,which recently could not deliver the contracted quantity, although Ukraine has interruptedRussian gas flowing to Turkey inthe past. rn Exceptionally poor hydro conditions (requiring increased gas fuelled electricity generation). rn Exceptionallycold winter, as mightbe experienced once inevery 20 or 50 years. The value o f storage usedto cover such an interruptioni s estimated by taking: The value per unitvolume o f gas o fthe avoided interruption, multiplied by: The probability weighted expected volume o f interrupted supply covered by storage To estimate the value o f avoided interruption we start with the same basis as used for the peak shaving issue, i.e., the shortage o f gas forces a shift to gas oil. The higher cost o f a security o f supply event compared to peak shaving interruption is allowed for inthe calculationby applying a factor greater than 1, e.g. premium on cost o f alternated fuel (gas oil) could de set at 2 times, instead o f 1 as used for peak shaving. The present value o f the probability weighted benefits from Tuz Golu security o f supply coverage for an outage event o f 45 days in the moderate demand scenario was estimated to beUS$19.5 million, annualised as US$3.5 million per year. In the alternative demand scenario it was estimated to be US$55 million, annualised as US$9.5 millionper year. The low valuation in the moderate demand case i s because the full nomination entitlements on Turkey's existing gas contracts are expected to remain higher than its demand requirements for between 10 and 20 years. As a result, until demand has sufficiently risen, the failure o f one supply route could, in theory, be covered by full nomination from remaining sources for some time. Evaluation Summary A summary of the economic assessment o f Tuz Golu is given inTable 9.l(a and b) for both the moderate and alternate demand scenarios, based on the approach outlined above: 54 ITable 9.la Summary of the Benefits of The Tuz Golu Storage Facility Storage benefit Higherdemand)$M/yr --_- __ _- -Moderatedemand$M/yr -__ -----_.__I_-. ~ _-__---I_ 1 Seasonalstorage 29.5 29.5 2 Operationalefficiency 21.5 25.0 3 Peak shaving 8.5 10.5 4 Security of supply 3.5 9.5 ~ Total benefits 63.0 74.5 Cost of storage -41.5 -41.5 Net benefits 21.5 33.0 The estimatedbenefits and costs are annualizedover the project lifetimeat a discount rate of 11%.Values are roundedto the nearest0.5 M. Moderatedemand Higher demand IRR - 17.3% 20.1% NPV @I1Yo -- $123 Million $190 Million NPV @IO% -- $159 Million $236 Million NetWork ExpansionInvestments The project will also finance two compressor stations, one at Erzincan and one at Corum. The Corum station will have a capacity o f 30 MW while the Erzincan Station will have 39 MW of compression capacity. The compressor stations are required to help transmit the increasing volumes o f gas expected to be imported into Turkey from existing and new sources. The first compressor station will enable increased imports to Turkey from Iran and Azerbaijan in the medium term. The Corum compressor station would allow increased imports under the Blue Stream contract that BOTAS has signed with GAZPROM. Both these compressor stations are part o f BOTAS' least cost expansion planfor its transmission system, which i s considered to be a reasonable plan based on conservative estimates derived from hydraulic flow analyses o f the system. There are thus, two main benefits of the construction o f the compressor stations. First, as stated above, i s that the compressor stations will allow Turkey to import additional gas, and without these stations, Turkey will face a potential shortfall in gas supplies starting in 2009 (under the moderate demand case)12. Second, these compressor stations allow Turkey to avoid or at least reduce any take or pay liabilities under these contracts. l2The need for the compressor stations and the rates o f return would b e even higher under the high demand case. 55 Inthe absence o fthe compressor stations, and ifno additional gas could be obtained under other existing contracts, the Turkish shortfall insupplieswould have to be offset by using gas oil (light fuel oil) instead o f natural gas in power plants. The benefits from using cheaper natural gas rather than gas oil far outweigh the costs o f the compressors. The result i s a pay back period for the compressors o f about 1.5 years o f operation. This implies an ERR o f about 76% inreal terms. Also if we assume that Azerbaijan, Iran and GAZPROM under the Bluestream contract would enforce the take or pay penalties in their contracts and require Turkey to pay for most (80%) o f the gas that Turkey i s not able to use due to the absence o f the compressors, then the payback period would be well under one year and the rate o f return would be well over 100% based on take or pay penalties alone. Ifwe, however, assume that the Russia, Iran, and Azerbaijan do not enforce their take or pay penalties and that all current supply sources that do not rely on the two compressor stations (Algerian LNG, Nigerian LNG, Russian Gas by the Western Route) would provide an additional 10% o f the contracted amount o f gas, then the rate o f return on the compressor stations falls to 47% inreal terms which i s still a very highrate of return. FinancialAnalysisofBOTAS Past andCurrent FinancialPerformance Profitability and cashj7ows BOTAS' tariffs are set by EMRA, which establishes price caps for the transmission, natural gas sales, and storage businesses. BOTAS has traditionally kept its tariffs well below the EMRA price caps. Particularly in 2004, with costs rising with oil prices, BOTAS was unable to raise tariffs commensurately, both because o f the desire to keep retail gas and electricity prices down and also because o f the need to retain customers in the light o f the onset o f competition in the near future. BOTAS overall, however, has had comfortable cash flows (as impliedby the EBITDA line below) inthe past, even though it has been constrained in increasing its tariffs to the price cap set by EMRA. BOTAS' cash flows have been robust largely because o f the high depreciation that it has been allowed to apply (20% on most categories o f assets). Depreciation rates have been reduced to a more reasonable 4.54% for a number o f asset categories for investments capitalized starting 2005, which may affect cash flows inthe future. Treasury requires profitable SEESto pay dividends on the equity capital. BOTAS, however, has in the past been allowed to retain the cash, either in the form of an equity injection or as a shareholder loan. Inthe future, however, it i s unlikely that BOTAS will be allowed to retain the cash, which may further impact cash flows. 56 (US$million) 2001 I 2002 I 2003 I 2004 IncomeStatement Summary Revenues 2,531.7 2,812.2 4,23 1.8 3,998.0 Cost of Gas Purchase (2,144.7) (2.304.7) (3,618.3) (3,395.0) Other Costs (27.7) (34.3) (39.3) (497.5) GrossProfit 359.2 473.2 574.2 105.5 EBITDA 491.1 727.4 957.7 435.7 Net Profit 42.3 345.8 532.1 4.2 BalanceSheet Summary Current Assets 1,148.24 1,819.82 3,165.75 3,899.66 FixedAssets 1,094.43 1,162.54 1,466.66 1,367.5 1 Total Assets 2,242.67 2,982.36 4,632.40 5,267.17 Debt Service CoverageRatio 1.9 3.9 3.3 1.4 Debt to Equity Ratio 1.16 0.39 0.22 0.17 Debt to Asset Ratio 0.60 0.54 0.37 0.29 Current Ratio 1.01 1.98 1.73 1.50 Days Receivables Outstanding 132.93 130.86 148.90 171.04 Days PayablesOutstanding 35.92 18.28 22.08 47.69 Cash management BOTAS has a carefblly planned cash management system to ensure that there i s enough cash for paying the gas and LNGbills every month. Given that monthly gas purchases can go up to more than US$300 million, BOTAS has to ensure that this significant amount of cash i s available at any point in the year. It i s creditable that despite these heavy cash requirements, BOTAS has not resorted to overdrafts or other forms o f working capital financing. This however is likelyto change inthe current year or the next, given the significant strain on its cash flows due to restrictions on allowed tariffs imposedby the Treasury and Ministryof Energy and due to the large investmentprogram. Overdue receivables BOTAS has had problems collecting bills from government-owned consumers, primarily EUAS and municipalities. Outstanding receivables have risen to nearly 6 months' o f sales, or about US$2.2 billion in2004. O f this about US$1.5 billion, or nearly 70% i s owed by EUAS and the three main municipalities (Ankara, Izmit, and Istanbul). BOTAS is now in discussion with these institutions on collection o f past receivables, which will improve their cash constraint. Currently, EUAS and municipalities pay their bills to BOTAS on time and the 57 overdue receivable amount from them i s projected to remain stable throughout the projection period. The collection efficiency i s expected to stay around 98% inthe future. Capital structure BOTAS' debt-equityratio i s a conservative 0.17, and its DSCR has been very healthy, declining to a still-healthy level o f 1.4 in 2004 because o f the lower revenues and operating profits. While this implies that BOTAS will have room for additional financing for its future investments, the fact that its revenues and cash flows are very uncertain has to be borne in mind. BOTAS hasbeenable to finance its investmentslargely from internalresources (no equity infusions have taken place since 2002) andborrowings. BOTAS' assets are almost entirely depreciated on account o f the accelerated depreciation rates that they have used in the past. The book value o f assets therefore i s well below the current replacement cost o f the assets. Net fixed assets o f US$1.3 billion compare unfavorably with similar-sized utilities across the world. This would have had ramifications on the level o f depreciation it can charge and the amount o f return that BOTAS can earn, which in turn would adversely impact its cash flows and its ability to finance new investments. BOTAS has however, agreed with EMRA to use a depreciated replacement cost approach which if applied accurately, may provide BOTAS the requisite quantum o f returns to be able to finance its investments. Forecast Financial Performance The main risks that BOTAS faces at present and in the medium term come from the constraints on raising its prices in line with rising operating and gas purchase costs. The other factors that contribute to the uncertainties inBOTAS' finances relate to the evolving structure o f the industry and the advent o f competition. This risk has not been quantified inthe forecasts, but it may pose a risk depending on the regulatory approach to transmission and storage tariffs. Current transmission charges appear low, largely due to the low asset base on which returns are calculated. For efficient operation o f the transmission and storage system, it is critical that the regulatory approach is reasonable. BOTAS proposed the use o f depreciated replacement cost as the regulated asset base, and EMRA allowed this approach in 2005. This rate base calculation needs to be improved to capture the true current cost o f replacement. In addition, the regulatory treatment for storage needs to be clarified (see Annex 10). The loan agreement, as a result, includes a covenant on establishing appropriate regulatory approaches towards transmission and storage (Table 9.3 below shows the returns on forecast regulated asset base as well). BOTAS' cash flow position may not continue to be as strong inthe short-term as a consequence o f an increase in investments and a reduction in depreciation. Annual depreciation reduces significantly because the existing assets are almost fully depreciated and because o f the revised lower depreciation rate for new assets. The cash flows improve after 2007 -the forecasts assume that BOTAS will break even on all costs over the next two years, and then will start generating healthy internal resources for investments. BOTAS will require significant external financing for its investment program over the medium term. Forecasts (summarized in the table below) show that BOTAS has the ability to borrow these amounts and service the debt comfortably. 