Turkey - Baku-Ceyhan Oil Export Pipeline Technical Assistance Project

Document of The World Bank Report No. T-6970 TU TECHNICAL ANNEX TURKEY BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT AUGUST 19, 1996 Industry, Trade and Finance Operations Division Country Department 1 Europe and Central Asia Region  CURRENCY AND EOUIVALENT UNITS Currency Unit = Turkish Lira (TL) June 30, 1995: US$1.00 = 43,888 TL January 30, 1996: US$1.00 = 62,387 TL June 30, 1996: US$1.00 = 81,224 TL WEIGHTS AND MEASURES 1 barrel (bbl) = 0.159 cubic meters 1 metric ton of oil (0.85 specific gravity) = 7.4 bbl 1 ton crude oil equivalent (toe) = 1 ton of crude oil = 41.2 MCF of natural gas = 1.167 cubic meter of natural gas 1 cubic meter (cm) = 35.3 cubic ft. 1 BCM = 1 billion cubic meters ABBREVIATIONS AND ACRONYMS AIOC = Azerbaijan International Operating Companies BOTAS = Boru Hatlari ile Petrol Tasima A.S. CAR = Central Asia Region CEAS = Cukurova Electric Company DSI = State Hydraulic Authority EIE = Electricity Survey Administration FSU = Former Soviet Union GOT = Government of Turkey KEPEZ A.S = Kepez Electric Company LNG = Liquidfied Natural Gas MENR = Ministry of Energy and Natural Resources MT = Million Metric Tons MTA = Mineral Research Institute PIU = Project Implementation Unit PSA = Production Sharing Agreements SEE = State Economic Enterprises SFYP = Seventh Five-Year Development Plan SOCAR = Azerbaijan National Oil Company SPO = State Planning Organization TEAS = Turkish Power Generation and Transmission Company TEDAS = Turkish Power Distribution Company TKI = Turkish Lignite Enterprise TPAO = Turkiye Petrolleri Anonim Ortakligi TTK = Turkish Hard Coal Enterprise TUPRAS = Turkish Petroleum Refineries Corporation TURKEY - FISCAL YEAR January 1 - December 31  TURKEY BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT TECHNICAL ANNEX CONTENTS Page No. I. COUNTRY AND SECTOR BACKGROUND 1 A. Country and Energy Sector Background 1 B. Energy Sector Institutions and Regulatory Environment 2 C. BOTAS: The Petroleum Pipeline Corporation 3 II. THE PROJECT 6 A. Project Background 6 B. Project Objectives and Scope 8 C. Project Cost and Financing 8 D. Project Implementation and Procurement Arrangements 9 E. Disbursements and Audits of Accounts 11 F. Project Reporting, Monitoring and Supervision Arrangements 12 ANNEXES 1 BOTAS Organizations 14 2 Project Cost Estimate 15 3 Procurement Plan and Disbursement Schedule 16 4 Key Project Activities, Implementation Schedule and Project Performance Indicators 17 5 Supervision Plan 18   TURKEY BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT TECHMCAL ANNEX I. COUNTRY AND SECTOR BACKGROUND A. Country and Energy Sector Background 1. Background. Turkey's domestic production of oil and gas is insufficient to meet its fast growing demand and as a result its dependence on imported energy, particularly oil and gas, has increased significantly over the last two decades. It is expected to remain high in the foreseeable future. Under the Seventh Five-Year Development Plan (SFYP), 1996-2000, the growth of demand for primary energy is forecast to increase at an average annual rate of 5.3 percent and shall reach 85.8 million tons of oil equivalent (mtoe) by the year 2000. The demand for electricity is expected to reach 122 billion Kwh by the end of the plan period at an average annual increase of 8 percent. Imports of gas are expected to displace higher value petroleum products and lignite whose consumption is being reduced because of environmental concerns. 2. Turkey's most important domestic source of energy is hydroelectricity, which accounts for 40 percent of total electric power generation and 8 percent of primary energy supply. The exploitable hydropower potential is estimated at 31,000 MW, of which 10,500 MW has been developed and another 3,200 MW is under construction or planned to be developed by 2000. Abundant deposits of low quality lignite also exist -- estimated at 8.2 billion tons, half of which are of low calorific value and high sulphur content -- accounting for 36 percent of power generation and of primary energy. There are also limited quantities of low-quality high-sulphur hard coal and of oil and gas; proven hydrocarbon reserves consist of 250 million barrels of oil and 0.5 billion cubic feet of natural gas. Domestic production of hydrocarbon at about 70,000 bbl per day or 2.9 million tons/yr accounted for 10 percent of the domestic demand in 1995. This proportion is not expected to increase substantially because of the limited prospectivity of Turkey's geology. A greater utilization of domestic lignite and coal is severely constrained by environmental considerations. The balance of domestic energy demand is met, and is likely to be met in the future, by fuel imports, especially crude oil and petroleum products (estimated at 33 million tons by the year 2000), as well as natural gas (12 billion cubic meters in year 2000) which together would constitute 45 percent of primary energy supply. 