58 Table 9.3 Forecast Financial Performance (2005-2012) (US$million) 2005 2006 2007 2008 2009 2010 2011 2012 Income Statement Summary Revenues 5,229 6,250 6,497 7,122 7,917 8,552 8,685 8,825 Cost of Gas Purchase (4,727) (5,702) (5,971) (6,449) (7,l 12) (7.667) (7,810) (7,913) Other Costs (328) (440) (324) (312) (357) (378) (386) (404) Gross Profit 74 108 203 360 448 507 489 508 EBITDA 315 327 298 426 536 595 575 602 Net Profit 0 1 85 206 250 294 281 299 BalanceSheet Summary Current Assets 2,440 2,587 2,607 2,699 2,823 2,918 2,919 2,922 F!xed-Assets---_ _ _ _ _ _ _ _ _ _ _ _ .................1,341. _--_1,476_ _ _ ___--------_-__??!?______?,!?? -_-_--_-_?,?E_ _ _ _ _ ?25?!. Tp.ta!Assets-- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - - --- _ _3,781_ - _ - - _ _4,063_ _ _ _. - _ . . . - - - 1,762 - _ _ --?2?6! - ___ _ _ _ _4,370__- _---!!!?!--?-----!!2956 _ _ - - -52!1?. - ___ V!?.____-5,446 - Capitaland Reserves 2,402 2,331 2,374 2,538 2,743 2,989 3,217 3,459 Debt 927 1,218 1,465 1,580 1,553 1,484 1,385 1,267 9!!F!-L!!!!l!!ieE- _ _ - - _ _ - - - - - - - _ -- - - - - - - - - - - -452- - - - - - - - -515- - _ _ - - - - - -53---- - - - - - - - - - 1 - - - - -660_ - ---- -706 - - - - -- - - 719 - -. ~ --.-I!!.- __ Total Equity and Liabilities 3,781 4,063 4,370 4,702 4,956 5,179 5,312 5,446 FinancialRatios Net Profit Margin 0.0% 0.0% 1.3% 2.9% 3.2% 3.4% 3.2% 3.4% EBITDA Margin 6.0% 5.2% 4.6% 6.0% 6.8% 7.0% 6.6% 6.8% Average SalesPrice (US%/OOOCM) 208.08 213.93 201.30 202.25 202.84 203.44 202.88 203.55 Ave. Sales PriceChange (%) 15.0% 2.8% -5.9% 0.5% 0.3% 0.3% -0.3% 0.3% Pre-TaxReturnon Assets 6.5% 9.4% 18.2% 21.6% 21.0% 24.6% 23.2% 22.9% Returnon Equity 0.0% 0.1% 3.6% 8.1% 9.1% 9.8% 8.7% 8.6% Returnon CapitalEmployed 0.0% 0.0% 2.3% 5.2% 6.1% 6.9% 6.5% 6.6% Self-FinancingRatio 0.0% 1.7% 17.6% 25.7% 27.6% 28.3% 29.2% 31.4% Debt Service Coverage Ratio 1.7 1.9 1.6 1.8 1.6 1.5 1.3 1.3 Debt to EquityRatio 0.4 0.5 0.6 0.6 0.6 0.5 0.4 0.4 Debt to Asset Ratio 0.7 0.8 0.8 0.8 0.7 0.7 0.6 0.5 Current Ratio 4.9 4.7 4.3 3.7 3.3 3.1 3.0 3.2 DaysReceivablesOutstanding 136 122 119 112 106 102 101 99 DaysPayablesOutstanding 25 25 25 25 25 25 25 25 Demand Forecast BOTAS forecasts a significant increase in gas demand o f 14% in 2005 and 16% in 2006, primarily from residential and industrial consumers, as additional gas distribution networks in cities are completed. These assumptions are among the key drivers determining the financial condition o f BOTAS inthe next few years. By the end o f 2009, gas demand is expected to increase from21.7 bcm in2004 to 38 bcm, a compounded annual growth o f 8% per year. 59 Table 9.4 Gas DemandForecast(000 M3) 2005 2006 2007 2008 2009 2010 2011 2012 Residential 4,629 6,097 6,832 7,527 8,314 9,637 10,202 10,511 Industry 6,683 7,817 8,789 9,568 10,420 11,988 12,190 12,433 Electricity 12,604 14,325 15,000 16,000 18,000 18,000 18,000 18,000 Fertilizer 883 547 547 547 547 547 547 547 Exportto Greece 0 21 492 737 737 737 737 737 Total 24,799 28,807 31,660 34,379 38,018 40,909 41,676 42,228 Tariffgrowth The other key driver inthe forecasts is the assumption on tariff growth. Because o f the significant increase in costs inthe current year so far, the forecasts assume a 15% increase in2005 and a 2.8% increase in2006. Starting 2007, tariffs are forecast to risemarginally inorder to provide sufficient internal resources. Tariff increase requirements w o u l d b e affected by the lowering of the depreciation rate, but the enhancement in the regulated asset base would offset the adverse impact. Investment plan BOTAS' investment program is significant in the medium term, focusing on strengthening the existing transmission network within the country, the start of the Tuz Golu storage project and completion o f distribution investments in several cities. Inthe future, Turkey i s expecting very significant investments in cross-border pipelines such as the Nabucco and Greece pipelines, but these investments are not likely to be o n B O T A S ' balance sheet. The projections therefore, factor in relatively moderate levels of expenditure on these projects representing BOTAS' exposure to these projects. B O T A S also has ongoing investments in city distribution networks, and though it anticipates that additional such networks will be required as new cities are connected to the gas grid, these are not currently factored into the planbelow. Table 9.5 InvestmentPlan(US%million) 2005 2006 2007 2008 2009 2010 2011 2012 Transmission 199 271 277 256 215 256 266 240 Storage 0 30 41 47 57 17 12 47 Distribution 118 110 108 53 0 0 0 0 Total 318 411 425 356 272 273 278 287 60 v 6" - h o m P cli z g 0 q0 5 F 3 0 rB 0 P 0 8 0 m m 0 0 m z 0 N 0 7 0 T ..e '2 -if r c! C 5 c N a (E 6, 2c E b c 5 1 a ; e n n h E E - f e c - In 6f ec -.-9 al a 0 7L In 6 W c e e r U i z f J P m e 6 c i U 0 m r P .-E cc : Q) c C r m c * ; L -2 - i- Annex 10: Framework for Regulation of NaturalGas Storage TURKEY: GAS SECTOR DEVELOPMENT This section identifies the regulatory issues and proposes the main principles on which storage regulation should bebased. This also allows assumptions to be made on the pricing and revenues from storage that are usedinthe financial analysis inAnnex 9. A. Principlesof storage regulation .. There are two parts to the regulation o f storage tariffs: Allowable costs. The costs o f storage that can be recovered as allowable revenue through charges. Charges. The tariffs, their level, structure and who pays. However, before these items can be calculated, the principles on which they will be determined need to be established. Storage will be a new activity in Turkey and, as yet, EMRA has not established the detailed principles on which storage will be regulated. However, the structure o f gas storage costs i s similarto transmission; i.e. it is almost all fixed cost. Furthermore, while storage fulfils anumber o f functions inthe gas system, one of its key roles i s to support the reliable and secure operation o f the transmission system. Therefore a sensible starting point for developing storage regulation principles i s to be consistent with the principles for transmission reg~lation'~.As accounting separation i s fully implemented and new importers enter the market, open access tariff arrangements may be considered Regulation of Capital Costs Since the major part o f cost i s fixed cost, the key regulation parameters and methods are those which deal with allowed capital costs, Le., the allowed annual costs o fusingthe assets. In cost of service regulation, which is the most common approach to regulation of unbundled activities, allowed capital cost i s determined by two key factors in the following formula, allowed rate o freturnand depreciation rate: CapitalCosts = Depreciation + ROR x RAB Where: Depreciation = Depreciation rate x RAB ROR = Allowed rate of return on assets (RAB) RAB = Regulatory asset base In each year t: RABt = RABt., - Depreciationt+ Allowed new assetst l3This does not necessarily mean that the principles have to b e identical. 64 The details o f the calculation procedure are also important, such as when new assets are allowed into the RAB andthe treatment o finflation. Transmission capital cost regulation-RAB and depreciation BOTAS originally proposed that their existing assets should be valued at the estimated new replacement cost for equivalent assets. However, as this ignores age o f assets and depreciation, the basis accepted by EMRA was an approximate inflation adjusted, depreciated historic value, .. calculated as follows: The historic costs of assets inTL were adjusted (increased) by the change inthe US$- YTL exchange rate. This is equivalent to adjusting historic costs by the difference in TurkishandUS inflationrates, although it does not adjust for U S inflation. Depreciation at the normal rates was applied to the adjusted asset values. Effectively, this gives the depreciated historic asset costs inUS$. ... Compared to a replacement cost basis, it should be notedthat this does not account for: Productivity gains in pipeline investments, such that the same pipe today might be laid for a lower (or different) cost than the original; Change in costs o f input factors, especially the price o f steel (which has risen substantially inthe last 3 years); The effect o f excessive depreciation. The first two factors are difficult to assess and many regulators prefer to ignore these adjustments (untilbetter data i s available). The third factor, depreciation rate, is important. Until2004, the tax rules allowed the principal BOTAS assets to be depreciated over 5 years, i.e. at 20% per year o f original cost on a straight line basis. EMRA had accepted this tax rule as the depreciation rate for regulatory purposes as weIll4. It should be noted that this i s highly excessive since pipeline lifetimes are generally assumed to be around 30 years plus and depreciation rates well under 5% are common. The effect o f a highrate of depreciation i s that the existing asset base i s very small inrelation to the cost o f new assets. New assets dominate the total asset base and largely determine the return on assets which BOTAS receives. Excessive depreciation leads to the need to keep new capital spendinghighin order to maintain and increase the return on assets. It also means that current consumers are paying many o f the costs for assets which will be used for the benefit o f future con~umers'~.However, it does, conversely, encourage investment. The new tax rules applying from 2005 onwards are that BOTAS' principal assets should be depreciated over 22 years, giving an annual straight line depreciation rate o f approximately 4.54% per year. This i s much closer to the real cost o f the assets, although still a little high (as lifetimes can be expected to exceed 22 years). This will go a considerable way towards l4 It is common, in other countries, for rate-making and accounting to use different depreciation rates from those usedfor tax purposes. l5 Once the assets are fully depreciated, their continued use imposes no additional cost on consumers. 65 correcting the distortion in future betweenold and new assets interms o f capital costs. Although an argument could be made for a lower rate than 4.54%, the new rate is an improvement on the old one. EMRA have confirmed that U S inflation adjustment will be applied to the total asset base in future. Again, this isnot the hlllevel o fadjustment that would berecommended, but as a second best approach it i s considerably preferred to havingno internationalinflation adjustment at all. The RAE3 is not increased as expenditureoccurs, but when eachproject is completed. New assets enter RAE3 at the end o f the month inwhich they are completed. We assume this means that the return on assets i s calculated for each month o f the year taking account o f depreciation and new assets on a monthly basis. This i s important since some new projects will produce a large change inRABandthe timingoftheir inclusioncanhave a large impact. Transmission capital cost regulation -ROR The other keyregulatoryparameter i s the allowed rate o freturnon assets". BOTASrequested an 11% IRR after tax and depreciation, in real terms for their transmission system. Given a depreciation rate o f 4.5%, and an assumption that no taxes will be paid (rate = 33%) until 2010, they calculated that the realpre-tax rate o freturn on assets they requiredwouldbe 9.5%17. EMRA have attempted to use the capital asset pricing model (CAPM) to assess the reasonable rate o f return on equity for an enterprise like BOTAS, and hence to come up with a weighted average cost o f capital (WACC) as a basis for determining allowable ROR for an enterprise like BOTAS. The shortage o f relevant data for comparable companies in Turkey (there are no large quoted utilities) meant that they were unable to carry out a robust calculation, but they have indicated that a real pre-tax ROR o f around 10% appears reasonable given the sector and country risks inTurkey compared to other countries. Therefore BOTAS' request o f 9.5% was acceptable to EMRA. B. Storage capital costs regulation The comments above on the principles for transmission capital costs regulation recommend improvements in the approach. However, it would be anomalous if storage capital costs were regulated significantly differently from transmission capital costs'*. Therefore it i s preferable to accept the main principles o f transmission capital cost regulation as the starting approach for . storage, and (re)state here the principles as applied to storage regulation. The allowable costs o f new assets (inthe case o f storage there are no existing assets, excluding LNG) are added to the RAB in the month o f completion, including capitalized ROR during construction; l6Regulation can also be applied on the basis o f a rate o f return on equity, with the costs o f debt financing treated as a cost pass-through. However, return on assets (ie the RAB) i s perhaps more suitable for a state owned enterprise where the capital structure may not be treated the same way as inthe case o f a private company. l7Itshould be noted that if BOTAS were to pay tax at 33% for all years prior to 2010, the required ROR to achieve an 11% IRR would need to increase to about 11.5%. l8Especially while BOTAS remains effectively an integrated utility. 66 . Depreciation on existing assets i s applied at the rate o f 4.54%pa (more precisely, 1/22); RAB is adjusted each year in line with inflation (for the time being, this will be the difference betweenTL and $ inflation, but should ideallybetotal inflation); . The return on assets i s calculated using an allowed ROR set as a real and pre-tax rate o f return; The above calculations should be carried out using equivalent monthly rates separately for each month since new assets can enter the RAl3 at the end o f any month. The Tuz Golu storage facility will require cushion gas volumes o f about 50% o fthe working gas volume. The cushion gas i s expected to be recovered at the end o f the economic life o f the storage facility. The cushion gas value therefore will not be depreciated, but will be included in the RAB for calculating the returnfor BOTAS. The cushion gas should be valued at the expected WACOG at the time the storage will be filled, as this i s the opportunity cost o f the gas. The principles for storage tariff regulation therefore should also include the following on the treatment o f cushion gas: m Cushion gas should be included as an asset in the RAB and a return calculated based on its opportunity cost value at the time o f filling storage and the ROR.It need not be depreciated provided it can be extracted at the endo fthe storage lifetime. RORon Storage A rate o f return o f 11% is suggested, which is higher than that currently applied to the calculationo f BOTAS' transmission tariffs. The reasons for this proposedrate are: Compared to the 9.5% currently assumed for transmission, ifBOTAS were to pay tax . at 33% for all years, their rate would have to be increased by about 2% to yield the same after tax return.For storage, it i s assumedthat tax will be payable on all profits. EMRA have indicated that a slightly higher rate might be acceptable, which presumably i s consistent with their calculations o f cost o f capital for this type o f activity. A number o f international comparators were obtained. The proposed rate of 11% is within the range o fRORsadopted byregulators for comparable situations. The riskiness o f storage is probably higher than for transmission. Transmission i s a regulated monopoly whereas storage services will eventually be in competition with each other. More details of the proposed approach to regulation are given in the next two subsections, covering allowed costs and charges. C. Draft regulation on storage Although regulated storage tariffs for Tuz Golu will not be needed until it i s put in operation in 2009, BOTAS needs to know now (Le. before it commits the investment expenditure) what revenues and returnit will be allowed to earn on its investment. 67 Similarly, EMRA i s presumably hoping that more storage investmentwill occur inorder that the minimum 10% of consumption requirement set in the NGML can be met. Other potential investors and lenders will also needto know what revenues storage can be expected to earn. It is therefore important that early in the process o f construction o f the storage, E M U puts in place a statement, inthe form o f a regulation or at least a draft regulation, setting out the broad principles it will apply to storage regulation, particularly tariffs. The principles set out above, and the details elaborated below, can provide BOTAS with a starting point for its draft proposal to EMU. BOTAS has agreed to submit a proposal with the principles of storage regulation to EMRAfor its reviewbyJanuary 2009. Allowable costs and revenues The proposed method for regulating allowed costs and revenues i s a multi-year cost o f service . approach usingthe principles for capital costs outlined above: Capital expenditureprojects should be approved by EMRA on an ex ante - ex post basis, Le. the costs should be approved inadvance and then reviewed afterwards. Any . deviations o f ex post cost from ex ante would have to be fully justified and not necessarily allowed infull by EMRAinto the regulatory asset base (RAE3). Assets enter the RAE3 at the end o f the month inwhich the project i s completed. The . allowable asset value should include rate o f return on assets during construction. The RAE3 should be adjusted each year for inflation. Annual capital costs would comprise depreciation plus allowed return calculated as . ROR n RAB. Depreciationrates should ideally be set on the economic lifetime o f the facility, say 30 years or more, but initially can use the rate o f 4.5% as applied to transmission, based on the tax rules. It i s proposedthat 11%be used for the ROR. Operating expenditure (opex) comprises mostly fuel for compressors and some other operating and maintenance costs. Fuel cost is a largely uncontrollable cost and it should therefore be allowed as a pass through item. Since the rest o f opex i s small, it . can also be passed through. Inthe future, an incentive based method (price cap) could be applied to non-fuel opex. The allowed cap costs should be treated as a revenue cap; if BOTAS over-recovers (or under-recovers) its costs through the tariffs in one year, a balancing adjustment should be made to allowable revenues in the next year. One way to do this and take account o f the need to apply a rate o f return to the under- or over-recovery is to treat the adjustment as a capitalized item and include it inRAE3.The annual adjustment in RAE3 for year t would then be: RABt = RABt., * (1+ Infl%) Depreciationt+ Allowed new assets, + RevAdjt - where: RevAdjt = Amount of allowed revenue not recovered in year t-I (+ve) or amount over- recovered(+e) Infl% = Inflationadjustment The analysis o f costs should be forward-looking to ensure that allowed revenue covers future costs. A multi-year framework i s desirable since capital expenditure can 68 be `lumpy' (occasional large expenditures) and allowed revenue should be smoothed out over a number o f years to enable prices to be stable. BOTAS should therefore produce an annual rolling 10-year business plan for its storage activity and project allowable costs and revenues on that basis. Allowed revenues can be smoothed out compared to allowed costs; the two projections (costs and revenues) should produce the sameNPV calculated at the allowedROR. Storage tariffs - chargingfor use of storage Once the allowable revenue i s set on the basis laid out above, the tariff structure will establish how, and from whom, BOTAS recovers those revenues. The approach to setting storage tariffs should be based on the role Tuz Golu storage will play inthe system, how (and who) will use it, the services it can charge for, and the structure o fthe gas market. There arepotentially manyways that storage costs could berecovered, eg: .. ... bundledinto the price for commodity gas, i.e. the wholesale gas price, bundledinto theprice for transmission, bundledinto a price for peak or seasonal gas, a combination o fthe above, Unbundled, and sold as a separate service to others, e.g. importers, shippers or consumers. The principles o f structuring tariff charges are briefly discussed inthe following sub-sections. D. Current market Prior to the development o f wholesale gas competition, the simplest cost recovery approach i s for BOTAS to adopt one o f the first 3 options. In fact, the current approach to setting the wholesale gas price i s to sumthree components: the weighted average cost o f imports (WACOG) + cost o f storage" +cost o f transmission. It would be straightforward to incorporate the allowed revenues for Tuz Golu (as well as for North Marmara) into this calculation. The `cost o f storage' should include the allowedrevenue for Tuz Golu divided by the forecast o f total wholesale gas sales to give a cost per unit o f gas. As this will introduce a market risk that allowed revenue would not be fully recovered (due to a demand forecast error) there should be a revenueadjustment to RAE3each year as set out above. E. Future market However, since the aim i s to move towards a competitive gas market, which requires that third parties have access to storage facilities, and since both BOTAS as the transmission and system balancing company, and gas shippers will wish to use storage services, it is reasonable that storage should be offered as an unbundled service once competition starts. Also EMRA will probably enforce the license requirement that BOTAS should fully separate the accounts for the storage activity. l 9Cost o f storage to date refers, infact, to the cost o fusing the LNGterminal. 