3. One of the objectives of the SFYP is to meet the energy demand and the overall development of the economy at the least cost possible. In line with this objective, the Government of Turkey (GOT) has entered into long-term gas sales and purchase agreements between the countries of the Former Soviet Union (FSU) and Algeria for the supply of 6 billion cubic meters (bcm) per year and 2 bcm per year, respectively. The gas from Algeria is in the form of Liquid Natural Gas (LNG) to be received at the recently completed LNG receiving terminal at the Marmara Sea, while the gas from FSU is through an intracountry pipeline from  -2- Ukraine in transit through Romania and Bulgaria to Turkey. Additionally, GOT has initiated new gas supply contracts with Russia and Algeria as well as Turkmenistan, Nigeria and Qatar. 4. With regard to crude oil, Turkey had depended on a major source of supply from Iraq through the Iraq-Turkey crude oil pipeline which was constructed in 1976, and later expanded to carry about 73 million metric tons of Iraqi crude for export through the Port of Ceyhan. Following the suspension of the pipeline operations in August 1990 under a resolution of the United Nations regarding the embargo on Iraq, Turkey had lost not only revenue from the transportation of Iraq's crude oil, but also a secured source of supply of a major portion of its crude oil requirements. As a result, Turkey decided to pursue alternative sources for reliable crude supply. 5. The countries of Azerbaijan, Kazakhstan and Turkmenistan in the Central Asia Region (CAR) have significant proven reserves of oil and gas. Due to their landlocked nature, and the constraints in capacity of the existing infrastructure for transporting oil, the opportunity for the export of their crude to international markets, particularly Western markets, in large quantities has been limited. As a result, it has been difficult for them to rapidly develop these resources for export and to use the revenues from the sale of the oil and gas for economic development. A practical way to overcome this problem is to construct dedicated export pipelines which would transit through several countries (such as Azerbaijan, Armenia, Georgia, Iran, etc. ). 6. Based on Turkey's strategic geographical location and the existence of excess crude oil handling capacity at its port of Ceyhan on the Mediterranean coast, a dedicated transit pipeline through Turkey for the export of crude from Azerbaijan and the CAR countries could be a viable option for the resolution of this problem. In this regard, Turkey has decided to undertake a feasibility study that would evaluate the viability of such an option. If found viable, the proposed transit pipeline would resolve a variety of issues. First, it would provide an alternative option for the export of crude from Azerbaijan and the CAR countries, and hence stimulate the rapid development of crude oil reserves in these countries; second, it would provide Turkey a reliable source of crude oil for its consumption, and also provide the region with a viable route which would be attractive to the producers and financeable by private investors; and last, it would reduce the bottleneck of oil and other products through the congested Straits (Istanbul Strait, Marmara Sea and Canakkale Strait)1 that link the Black Sea to the Aegean Sea. B. Energy Sector Institutions and Regulatory Environment 7. Energy Sector Institutions. Energy development in Turkey is dominated by the public sector. The Ministry of Energy and Natural Resources (MENR) is responsible for the planning, 1/ The Straits connecting the Black Sea to the Mediterranean Sea were defined in November 24, 1994, by the Rules and Recommendations of the International Maritime Organization to consist of Istanbul Strait, Marmara Sea and Canakkale Strait.  -3- coordination and development of energy resources in Turkey. The Turkish Hard Coal Enterprise (TTK), the Turkish Lignite Enterprise (TKI), the Turkish Petroleum Corporation (TPAO) and the Mineral Research Institute (MTA) have responsibility for the extraction of fossil fuels and radioactive materials. Design and construction of public sector hydroelectric projects is entrusted to the State Hydraulics Authority (DSI). Turkish Power Generation and Transmission Company (TEAS) is responsible for the generation and transmission of almost all the electricity produced in Turkey and for implementing the Government's program of rural electrification and the construction of all public sector generation and transmission facilities, with the exception of all public sector hydroelectric plants for which DSI has responsibility. The Turkish Power Distribution Company (TEDAS) has responsibility for distributing electricity produced by TEAS. The production, transport and marketing of petroleum products are undertaken respectively by Turkish Petroleum Refineries Corporation (TUPRAS), Boru Hatlari ile Petrol Tasima A.S. (BOTAS) and Petrol Ofisi (marketing and distribution). The Electricity Survey Administration (EIE) is responsible for renewable energy, hydropower surveys and implementation of the national energy conservation program. 8. Participation of the private sector in the energy sector in Turkey has been limited. It consists of two small electricity utilities, Cukurova Electric Company and Kepez Electric Company (CEAS and KEPEZ), some small coal mines, one refinery, joint ventures in petroleum exploration and some petroleum product marketing and distribution activities. 