69 Storage would then be regulated as a separate activity with accounting separation at least. Thus the storage unit o fBOTAS would charge the wholesale supply unit o f BOTAS for use o f storage, as well as charging any other importer that requires access to storage (for commercial reasons or to meet its requirement to have access to storage equal to 10% o f its annual import volume2'). The tariff regime for Kuzey Marmara has been set at a charge (to BOTAS) of $12.75/ thousand m3on entry and the same on exit. Since BOTAS has paid for the cushion gas (at a reduced price o f $80/ thousand m3),the single cycle cost o f the storage to BOTAS is about $30.5/ thousand m3, assuming that the full volume o f the storage is used each year for seasonal storage (with some security o f supply benefits as well). However Tuz Golu i s a more flexible storage than Kuzey Marmara. It will provide additional services, i.e. peak shaving and operational efficiency, and a different tariff approach should be used, as some gas may be cycled inand out several times duringwinter. Since Tuz Golu is likely to be used for more than a single cycle it i s not reasonable to pay repeatedly for injections and withdrawals at such highrates. Different shipperswould make different use o f storage (seasonal, short term etc) while BOTAS will also use it for systembalancing and security o f supply. In order to accommodate difference storage services and charge for each on a cost reflective basis, three components o f storage services should be offered: (a) Storage volume, i.e. capacity, (b) Injection, (c) Withdrawal. The proposedbasis for determiningstorage charges for Tuz Goluwould be: Storagevolume - ~ ~~ Revenue cap used to set aprice per unit volume of storage capacity charge capacity. Allowed revenues in the revenue cap will be capital costsplus anyjxed cost elements of operating costs. Based on expected uptake of storage capacity (I00%) on a single cycle. Injection and withdrawal - Initially a costpass through, with most of the variable costs variable charges allocated to injection (i.e. pumping), as the costs of withdrawal are very small. Later moving to aprice capper unit volume of injection and withdrawal, to give an incentive to improve efjciency. It should be noted that EMRA has the intention of making storage a competitive activity, but so long as BOTAS has a monopoly or dominant position in storage facilities, BOTAS' storage prices and access will needto be regulated. 2o Sincethere may not be physical storage capacity in Turkey equal to 10% o f total imports for the foreseeable future, EMRA have indicated that they would impose the storage requirement on importers pro rata to their share of total. 70 Annex 11:SafeguardPolicyIssues TURKEY: GAS SECTORDEVELOPMENT The three main safeguard policy issues addressedinclude: I. Socialsafeguards 11. Environment 111. Dam Safety Inaddition, anindependentseismic assessmentwas also conducted. I. SOCIAL The overall social impact o f this project will be positive since the main component, the gas storage at Tuz Golu, will increase the availability o f natural gas during the winter heating season and reduce the possibility o f interruptions in supply. The project will also expand the transmission capacity of the Turkish gas transmission system thus allowing the increased imports anduse o fnatural gas which tends to replace much morepolluting fuels. Landowners, both private and public, will be affected directly by the construction o f pipelines, pump stations and storage tanks and the gas storage field, butthe overall impact will beminimal. The pipelines travel through the territory o f 27 villages, but will be located away from the settlements, thus causing no resettlement. The area is sparsely populated, overall, and the pipeline route i s virtually unpopulated. The population lives in small compact settlements separatedby vast open spaces used for extensive grain cultivation or grazing, where agricultural production i s viable, or simplynot used at all, particularly southeast and south o fTuz Golu. Landowners will experience one or more o f three types o f direct impact: 0 Temporary easement for access during pipeline construction, after which the land i s restored to its original condition; 0 Permanent easement (from 10 to 38 m.wide), disruptedduring construction, after which it is returned to its original condition, but carrying permanent restrictions on land use to avoid damage to the pipe; 0 Land acquisition-small parcels for pump stations and storage tanks, and larger tracts for the storage area. Private owners will be compensated differently for easements and land purchase; the need for compensation for state and Treasury lands depends on the status o f the landand its use requirements. Except for the few places where land needs to be acquired, BOTAS will merely acquire 49-year easement rights, which restrict owners from growing trees or building structures on the easement land. Otherwise, landowners will be able to continue using their lands except for during the immediate construction period. The easement requirements can be divided into four distinct segments are as follows: (a) Hirfanli Reservoir to gas pipeline The new fresh water pipeline from Hirfanli Reservoir to the gas pipeline, 35.9 km., will require easement rights 16 meters wide, totaling 57.6 ha. The land for pumping stations and storage tanks will be acquired. A pumpingstation will be constructed at the intake point, on State land, and another one at the highest point o f the route near the gas pipeline and a third 71 along the route. Three water storage tanks will be constructed, two o f which at the site o fpumpingstations. The total land acquired i s less than 1ha; (b) Gas pipeline alignment The freshwater pipeline will run parallel to the gas pipelinefor 60 km., for which an easement o f 10meters will berequired along the route, totaling 61 ha; (c) Gas pipelineto storage site All three pipelines(fresh water, brine and new spur o f the gas pipeline) will runparallel, requiringan easement o f 28 m for a distance o f 23.2 km. totaling 65 ha.; (d) Gas pipelineto Tuz Golu The brine pipeline will continue from the gas pipeline to the discharge point at Tuz Golii, 16.7 km., requiring a 16-meter easement, totaling 26.8 ha. A pump station and loading tank will be constructed along the pipeline, for which the total landto be acquired i s less than 0.5 ha. Land Acquisition Plan BOTAS prepared a Land Acquisition Plan for the project. It was reviewed and found acceptable to the Bank, which was disclosed through discussions inaffected villages. BOTAS will implement the Land Acquisition Plan and will directly manage the process o f acquiring easements and land and thereafter monitoring the work o f contractors to ensure that they stay within the agreed tracts. BOTAS utilizes professional assessors to valuate the parcels and crops. They preparea valuation report for each parcel, which is used as the basis for direct discussions with owners. Private owners are paid quickly upon reaching agreement and official transactions (transfer o f title and/or registration o f easement restrictions on titles) must be completed before civil works can begin. BOTAS gained considerable experience working under provisions o f OP/BP 4.12 duringthe design and construction o f the Baku-Tbilisi- Ceyhan Pipeline, thus the Bank team i s confident that the plan will be implemented well. The EntitlementMatrix is attached as Table 11.1 at the endo fthis section. The gas compressor stations at Corum and Erzurum respectively will each require a site o f approximately 30 by 40 meters. This land acquisition, and others currently unforeseen, will be covered by the Resettlement/Land Acquisition Policy Framework that BOTAS prepared and disclosed prior to completion o f appraisal. Consultation and Disclosure Stakeholder identification and consultations were initiated early in the process o f preparing the EIA, followed by disclosure of the Land Acquisition Plan. Directly affected land owners will be contacted individually during land acquisition activities. National NGOswill be informed and their feedback will be sought on various occasions. The local level meetings held in March 2005, including the sub-governors (kaymakam) and village consultations, focused on land issues. The most common issues raised by the sub- governors and village legal self government (muhtar) include the following: Land expropriation and compensation (private, pasture lands, crops and assets etc) 0 Damage to infrastructure (roads, irrigation channels, etc) 0 Reinstatement o f land status after construction (this was raised especially by the Muhtars o f the villages located along the existing gas line route) Impacts on livelihoods (Le. animal husbandry; access to grazing lands) 72 Officials and residents were assured that expropriation would be minimized, compensation would be paid promptly and fully, infrastructure damage will be avoided or repaired, lands will be returnedto their pre-construction status and the pipelines are not expected to affect grazing areaspermanently and temporary losses will be compensated. Monitoring and Evaluation BOTAS will report semi-annually on land acquisition progress andproblems and Bank staff will conduct field visits regularlyduring supervision. The pipeline will have insignificant impact on individual households, so precise household-level monitoring and evaluation i s not appropriate. The status o f landowners inthe storage area will be assessed, however, although it appears that few private owners will be affected. The monitoringwill verify that: 0 Actions and commitments described in the Land Acquisition Plan are implemented fully andontime; 0 Eligible affected people receive their full compensation entitlements within agreed timeframes; 0 Complaints and grievances lodgedbyproject affected people are followed up and that where necessary, appropriate corrective actions are implemented; 0 If necessary, changes inLAPprocedure are made to improve communications and the deliveryo fentitlements to project affected people. BOTAS Surveying and Land Acquisition Department will be responsible for monitoring and reportingland acquisition activities within the framework o fthe Land Acquisition Plan. Investment Component Action Category ofProject Entitlement Affected Person IPipeline BuriedPipeline Permanent PrivateOwner" 35% of landvalue (net incomemethodology) (210ha.) Easement Treasury Agreed concession TBD Temporary Private Owner 10-20%of land value (netincomemethodology) Easement Treasury Agreed concession Pump Stations, Purchase Private Owner Landvalue (net incomemethodology) StorageTanks (approx. 0.9 ha.) Treasuryz2 Landvalue, negotiated - BrineReservoir Purchase PrivateOwner Landvalue (net incomemethodology) (Approx. 2 ha.) Treasury Landvalue, negotiated Gas Storage Cavern Area Purchase PrivateOwner Landvalue (net incomemethodology) Facility (Approx.605 ha.) Treasury Landvalue, negotiated SurfaceFacilities Purchase PrivateOwner Landvalue (net incomemethodology) *'Permanent Easements are registered o n land titles. The easement restricts any activity which would cause or lead to damage to the pipeline, including the following: construction o f buildings or assets; planting trees; construction of new irrigation or drainage ditches; boreholes; changes to the ground profile; changes to the profile o f areas that affect the easement area; decrease indepth o f soil cover over the pipeline; locating substances such as rubbish, waste or detritus. 22The following applies to all lands registered inthe name o f Treasury or unregistered lands inthe possession and jurisdiction o f State. Registered Treasury lands are purchased; unregistered lands are used without compensation. 73 ITreasury ILand value, negotiated 74 11. ENVIRONMENT The Tuz Golu Basin UndergroundNatural Gas Storage Project (UNGSP) will create a series of undergroundgas storage caverns by controlled fresh water dissolving o f portions o fthe extensive undergroundnatural salt formations existing at a depth o f approximately 1000m. To establish technical feasibility of the Tuz Golu salt structure, BOTAS evaluated seismic characteristics of the site, mechanical characteristics o f the salt cores, and hydrological requirements for leachate water supply and brine disposal. A detailed environmental impact assessment (EIA) study was conducted to satisfy Turkish Environmental regulatory requirements. The EIA was officially approved by the Ministry o f Environment and Forestry (MoEF) on 19.08.2003. EnvironmentalImpactAssessment (EIA) Process An EL4was prepared instrict accordance with Turkish Environmental Legislation and approved bythe Turkish MinistryofEnvironment andForestry (MoEF). An EIA supplement (EL4Annex) was also prepared by BOTAS to address the change in fresh water supply and additional information requirements needed to satisfy World Bank EA policies and procedures (OP/BP/GP 4.01). Thus the Turkish EL4together with the supplement fully satisfies both Turkish and World BankEArequirements. Public consultation for the Turkish EL4was conducted at Sultanhani Municipality on 27.03.2003 and a second public consultation for both the Turkish EL4 and the EIA Annex was conducted at Agaqoren Municipality (close to the water supply line) and Sultanhani Municipalities on 24.03.2005. A Turkish language version o f the EIA documents, including EIA Annex was disclosed locally at Sultanhani Municipality and BOTAS web site on June 1, 2005 (The English language version was received by the World Bank on June 6, 2005 and deposited in the World Bank Infoshop on July 8,2005). An independent TurkishEnvironmental Consultant accredited by MoEF prepared the EL4 study on behalf o f BOTAS. It was approved by MoEF in2003. The water supply modification scenario required BOTAS to supplement the EIA by adding an addendum according to the Turkish EIA Regulation, which was approved byMoEF. BaselineAssessment Environmental resources at the project site were assessed by the EL4 project team. Comprehensive studies determined local air, water and soil quality and biological resources. Turkish seismic experts carried out studies within an area o f 73 h2 surrounding the project site and determined it to be one o f the most stable regions inTurkey, with the lowest seismic risk: an earthquake inthe project site is most unlikely to occur, thus risk o f failure from an earthquake i s low. In addition, an internationally recognized seismic expert assessed the situation and also determinedthat the depthand strengthof the salt domes make failure probability extremely low, and introduce a risk similar to installations world-wide. 75 Factors usedinselecting the proposed project site are: 0 Proximity to the existingmain gas pipeline; 0 Convenience innatural cavern formation and drainage processes; 0 Lowest seismic risk region inTurkey; 0 Very low agriculturalpotential inthe region. Air Quality There are no significant emission sources within the project site and its vicinity. Since the project region is a rural area, present air quality depends upon emissions that originate from sources used for heating purposes (Le. coal) and soil. There are few settlements at or near the project site; the only existing problem is dust emissions duringdry andwindy conditions due to soil dispersion. Water There i s no surface fresh water source within the vicinity of the project site except the rivers feeding the Tuz Golu, about 40 km. north o fthe site. Soil General properties o f the soil inthe area, distributions o f soil groups, landuse conditions, slope and erosion degrees were examined. There are limitedagricultural activities inthe area. Noise Results o f ambientnoise measurements settlements close to the project site are typical for rural areas. Flora and Fauna Endemic and/or rare species were identifiedinthe general region o f the Tuz Golu B a d 3(but not specifically in the salt lake or the discharge area) including species under protection by Bern Convention. For each species underprotection, requirements o f the particular laws, regulations and treaties have been reviewed and all specifications will be followed during construction and operation. Wetlands in the vicinity o f the brine discharge pipeline and Tuz Golu are important as a "migratory bird route". This area is designated as a "Special Environmental Protection Area". About 15 kmo fbrinedischarge pipelineroute passesthrough this zone. However, important bird species do not live there. They may be found individually or in small colonies as part o f their migration pattern. To minimize any effect to migratory birds, construction o f the 15 km section o f brine discharge pipeline will be restricted to the period o f lowest or no migration activity (July-September). The Hirfanli dam section that i s the fresh water intake i s on the border o f a bird wintering area (Tufted duck, Pochard, Red-crested Pochard, White-headed duck, Coot and water birds) and migratory route (Ruddyshell duck). Construction o f this section will be carried out between July andAugust to minimize any effects on migratory andwintering birds andtheir habitats. 23The Tuz Golu Basin covers the salt lake itself, rivers feeding the lake and other related lakes. Exact borders are not clear, butthe basin area is estimated at around 530,000 hectare. 76 Tuz GoluBasin Tuz Golu Basin i s the water catchment area covering the lake itself, rivers feeding the lake and other related lakes. Although exact borders are not certain, the basin area i s around 530,000 hectare. No fish species were found inclose vicinity o f the project site. Freshwater creeks that feed the salt lake generally cannot reach the lake in summer months. Thus, with no source of fresh water during the summer, the resulting lake salinity from net evaporation provides an extremely hostile environment for fish habitat, as well as being extremely inhospitable to any plant growth throughout the year. Three main fresh water rivers namely Karasu, Pecenek and Insuyu feed the lakes in the basin. Fishspecies mentioned inthe EIA Report were not observed during field surveys carried out on April 2001. However based on the literature, these species are possibly found inInsuyuRiver, at approximately 100 kmnorth o f the project site (Phoxinellus crassus found in 1960 and Aphanius chandrei found in 1944). The high salinity in the lake basin (including the discharge area) prevent these species from migrating to these sites. Inconclusion, the proposed project site (including surface facilities and brine discharge area) is poorly inhabited and poorly vegetated with any significant flora andfauna. EnvironmentalImpacts The EIA identified a number of potential impacts associated with both construction and operation phases o f the project. All pipelines will be buried. Therefore keypotential impacts are construction o f the fresh water pipeline, brine discharge line, and natural gas connector line. There are also potential impacts associated with construction o f surface facilities for gas processing, drilling operations and leaching operations. Operation activities are limited to gas injection and withdrawal so few potential operational impacts are identified. Major concerns are related to safety risks for workers and populations at the storage site and along the gas pipeline route. Potential project impact mitigation and monitoring plans are outlined in Tables 11.2 and 11.3 respectively. All potential impacts have been analyzed and are readily managed through internationally accepted standards o f good engineering practices and procedures which will be followed in design, construction and operation o f the gas storage and pipeline distribution systems for water, leachate and gas respectively. Potential impacts associated with the brine discharge into Tuz Golu have been determined to be insignificant, since the effluent will be providing water to Tuz Golu in the same manner and o f the same quality as i s naturally supplied from groundwater sources currently feeding the lake. The Environmental Management Plan (EMP) includes cost effective mitigation measures for each identified potential impact, details o f the implementation period, monitoring requirements and institutional arrangements for effective environmental management. Reference should be made to the EMP for further details. 77 rable 11.2 Mitigation Plan Issue Mitigating Measure Zonstruction of Excavation Excavation materialwill be reused pipelineand The vegetativetopsoil will be stored properly surface facilities 3ust generation due to excavation, Excavated materialwill be protectedfrom wind and rain inlaterSupply material storage, handling and All transportationvehicles will be covered 3rine Discharge transport Vatural Gas Branch The speed of the vehicles will restricted -ine Any exposed dust prone areas (e.g. roads) will be watered regularly Solidwaste generation at worksite Domestic solid wastes and construction wastes will be collected and disposed properly Wastewater generation at worksite Domestic wastewater will be collected in a septic tank. Various wash down waters will be collected separately and used for watering green areas. Any hydrotest water will be discharged after settling. Wastehesidual oils will be stored onsite and given to a firm licensedby MoEF. Noise and vibration due to site No explosives to be used unless required. Local preparationand construction activities residentswill be informed. The activitiesthat generate noisewill be limited. Employees will be provided with noise protection. Maximum noise levels will not be exceeded Transportation No access roads will be constructed unless necessary and approved by BOTAS. The existing roads will be used to the greatestextent. Impacts on flora (due to site clearance) Species protected by the BERN Convention and "Vulnerable" species according to Turkish Red Data Book if found, will be managed in accordance with the Bern Convention.. Constructionactivitieswill be limited to the construction Impacts on fauna Decisions of Central Hunting Commission shall be (disturbance during the construction compliedwith. (refer to theAnnex) activities) Constructionactivitieswill be limited to the construction corridor. Any rare and endangered species will be managed in accordancewith the nationalor international regulations and treaty requirements Construction activities will take place during periods when no migratory bird flight are occurring A fauna expert shall be employed by the Construction Contractorto monitor constructionactivities Health and safety risks Warning signs will be placedin the field. The workers will be equipped with necessary safety equipments. The area will be fenced and guarded or locked. An emergencyresponse planwill be developed. Handling & usage of Any explosivematerialwill locked. explosive/hazardous and toxic Any fuels or hazardous liquids will be stored in tanks materials situated on impermeable (e.g. concrete) surfaces with bund to containany leaks. Warning signs will be placed on the storage tanks, etc. Drainage (forsurface facilities) The drainage system will be formed at the base level of the buildings. Impacts on Cultural and Natural Assets A culturalexpertwill monitor the construction activities. Turkish chancefind procedures will be followed. Drilling activities OilyWaste Waters A wastewater pool with an impermeable lining and an oil trap will be placedin the channel. Impacts on Groundwater due to Casing will be cemented until reaching the impermeable leakage of drilling mud fluids formationalong the drillingsection. Only water based drilling muds with no toxic materials will be used. 78 Issue Mitigating Measure FormationWastes and DrillingMuds Mud pits (lined) will be opened for the temporary storage of the formation wastes and drilling mud and they will be removedfrom the area by a firm licensed by MoEF after solidification (drying). Sludge from brine settlingtanks The solid particles will be-collected in settlingtanks Impacts of brine discharge on lake Discharge location is in unproductive/aridarea in terms water quality of ecological characteristics and agricultural activities and also there exist no salt production)of Lake (based on the officialmaps and field surveys) Discharge plume will remain within the boundaries of the unproductive area. The plumewill be monitored. Noise Installationof silencers. (Pump and Compressors, etc.) Low sound emanating backup motor, pump and compressors Limitationof truck transportation