9. Regulatory Environment. BOTAS' operations and key long-term policies are dictated to a large extent by several public agencies which are mandated to implement the various policies of the Government. BOTAS' investments, like all investments in the energy sector, must be approved by the State Planning Organization (SPO) and MENR, to ensure consistency with the country's integrated long-term planning for energy consumption. The environmental aspects associated with BOTAS' operations are regulated by the Ministry of Environment. The financial affairs of BOTAS are governed by the Turkish Commercial Code. However, as regards the pricing of natural gas, BOTAS has been given complete responsibility for establishing the pricing in accordance with Decree No. 397. C. BOTAS: The Petroleum Pipeline Corporation 10. Organization. BOTAS was originally established on August 15, 1974 as an affiliate of TPAO to transport Iraqi crude oil to the port of Ceyhan in the Gulf of Iskenderun. Its mandate was later expanded to include: (a) transportation of crude oil (including locally produced crude) and natural gas; and (b) purchase and sale of natural gas. BOTAS is a state monopoly and, as such, has complete jurisdiction over the importation, distribution, and sale of natural gas as per Decree No. 397. BOTAS is also responsible for setting natural gas prices and transmission tariffs. Up to 1994, BOTAS was a subsidiary of TPAO. By Decree 95/6526 of February 8, 1995, it was spun off from TPAO and became a State Economic Enterprise (SEE). This decree allows BOTAS to engage in such activities as exploration and production, transportation, storage and refining of crude oil and natural gas outside Turkey. The operations of BOTAS are also governed by Law 233 which defines the operations of SEEs.  -4- 11. BOTAS is overseen by a Board of Directors which comprises six members, the Chairman, two representatives from MENR, one from Treasury and two Assistant General Managers. The Board is elected for a three-year period. BOTAS' management comprises a General Manager, who is also the Chairman of the Board of Directors, and four Assistant General Managers each responsible for Construction, Operations & Administration; Project, Planning, and Management Information Systems; Natural Gas Activities; and Procurement and Petroleum Activities. The four Assistant General Managers are supported by nine Department Heads and their staff. The managers of the Ankara and Ceyhan districts and the heads of such auxiliary functions as legal, public relations and security report directly to the General Manager. The organization chart of BOTAS is shown in Annex 1. 12. Personnel and Staffing. BOTAS' personnel policies are governed by the general Labor Law 1475, applicable to both public and private enterprises in Turkey. Under this Law, all labor contracts are subject to collective bargaining without government intervention. The results of the collective bargaining are subsequently approved by the Government. As of December 31, 1995, BOTAS employed 1,917 staff. The staff of BOTAS participate in various training programs to build their technical and administrative capabilities. These programs take place externally in various training centers in Turkey and abroad. 13. Facilities and Operations: (a) Crude Oil Transportation. BOTAS is responsible for the transportation of crude through four pipelines with a total annual capacity of about 80 million tons: (i) the Iraq-Turkey crude oil pipeline is 1,297 km long (in Turkish territory) and has a total annual capacity of 70.9 million tons; (ii) Batman-Dortyol pipeline is 511 km long with an annual capacity of 3.5 million tons; (iii) Selmo-Batman pipeline is 42 km long with an annual capacity of 0.8 million tons; and (iv) Ceyhan-Kirikkale pipeline is 448 km long and has an annual capacity of 5 million tons. These pipelines are supported by 9 pumping stations, 2 pigging stations, 43 storage tanks, 4 relief tanks, 3 ballast water treatment facilities, 1 slop tank and a marine terminal. As a result of the embargo imposed on Iraq by the United Nations in August 1990, the operation of the Iraq-Turkey pipeline has been suspended. The pipeline is expected to begin operations later this year as the United Nations has permitted Iraq to export about US$2 billion of crude to meet emergency needs. About 6.4 million tons were transported by the three other pipelines in 1994, representing a capacity utilization of over 65 percent. The construction of these pipelines along with the Russian-Turkey gas pipeline was managed by BOTAS 14. (b) Natural Gas Transportation and Trade. The natural gas transmission pipeline linking the Russian Federation (Russia) gas export system to Turkey is 842 km long from Bulgaria border to Ankara. The high-pressure pipeline (75 bar) is comprised of linepipes ranging from 12-36 inches in diameter. It is also supported by 31 line valves, 9 pigging stations and 1 compressor station. Construction of a second compressor station started in 1995. Construction of an LNG import terminal in Marmara Ereglisi was completed in 1995. The terminal is used for receiving, storing and regasifying LNG for injection to the pipeline system. The terminal is designed to receive imports of up to 2 billion m3 of LNG annually.  -5- 15. In February 1986, BOTAS and Russia through SOYUZGAZEXPORT, entered into a Purchase and Sale Agreement for a period of 25 years for the supply of up to 6 billion m3 of natural gas per year. BOTAS also has an agreement with Algeria to purchase up to 2 billion m3 of natural gas per year. A total of 5.4 billion m3 of natural gas was imported from Russia and Algeria in 1994. In 1995, BOTAS signed a contract with Nigeria for the supply of 0.9 billion m3 starting 1999. More recently, it has reached agreement with Turkmenistan for the supply of 15 billion m3 of natural gas over a period of 30 years, starting in 1998. In order to secure a further supply of gas, BOTAS is investigating the possibility of procuring natural gas and/or LNG from Iran and Qatar. 16. Turkey initially started using natural gas in 1987 for power generation; residential and commercial usage followed primarily in two big cities, Istanbul and Ankara. Industrial usage of natural gas started in 1989. Efforts are being made to encourage the establishment of more regional and local natural gas distribution companies to facilitate industrial, commercial and residential usage. 17. Long-Term Plan and Investment Program. BOTAS' long-term plan is based on SPO's detailed projections of the country's natural gas consumption, which is expected to grow at about 12 percent annually and to reach 40 billion m3 by the year 2010 and 63 billion m3 by the year 2025. In order to meet the demand for natural gas, plans are being made for extending the current pipeline routes, increasing storage capacities and for establishing natural gas distribution companies within the cities. The construction of the Eskisehir and Kosekoy Distribution Lines which would carry the gas from the main import pipeline to the industries in the Thrace, Izmit Bay, Bursa, Bilecik, Eskisehir and Ankara regions is ongoing. 18. Studies are ongoing for: (a) extending the Russian-Turkey natural gas pipeline to the Aegean and Southern parts of Turkey; (b) constructing a Georgia-Turkey pipeline which would supply natural gas to the Eastern part of Turkey, especially Erzurum; (c) building an Iran- Turkey-Europe natural gas pipeline; and (d) assessing the possibility of using the gas reserves in Silivri and the domes in the Salt Lake as underground storage in order to allow for a more efficient management of supplies during the peak demand periods. Finally, evaluation of the feasibility study for building a new LNG import terminal in Iskenderun and/or Izmir is ongoing. 19. As regards crude oil, in addition to the study to be financed under the proposed loan, other projects are being considered. The Governments of Turkey and Turkmenistan are undertaking a study which will review the possibility of transporting crude oil by pipeline from Turkmenistan to Europe via Turkey. In addition, a study is ongoing for transporting crude oil from the Ceyhan marine terminal to Ukraine and/or other Black Sea countries via Samsun.  -6- II. THE PROJECT A. The Project Background 20. The Government of Turkey has requested a World Bank technical assistance loan to undertake a feasibility study and a general environmental audit of several route options for an oil export pipeline which would pass through Turkey starting from Baku in Azerbaijan and ending at Ceyhan Marine Terminal in Turkey. The proposed pipeline transmitting through Turkey would transit through several countries. If found viable, the pipeline would provide for Turkey, a reliable and diversified source of crude supply as well as revenue from the transport of the crude. Furthermore, it would provide a reliable alternative route for the export of crude oil from Azerbaijan and other countries in the CAR to international markets, as well as contribute to enhancing the regional cooperation and accelerating the development of the oil resources of the region. Hence, BOTAS on its own and in association with major oil companies active in Azerbaijan, has undertaken preliminary screening of the possible routes for exporting crude oil from the land-locked region to the International markets and has concluded that the inland routes from Baku to Ceyhan through either Georgia or Armenia are the most attractive options and should be studied in greater depth and detail. 21. A World Bank mission that visited Ankara from February 15 to 17, 1996, examined the route analysis done by BOTAS, and recommended that prior to undertaking a detailed design and engineering study of a particular route, a feasibility study to evaluate the technical viability and environmental sustainability of several route options should first be undertaken. The mission and the Turkish authorities agreed that the proposed study to be financed by the World Bank should be undertaken with the assistance of internationally-reputable consultants. The consultants shall review and update the prefeasibility studies already done by BOTAS, taking into consideration such evaluation parameters as pipeline capacity, technical and economic viability, environmental sustainability, least cost to the oil shippers and other factors that may be pertinent. On the basis of this review, the consultants would recommend an optimum route which is technically viable, cost effective and environmentally sustainable. 