hours Fire A fire protection system will be available at site. Accidents and Sabotage Pressure, temperature and flow rate will be monitored continuously Line valves sensitiveto sudden pressure drops will shut down automatically. Health and Safety Educationon; Sitesecurity Environmental protection Firstaid Firefighting Health and occupational safety Risk assessment will be given to the personnelemployed. Leakage and explosion (pipeline) In case of leakage of natural gas in closed areas the area will be immediatelyventilated Emergency Cases BOTAS, will inform the relevant governorships, municipalities,etc. prior to the commencement of gas storage and send to them the emergency response plans Waste generation Domestic solid wastes will be collected and properly disposed. Septic tank will be replaced by package treatment plant. Effluentwill be used for watering green areas 79 rable 11.3 Monitoring Plan Parametersto be monitored Monitoring Monitoring Location Technique Monitoring Frequency :onstruction of Top soil storage Jipeline and Top soil storage area tisual I Weekly Surface Facilities Storageand Disposal of Designated disposal excavatedmaterial areas Visual Weekly ~ Work site Coveringof vehicles, which boundariesat the At random, but averaging carry excavation material location, where Visual loadingwill be weekly performed. Weekly during Excavation, material constructionactivities. Dust Level storage, handling Visual More frequently (2-3 areas timedweek) during hot, dry, windy conditions Solid Waste Work site Initiallyonce a week, if (Collection,storageand boundaries Visual satisfactorysubsequently disposal) (at the solid waste storagearea) monthly Domesticwastewater isually for leaks management Septictank (Suddendecrease Weekly Septictank lined in the level) Washingwaters management At the exit of the Gravimetric Weekly Suspendedsolids (ss), oil and washing water analysis for ss initially grease treatment area (for Hexane solubility then monthly ss, oil grease test for oil and removal) grease Hydrotest water disposal At the hvdrotest Visual Beforedischarge (eithersettled before water c6llectiontank dischargefor suspended priorto discharge (not necessary to solids and any coarse material make removal) physicallchemical analysis) Wastelresidual oils collection Wasteoil containers Visual Once a week and removal Noise level Along the pipeline Sound level meter Duringmajor construction d W 1 route and surface activitiesand if there are facilities local complaints constructionareas Health and Safety Work site boundary Visual Random, but averaging Use of equipmentby Before entering oncelweek. If violations employeesagainst noise workplace are observed,frequency Warningsigns will be increased Safety equipments of workers Adoption of safety rules (for security of site and excavation,scaffold and heavy vehides, etc) Work site safety (eitherfenced Work site boundary Visual Random,but averaging and entrance & exit are kept once/week. Ifviolations under control) are observed, frequency will be increased Drainageof surface facilities Facilitiesarea Visual Duringsite preparation area and impermeabilityof and constructionof internal roads facilities (Check during rainy conditions) Flora under protection Along the pipeline Visual monitoring, Weekly during route and at the recording and constructionactivities surfacefacilities reporting by (morefrequent if area university trained necessary) ecological expert 80 Table 11.3 Monitorins 'Ian Parameters to be monitored Monitoring Monitoring Location Technique LnonitoringFrequency Fauna under protection and Along the pipeline Visual monitoring, Neekly during the construction periods for route and at the recording and mstruction activities wintering and migratory birds surface facilities reporting if necessary, then more area by university requent,to be decided trained ecological )y BOTAS) expert Drilling Activities Oilywastewaters collection Wastewater pool Visual Neekly or daily if and storage (either lined and oil xoblems are observed trap functioning properly) Removal of oily wastewater by Plant site Visual 4ccording to removal Licensed Companies scheduleto be jetermined prior to the :onstruction activity Casing usageagainst leakage Drilling area Pressure Sontinuously, during of drilling mud monitoring of the jrilling activity drilling casing to see if there is a rapid decrease Formationwastes and drilling Mud pits for leakage Visual Neekly muds storage and removal Controlled entrance Check to mud pit area certification. Disposal by licensed Check validity of firm license before engaging the firm Leachina Brine quality/Receiving water At diffuser location Conductivity Monthly Operatigns quality (saltcontent, pH, Tuz Gtjlu (brine meter, heavy metals, ) discharge) pH meter Measurements to be Atomic absorption made upstream and -key parameters - downstream of compare to diffuser as well as receivingwater in on either side. unproductive area Attempts will be madeto characterize the brine discharge "plume" and how/if it is evolvingwith time compared to predictions to ensure it remains in the unproductive area Operation Noise from Compressor Compressor Sound level meter Measurementat the start Stations Station at the of operation, and then projectsites any complaintsfrom local At the nearest residents settlementarea Domestic Wastewater Wastewater PH, BOD, Weekly treatment plant suspended solids then monthlyif operation effluent is stable Fire protectionsystem At surface facilities Visual and Monthly initially,quarterly area regularly if no problems observed scheduled simulations Leakage and explosion Gas storage area, Methane detectors Continuous surface facilities 81 PublicConsultation The first public consultation was performed on 27.03.2003 at Sultanhani Municipality with the participation o f local people and governmental organizations. The second public consultation was performed on 24.03.2005 at Agagoren and Sultanhani Municipalities. Details o f the first Public Consultationare fully documented inEIA Report. Records o fboth first and second public consultations are included inthe EMP. Duringthe first public consultation concerns were raised about groundwater usage for leaching operations, since there i s a water shortage and this might impact irrigation, seismicity o fthe area, and brine discharge impacts on Tuz Golu. These issues were fblly addressed in EIA Report. In addition, public concerns played an important role in BOTAS' revising their decision on water resource selection. Taking public concerns into consideration, BOTAS altered the project design to utilize HirfanliDam reservoir as fresh water resource. Duringthe second public consultation, major concerns were duration o f construction activities and job opportunities for local people. BOTAS representatives stated that local manpower would be preferred during construction activities. Local people were also informed that their agricultural activities would not be negatively affected. C.InstitutionalArrangements Organizational Overview Inorder to provide efficient co-ordinationbetween, 0 BOTAS, 0 Construction Contractor, 0 IndependentEnvironmental Monitoring Company to be hiredby BOTAS, 0 MinistryofEnvironment & Forestry (MoEF) MoEF, EIAMonitoring and Control Department and its associated units. With reference to the Environmental Management Plan (EMP), monitoring and control are of critical importance for minimizing environmentalimpacts. BOTAS Management together with the construction departmentwill ensure that all construction related activities o f Contractor(s) comply with approved EMP. To achieve this, BOTAS will regularly monitor and evaluate the Contractor's field activities and performance through auditors. EnvironmentalEngineer o f BOTAS directly connected to Underground Storage Manager, will be responsible for coordinating and supervising the monitoring activities. BOTAS will also carry 82 out an independent auditing programme through an Environmental Monitoring Company, which will inspect the field activities o fContractor(s) and directly report to BOTAS. Roles and Responsibilities BOTAS Contractor(s) will be responsible for adopting the EMP during construction, implementation o f all mitigation measures stated inEMP and required to be in compliance with the EMP together with the project' environmental standards. In order to achieve this, BOTAS Contractor(s) will adopt a self-control/monitoring mechanism and formulate his own management plan including regular self inspection and auditing programme, which will be reviewed in terms o f consistency with EMP and approved by BOTAS prior to construction. BOTAS Contractor(s) will assign a full time "Environmental Engineer", prepare weekly progress reports based on the monitoring plan detailing works completed within the respective period, results o f measurements and supervisions further to site problems encountered and have direct contact with BOTAS Environmental Engineer.Progress reports will include a work schedule for the next period. BOTAS will hire an "Environmental Monitoring Company" for1independent monitoring the BOTAS Contractor(s) activity. The Environmental Monitoring Company will review and comment on the weekly reports prepared by the Contractor(s), inspect work sites, review project environmental performance and Contractor(s) field activities, implement environmental control analyses and data collection as defined in the EMP, and report their findings both to the Contractor's Environmental Engineer and BOTAS Environmental Engineer on a weekly basis. Reports would detail an environmental problems encountered, deficiencies in protection measures, and recommendations. Responsibility for resolving any reported problems and remedying reported deficiencies resides with the Contractor(s) with possible approval by BOTAS if either the construction schedule i s affected or expenditures are necessary to implement the recommendations. The Environmental Monitoring Company should integrate into these studies the findings o f their site visits and their proposed solutions for any environmental bottlenecks. Weekly and Monthly reports by Environmental Monitoring Company will be provided to BOTAS for review and approval o f BOTAS Environmental Engineer who will evaluate data collected and analyses, perform verification visits during construction and operation activities incase needed, and prepare a final report including summary o f the activities and recommended actions, if necessary on a monthly basis, which needs to be reviewed and approved by the UGS Manager. Incase o f significant action i s required, BOTAS Management will be informed. At the project site, daily meetings initially (but the frequency may be changed by BOTAS, depending on the work progress) with the participation o f Environmental Monitoring Company's, Contractor's and BOTAS's site supervisors, to discuss the daily activities, and take decisions. With BOTAS authorization and approval, the Contractor(s) will be responsible for adoption o fthe decisions and to perform the requiredactions. Compliance and non-compliance with EMP identified during inspection and audits will be recorded by Environmental Monitoring Company and reported to BOTAS immediately. BOTAS 83 Management will take necessary actions in such a case to stop the activities in the case o f Contractor's non-compliance with EMP and take corrective action. BOTAS will submit Summary Reports to World Bank quarterly indicating activities and actions taken, as well as project progress. Monitoring process should involve the contribution o f the MoEF. The Independent Environmental Monitoring Company will also report to the MoEF periodically during the construction activities ina requested time schedule and format. During operation the unit inBOTAS responsible for operationwill be responsible for monitoring and reporting. BOTAS, at that stage, will either continue working with the Environmental Monitoring Company, which performed monitoring during construction, or hire another company for making measurements defined in the operation phase o f the monitoring plan and reporting results to BOTAS. The environmental engineer o f the department responsible for the project operation will review and evaluate these results and prepare quarterly reports including any recommended actions to BOTAS Management. 111. DAM SAFETY The Hirfanli dam was constructed between 1954 and 1960. It is an inclined clay core rockfill dam with a selected material transition area downstream on a thin inclined core. Filters are providedbetween the watertight zones (inclined core and transition) and the downstream rockfill shell. Maximum dam height on its foundations i s 82 m. Reservoir capacity at maximum storage level (851 m a.s.1.) i s 5.75 billion m3. Dam foundations are in an igneous rock formation (gabbro) generally sound to locally weathered. A grouting curtain has beenprovided at the base o fthe inclined clay core. The following agreements were reached with DSI, EUAS and BOTAS after a site visit on June 28,2005. (The DSIreport o fApril 28,2005 is attached below.) Dam Stability In analyzing dam stability the Designer (re: June 1958 Analysis of Design, Knappen-Tippets- Abbett-McCarthy) assumed a fully drained downstream shell and derived the corresponding factor o f safety under an "infinite slope" assumption. This assumption is acceptable for a free draining rockfill used at Hirfanli. At the same time, it i s normal practice to introduce monitoring measures for validating such assumption during reservoir operation. The validation involves monitoring the location o f the saturation line within the dam body and inthe downstream shell in particular. This has not been the case at Hirfanli. Similardams have experience progressive migration of fine materials with consequent reduction o f permeability o f the rockfill. This i s turn may lead to raising o f the saturation line in the downstream shell and reduction o f the factor o f safety. Inorder to verify that this i s not the case at Hirfanli,geophysical methods could be used and/ or recourse could be made to the installation o f open-tube type piezometers inthe downstream shell. Given the observed situation, the latter 84 option i s not recommended before a geophysical campaign has provided relevant indications. D S I has considerable experience in site investigations, including geophysical methods, and DSI experts agreed to assess which are the preferredmethods24for the task and to carry out the tests. Once the location, or the absence, o f a saturation zone has been ascertained, the tests could be repeated at, say, 3 or 5 years intervals ifother observations (see below) do not suggest otherwise. Seepage Control Probably, the most critical mode o f deterioration that should be kept under control i s internal erosion o f the core and filter materials. Inspection o f the downstream toe o f the dam revealed that no drainage collection system (drainage ditch, drainage conduit outfalls, etc.) i s in place. Besides, the area seems quite dry as also suggestedby the fact that the small platform at the toe of the dam is irrigated in order to maintain it green. However, the toe i s composed o f large boulders and there i s dense vegetation that makes inspection almost impossible. Giventhe situation, the low vegetation (excluding trees) should beremovedby EUAS andaccess to the entire downstream toe provided for visual inspection. Observations should be carried out during the period of maximum reservoir level with the intent o f locating areas o f concentrated seepage (if any) by DSI. Should these be observed, adequate monitoring devices would be installed and used to regularly monitor quantity (discharge) and quality (contents o f sediments) o fthe water. Global Movements The design drawings (details A and B-plate No.11) show the existence o f embankment external settlement points. One such point was observed during the visit, on the crest o f the dam, Such measuring points should be cleared o f debris and re-activated by EUAS for measuring global deformations of the embankment. One reference set o f measurements should be carried out as soon as possible by DSI, and repeated with yearly intervals for the first 3 years. After that, D S I experts would decide on the most appropriate frequency. Spillway Hirfanli dam has got a free crest spillway. An unlined channel connects the control weir to the reservoir. The discharge channel downstream o f the control weir i s excavated inrock and has no lining. The spillway hasbeendesigned to evacuate floods with a 1:1000year returnperiod. In45 years of operation, the spillway has been discharging only duringtwo years: 1968 and 1988. The upstream channel and the spillway crest are clogged with vegetation that considerably reduces the hydraulic performance o fthe spillway system.The downstream channel is blocked by several rockfalls that partially obstruct the waterway. Both situations need to be rapidly addressed by EUAS. 45 years o f flow data are available in addition to those used at the design stage. It i s highly recommended that the design flood, for different return periods, including the PMF (Probable Maximum Flood), i s updated using all available data. The study should include a Safety-Check Floodanalysis25. DSIagreed to carry out these analyses. 24Resistivity, Ground Penetrating Radar, Natural Potential, Thermal methods, etc. 25The safety check flood is often made equal to the Probable MaximumFlood (PMF) or the 1:10,000 years flood. It is considered acceptable practice for the crest structure, waterway, and energy dissipation to be on the verge o f 85 DamDesign Copy o f the Design reports and Drawings should be available at the dam site and the operators should be familiar with them. EUAS will update the Operation and Maintenance Manual for the dam and train dam operators inits application. DSI can assist inthis task. EmergencyPreparedness Telecommunications systems are available and finctional. Staff i s aware of the line of communication to be used in case o f emergency situations (floods, earthquakes, etc.). The Howell-Bunger valve that controls the bottom outlet i s operated every year to make sure that it willbe functional incase rapid drawdown o fthe reservoir is required. SupervisionandIndependentInspections Independent inspections should be continued by DSI experts on a regular basis, as per current practice inTurkey. The dam safety monitoringprotocol i s disclosed inthe EMP as an annex. failure, but to exhibit marginally safe performance characteristics for this flood condition. The design flood strictly represents the inflow which must be discharged under normal conditions with a safety margin provided by the freeboard. It is usually taken as a percentage o f PMF or a flood with a given probability o f excedence. 86 Attachment DSISite Visit Report,April28,2005 (EnglishTranslation) Subject: Security Status ofthe HirfanliDam Date:April 28,2005 TeamMembers: Abdullatif LATIFOCLU, BranchDirector (DSIDams and Hydro Power Plants Dept.) Seyit AKSU, Civil Engineer (DSIOperation and maintenanceDept.) Tiimer MANGIR, BranchDirector (DSI5thRegion) Ali OZDEN, Branch Director (DSI5thRegion) HasanCAKIRYILMAZ, BranchDirector (DSI 5thRegion) Serafettin CANAZ, Civil Engineer (DSI5thRegion) Nafiz OZCAN, EUASHirfanliandEnvirons OperationDirector The aboveteam conductedstudies onthe saidday to specify the lateststatus ofthe HirfanliDam, from which BOTAS General Directorate plans to take 10million cubic meters of water annually under the "Tuz GoluUnderground Natural gas StorageProject". The findings of the team are as follows: Characteristicsof the Dam River: Kizilirmak Province:Kiraehir EmbankmentType: Rockfill DamVolume:2,000,000 m3 CrestLevel: 860 HeightfromFoundation:83 m HeightfromThalweg:78 NormalWater Level: 851 Reservoir Volume: 5980 hm3 Reservoir Area: 263.00 h2 Purpose:Energy andFloodPrevention IrrigationArea: -- InstalledPower Capacity: 128M W AnnualGeneration:400 GWh Constructionstartedin 1953 Constructioncompletedin 1959 0 The dam does not have any measurement facility since its project design does not cover any measurementfacility 87 There has not been any disruption in the geometry o f the dam's upstream and downstream slopes despite the slope of 1.3/1. There is no leakage, dampening or steaming on the dam's downstream slope and slope intersection line. No cracking (lengthwise or widthwise) has been observed o n the crest o f the dam. It is considered that the dam has completed its settling. The research gallery between the body of the dam and the power plant buildinghas been analyzed and no water movement has been detected. It is important to urgently remove the plants and trees, together with their roots, on the dam's downstream slope and the body o f the dam, interms o f security. At this stage, it is not necessary to install measurement devices at the dam. If future observations reveal any negative aspect, then specifically needed measurement devices may b e planned and installed. If the posts on the dam will be re-arranged and their upper parts are turned into benchmark points, it will be possible to observe the dam movements through geodesic measurements (inx, y, z directions). The dam i s examined every year by an Examination Team consisting of expert staff and the recommended repair-maintenance activities are perfonned within the same year. The photos taken are annexed to the report. Conclusion: The studies have not revealed any findingthat would negatively affect the security ofthe dam. Tumer MANGIR, BranchDirector (DSI 5'h Region) Serafettin CANAZ, Civil Engineer (DSI 5th Region) Hasan CAKIRYILMAZ, Branch Director (DSI 5thRegion) Ali OZDEN, Branch Director (DSI 5thRegion) Seyit AKSU, Civil Engineer (DSI Operation and maintenance Dept.) Abdullatif LATIFOGLU, Branch Director (DSI Dams and Hydro Power Plants Dept.) 88 Annex 12: ProjectPreparationandSupervision TURKEY: GAS SECTORDEVELOPMENT Planned Actual PCNreview 03/11/2005 03/03/2005 Initial PID to PIC 03/25/2005 03/31/2005 Initial ISDS to PIC 3/25/2005 07/12/2005 Appraisal 04/04/2005 05/04/2005 Negotiations 10/11/2005 10/11/2005 Board/RVP approval 11/29/2005 Planned date o f effectiveness 02/28/2006 Planneddate o fmid-term review 06/30/2009 Plannedclosing date 12/31/2012 Key institutionsresponsible for preparation oftheproject: BOTAS Bank staff andconsultants who worked on the project included: Name Title Unit RanjitLamech Task Team Leader ECSIE Sameer Shukla Senior EnergySpecialist ECSIE James Moose Economist ECSIE Gurhan Ozdora Senior Operations Officer ECSPF Bernard Baratz Environment Specialist ECSIE Norval Stanley Peabody Lead Social Scientist ECSSD SalihKemal Kalyoncu Procurement Specialist ECSPS DeveshChandra Mishra Senior Procurement Specialist ECSPS DilekBarlas Senior Counsel LEGEC ShinyaNishimura FinancialAnalyst ECSIE Yukari Tsuchiya ProgramAssistant ECSIE Ozlem Katisoz Team Assistant ECUU6 Alessandro Palmieri LeadDam Specialist QACU Ayse SedaAroyomak Sr. FinancialMgt Specialist ECSPS Hala Khattar Senior Financial Officer BCFBD Ray Tomkins Consultant Economic Consulting Assoc. Nafi Toksoz Consultant Mass. Instt. Of Technology (MIT) Kenneth Beckman Consultant International Gas Consulting Inc. 89 Bank finds expended to date onprojectpreparation: 1. Bankresources: 2. Trust funds: 3. Total: Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost: 90 Annex 13: Documents inthe ProjectFile TURKEY: GAS SECTORDEVELOPMENT - Turkey:EconomicAssessmentandRegulatoryIssuesfortheTuzGoluStorageProject, Economic Consulting Associates Ltd (July 2005) - LandAcquisitionPlan(August2005) - EnvironmentalImpactAssessment(EM)(June2005) - ReportonTechnicalAssessment oftheTuzGoluStorageProject, InternationalGas Consulting Inc. (July 2005) - TuzGoluUndergroundGasStorageFacility-FiniteElementAnalysis, IS.Fuenkajorn, Geomechanics Research Unit, Suranaree University o f Technology, Thailand (May 2005) - SeismicHazardEvaluationoftheTuzGoluGasStorageFacilityinTurkey, Dr.NafiToksoz, EarthResources Laboratory, Massachusetts InstituteofTechnology (June 2005) - FeasibilityReportfor theTuzGoluGasStorageProject, BOTAS(June2005) - GasSectorStrategyNote,TheWorldBank(September2005) - FinalDesignof Sub-surfaceFacilities, E.ONEngineering(August 2005) 91 Annex 14: Statementof Loansand Credits TURKEY: GAS SECTORDEVELOPMENT Differencebetween expected and actual OriginalAmount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Fm.Rev'd PO66149 2005 SEC EDUC 104.00 0.00 0.00 0.00 0.00 96.49 0.00 0.00 PO77328 2005 RAILRESTRUCT 184.70 0.00 0.00 0.00 0.00 173.32 0.00 0.00 PO78359 2005 SEISMIC RISKMITIGATION 400.00 0.00 0.00 0.00 0.00 373.91 0.00 0.00 PO81880 2005 MUNICIPAL SERVICES 275.00 0.00 0.00 0.00 0.00 256.79 0.00 0.00 PO93568 2005 EFIL3 (CRL) 305.00 0.00 0.00 0.00 0.00 298.04 0.00 0.00 PO94167 2005 PSSP2 465.40 0.00 0.00 0.00 0.00 434.21 0.00 0.00 PO94176 2005 ECSEEAPL #2 (TURKEY) (CRL) 66.00 0.00 0.00 0.00 0.00 61.03 0.00 0.00 PO82801 2004 EFIL2 303.10 0.00 0.00 0.00 0.00 75.00 -155.10 0.00 PO82996 2004 PFPSAL 3 1,000.00 0.00 0.00 0.00 0.00 500.00 0.00 0.00 PO75094 2004 WATERSHED REHAB (GEF) 0.00 0.00 0.00 7.00 0.00 6.75 0.25 0.00 PO74053 2004 HEALTH TRANSIT (APL #I) 60.61 0.00 0.00 0.00 0.30 56.34 7.22 0.00 PO70950 2004 ANATOLIA WATERSHED REHAB 20.00 0.00 0.00 0.00 0.10 19.55 0.15 0.00 PO72480 2004 RENEW ENERGY 202.03 0.00 0.00 0.00 1.01 196.33 7.31 0.00 PO59872 2003 BASIC ED2 (APL #2) 300.00 0.00 0.00 0.00 0.00 291.46 283.05 80.46 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 0.00 223.31 187.94 -13.89 PO70286 2002 ARIP 600.00 0.00 0.00 0.00 0.00 268.71 268.71 66.01 PO69894 2001 PRIV SOC SUPPRT 250.00 0.00 0.00 0.00 0.00 7.21 7.21 -28.79 PO68368 2000 MARMARA EARTHQUAKE EMG 505.00 0.00 0.00 0.00 0.00 281.59 281.59 37.37 RECON PO44175 2000 BIODIViNTRLRES MGMT (GEF) 0.00 0.00 0.00 8.19 0.00 4.12 3.52 0.18 PO09073 1999 INDUSTRIAL TECH 155.00 0.00 0.00 0.00 0.00 13.49 13.49 0.00 PO48852 1998 NAT'L TRNSM GRID 270.00 0.00 0.00 0.00 34.48 116.60 151.08 78.76 Total: 5,965.84 0.00 0.00 15.19 35.89 3,754.25 1,056.42 220.10 92 TURKEY STATEMENT OF FC's Held andDisbursed Portfolio InMillionsofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Acibadem 20.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 AltematifBank 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.00 1996/01103/05 Arcelik 103.36 0.00 0.00 103.36 103.36 0.00 0.00 103.36 2000 Arcelik LGKlima 8.29 0.00 0.00 0.00 8.29 0.00 0.00 0.00 2002 Assan 22.50 0.00 0.00 0.00 22.50 0.00 0.00 0.00 2002 Atilim 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00 2000 Banvit 8.33 5.00 0.00 0.00 8.33 5.00 0.00 0.00 BayindirbankAS 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00 2002 Beko 32.15 0.00 0.00 28.07 32.75 0.00 0.00 28.07 2001 Bilgi 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 1994/96197 Borcelik 8.18 3.21 0.00 0.00 8.18 3.21 0.00 0.00 2004 BorusanHolding 30.00 0.00 10.00 0.00 30.00 0.00 10.00 0.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1990102 Conrad 3.15 0.00 0.00 0.00 3.15 0.00 0.00 0.00 2002 EKS 10.96 0.00 0.00 0.00 10.96 0.00 0.00 0.00 2004 Ege 10.00 0.00 0.00 8.00 10.00 0.00 0.00 8.00 1995 Entek 19.00 0.00 0.00 9.94 19.00 0.00 0.00 9.94 1999 Finansbank 2.22 0.00 0.00 0.00 2.22 0.00 0.00 0.00 2004 GarantiLeasing 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 GumussuyuKap 4.00 0.00 3.66 0.00 4.00 0.00 3.66 0.00 2001 Gunkol 4.53 0.00 0.31 0.00 4.53 0.00 0.31 0.00 1998 IndoramaIplik 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 Intercity 15.00 5.00 0.00 27.15 4.44 5.00 0.00 8.21 1998/00/02 IpekPaper 10.85 0.00 0.00 0.00 10.85 0.00 0.00 0.00 1990 Kepez Elektrik 2.43 0.00 0.00 0.00 2.43 0.00 0.00 0.00 1988190 K i r i S 11.33 0.00 0.00 0.00 11.33 0.00 0.00 0.00 2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.20 0.00 0.00 0.00 5.20 0.00 0.00 0.00 2003 MESAGroup 11.oo 0.00 0.00 0.00 11.oo 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 8.50 0.00 0.00 0.00 8.50 0.00 2002 Milli Re 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998/02 ModemKarton 8.33 0.00 0.00 0.00 8.33 0.00 0.00 0.00 1991 NASCO 10.18 0.00 0.00 3.55 10.18 0.00 0.00 3.55 2004 OPET 25.00 0.00 0.00 40.00 8.33 0.00 0.00 25.00 2004 Oyak Bank 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2002 Pasabahce 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00 1998 Pinar ET 3.14 0.00 0.00 0.00 3.14 0.00 0.00 0.00 93 2000 Pinar SUT 11.45 0.00 0.00 0.00 7.77 0.00 0.00 0.00 1999 SAKoSa 9.91 0.00 6.61 6.64 9.91 0.00 6.61 6.64 1990 Silkar Turizm 1.89 0.00 0.00 2.15 1.89 0.00 0.00 2.15 2002103 Sise ve Cam 43.93 0.00 18.18 36.56 43.93 0.00 18.18 36.56 2002 Soktas 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 200s TSKB 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 1982183189191/96/99 Trakya Cam 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 2002 Turk EkonBank 11.11 0.00 15.00 0.00 11.11 0.00 15.00 0.00 2001 Turkish PEF 0.00 9.59 0.00 0.00 0.00 2.17 0.00 0.00 1999 Unye Cement 8.22 0.00 0.00 0.00 8.22 0.00 0.00 0.00 1999 Uzel 8.40 0.00 0.00 4.95 8.40 0.00 0.00 4.95 1998 Viking 7.62 0.00 0.00 0.00 7.62 0.00 0.00 0.00 Total portfolio: 662.39 23.16 112.26 270.97 571.48 15.74 112.26 236.43 ApprovalsPendingCommitment ~~ ~ FY Approval Company Loan Equity Quasi Partic. 2001 Akbank 0.03 0.00 0.00 0.00 2004 Akbank BLoan Inc 0.00 0.00 0.00 0.02 200s Avea 0.12 0.00 0.00 0.30 200s BandirmaDogalga 0.00 0.00 0.00 0.00 2005 Gemlik Dogalgaz 0.00 0.00 0.00 0.00 2002 MilliReasurans 0.00 0.01 0.00 0.00 200s PALEN 0.00 0.00 0.00 0.00 200s Palgaz 0.01 0.00 0.00 0.00 200s Sivas Dogalgaz 0.00 0.00 0.00 0.00 2002 TEB 111 0.00 0.00 0.00 0.0s 2005 YUCE 0.00 0.00 0.00 0.00 Total oendine commitment: 0.16 0.01 0.00 0.37 94 Annex 15: Country at a Glance TURKEY: GAS SECTORDEVELOPMENT Europe 8 Lower- POVERTY and SOCIAL Central middle- Turkey Asia income Development diamond' 2003 Population, mid-par (millions) 70.7 473 2,655 I GNI per capita (Atlas method, US$) 2,800 2,570 1,480 Life expectancy GNI (Atlas method, US$ billions) 87.8 V V 3,934 Average annual growth, 1997-03 Population (%) 17 0.0 0.9 Laborforce (%) 2.3 0.2 1.2 GNI Gross M o s t recent estimate (latest year available, 1997-03) iper primary capita nrollment Poverty(%of population belownationalPovertyline) Urbanpopulation (%oftotalpopulation) 66 63 50 i Life expectancyat birth (pars) 70 69 69 I Infantmortality(per IOOOlivebirths) 35 31 32 Childmalnutrition (%ofchildrenunder5) 8 11 Access to improvedwater source Access to an improvedwatersource (%ofpopulation) 82 91 81 llliteracy(%ofpopulation age 69 14 3 a Gross primaryenrollment (% ofschool-agepopulation) 94 a 3 112 __I Turkey Male 98 a 4 113 1 Female Lower-middle-income group 91 a 2 111 ~ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 I Economic ratios. GDP (US$ billions) 61.5 V9.4 183.9 240.4 Gross domestic investment/GDP 6.3 27.6 213 22.8 Exports of goods andservices/GDP 12.5 13.7 29.2 27.4 Trade Gross domestic savings1GDP 'P.2 219 8.8 8.5 Gross nationalsavings/GDP 5.3 24.8 20.8 8.5 i Current account balance1GDP -3.1 -3.6 -0.8 -2.8 Interest payments/GDP 2.9 2.2 3.8 3.2 Totaldebt/GDP 33.0 38.2 713 612 Totaldebt service/eworts 39.2 316 50.7 40.3 Present valueof debt/GDP 73.1 Present value of debt/exports 234.2 i indebtedness 1983-93 1993-03 2002 2003 2003-07 (averageannualgroMh) 1 GDP 5.0 2.7 7.9 5.8 5.6 -Turkey GDP percapita 2.8 0.9 6.2 4.2 4.1 Lower-middle-income group ~ - . STRUCTURE of the ECONOMY I 1983 1993 2002 2003 Growth of investment and GDP (%) (%of GDP) Agriculture 21.4 6.2 13.0 13.4 Industry 25.0 29.8 23.7 219 Manufacturing 6.8 18.3 14.0 13.3 Services 53.6 54.0 63.3 64.7 - Private consumption 78.4 65.0 66.2 66.9 General government consumption 9.4 13.0 14.0 13.6 Imports of goods andservices 6.6 8.3 30.7 30.7 -GDI d G D P 1983-93 1993-03 2002 2003 Growth of exports and imports (average annualgroMh) ( O h ) Agriculture 1.5 10 7.4 -2A 4o T ' Industry 6.7 2.2 5.6 5.O Manufacturing 6.9 3.0 8.2 8A Services 4.3 3.0 7.3 6A Privateconsumption 4.7 19 2.2 6.7 Generalgovernment consumption 4.0 3.9 5.4 -2.4 -40 - Gross domestic investment 7.7 10 35.9 20.4 I imports of goods andservices 11.4 7.8 15.8 27.1 -Exports -Inports 95 Turkey PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domestic prices (%change) I100 T Consumer prices 31.4 66.4 44.8 25.2 Implicit GDP deflator 26.3 67.8 44.1 22.5 Government finance 25 - (%of GDP, includes current grants) 0 Current revenue 19.0 312 30.4 98 99 00 01 02 -3.1 -5.1 -5.3 1 Current budget balance 031 Overall surplus/deficit 4 . 0 -119 -0.1 -----GDPddlator -CPi T R A D E I 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 5,905 15,345 40.P4 51,206 80,000 - Agricultural and livestock 1032 1,044 2,089 2,545 Mining and quarryproducts 8 8 233 387 543 Manufactures 4,665 n,o68 33,565 43,9P Total imports (cif) 9,235 29,428 51,554 69,340 Food P3 969 1245 2,006 Fuel and energy 3,851 3,903 9,192 11.568 I Capital goods 2,311 7,499 9.03 11,792 Export price index (895-WO) 89 92 75 82 97 98 99 00 01 02 03 Import price index (895=WO) 0 0 85 73 83 IEyports 0 Inports Terms of trade (895-WO) 89 0 9 0 2 99 I B A L A N C E o f P A Y M E N T S 1983 1993 2002 2003 (US$ millions) Current account balance t o G D P (%) Exports of goods and services 7,865 26,264 54,907 70231 Imports of goods and services 0,lS 33,721 55,365 73,760 ' T Resource balance -2,253 -7,457 -458 -3,529 Net income -1430 -2,744 -4,554 -5,427 Net current transfers 1760 3,768 3,490 2 3 6 Current account balance -1,923 -6,433 -1522 -6,850 Financingitems (net) 2,075 6,741 7,675 0.897 Changes in net reserves -152 -308 -6,153 -4,047 Memo: Reserves including gold (US$ millions) 2,253 V,762 38,051 44,957 Conversion rate (DEC,iocal/US$) 226.0 11046.7 1509,471 1,496,668 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) C o m p o s i t i o n o f 2003 debt (US$ mill.] Total debt outstanding and disbursed 20.324 68,605 U1058 147.035 IBRD 2,336 5,285 5,367 52% A 5.214 IDA 8 4 n 2 89 83 G 23,OU 8 83 Total debt service 3,138 8,664 29,092 29,l72 iBRD 274 133 708 728 IDA 4 7 7 7 Composition of net resourceflows Official grants 98 403 Official creditors 327 -740 224 -12V Private creditors '09 6.04 6,901 -511 Foreign direct investment 46 622 863 1063 Portfolio equity 0 8 9 -133 2250 F World Bank program 86,624 Commitments 675 207 1,650 0 A IBRD - E- Bilateral Disbursements 486 354 1,031 276 6-IDA D-Othermltilaterd F-Private Principal repayments 115 753 443 502 C-IMF G- Short-term 96 Annex 16: Maps TURKEY: GAS SECTORDEVELOPMENT 97 IBRD 34191 TURKEY Kirsehir Hirfanli Reservoir GAS SECTOR DEVELOPMENT PROJECT EXISTING GAS PIPELINES EXISTING COMPRESSOR STATIONS PROVINCE CAPITALS* TURKEY EXISTING OIL PIPELINES NEW COMPRESSOR STATIONS NATIONAL CAPITAL Tuz GAS PIPELINES UNDER CONSTRUCTION NATURAL GAS IMPORTS PROVINCE BOUNDARIES G
World Bank Group · Project Appraisal Document
Turkey - Gas Sector Development Project
View original document
The full text is hosted by the publishing organisation. lawenc.com indexes the metadata and links to the official source.
Full text
Key facts
Organisation
World Bank Group
Document type
Project Appraisal Document
Country
Türkiye
Source
World Bank