22. Regional Development. In 1991, Azerbaijan started the tender rounds for development of the Azeri, Chirag and deep water portion of Gunashli oil fields. After some extended negotiations, on September 20, 1994, a Production Sharing Agreement (PSA) for development of these fields was signed between the State Oil Company of Azerbaijan (SOCAR) and eleven foreign oil companies (BP, AMOCO, LUKOIL, UNOCAL, STATOIL, ITOCHI, TPAO, EXXON, PENZOIL, RAMCO and DNKL). The PSA was then ratified by Azerbaijan Parliament and became effective on December 12, 1994. The PSA requires that the foreign oil companies finalize, as soon as possible, the arrangements for financing, constructing and operating of a main export pipeline capable of transporting the envisaged volume of oil to its members. 23. Azerbaijan International Operating Company (AIOC) is a joint venture company formed by the eleven foreign oil companies in order to provide the consortium with a vehicle to carry  -7- out the operations mandated by the PSA. AIOC's headquarters is in Baku, Azerbaijan. The consortium through AIOC is planning to develop Azeri, Chirag and the deep water portion of Gunashli oil fields so as to achieve an estimated peak production of about 700,000 barrels per day. There are a number of other oil companies operating in the region under various PSAs, that have either been concluded or are at the final stages of negotiations for development of the other Caspian offshore discoveries and prospects. Since there are several oil producers in addition to AIOC, working in Azerbaijan and in the CAR, a main export pipeline is needed to complement the existing infrastructure for transporting the oil produced by these companies. 24. Two routes to the Black Sea, one via Russia and one via Georgia have been under consideration for AIOC's early oil production. The first one is 1,346 kms long and follows the existing pipelines to the Russian Port of Novorossiysk. The severe port congestion caused by the ongoing trade, the harsh climatic conditions at Novorossiysk during the late autumn, winter and early spring which limits tanker loading to approximately hundred and eighty (180) days per year and the lack of spare capacity to handle a substantial volume of additional export, are the obvious drawbacks of utilizing this route beyond the volumes anticipated for the early oil production. The second route is 795 kms long and follows the ancient pipeline built by Nobel in the late 19th century to the Port of Batumi in Georgia. Although shorter than the first route, it is likely that the sea terminal for this option will be near the new port of Poti rather than Batumi. Other significant shortcomings to these routes include: (a) additional new investments in port handling facilities and storage; and (b) the fact that both routes would terminate at the Black Sea, and would imply that the export crude oil would have to pass through the already heavily congested Straits. This concerns Turkey greatly because of the potential environmental and safety hazards. 25. The other likely route via Iran to the Persian Gulf, although it provides easy access to the markets of the Far East, would require the longest pipeline and, would be the most expensive to construct, maintain and operate. The most promising route for transporting the expected large volume of oil to the International markets therefore appears to be the construction of a dedicated export pipeline from Baku via Georgia or Armenia to the Ceyhan Marine Terminal in Turkey, on the Mediterranean Sea. Since a significant portion of the oil to be exported would be bought by Turkey for its own use, it is envisaged that the proposed routes through Turkey would inspire the confidence of the international banking community, whose support is essential in obtaining financing for this project. 26. Constraints of the Straits. Traffic through the Straits is governed by the 1936 International Montreux Convention which allows free passage of all commercial vessels. However, a series of accidents along the Straits, combined with growing ecological concerns, prompted the Government of Turkey in 1994, to implement new regulations aimed at improving the safety of the passage of vessels through the busy and vulnerable Straits. As a means of ensuring safety of traffic through the Straits, the International Maritime Organization Safety  -8- Committee subsequently approved complementary rules and recommendations to regulate the passage of ships carrying hazardous cargo (including oil tankers), longer than 200 meters or having a draft greater than 15 meters, through the Straits. These safety rules and recommendations will permit to regulate the number of ships carrying hazardous cargo. In addition, the rapidly increasing dry cargo and local traffic through the Straits will limit the passage of oil tankers still further. 27. When the current plans for developing the oil fields of Azerbaijan, Kazakhstan, Russia and Turkmenistan are carried through, the export volume of oil that will reach the Black Sea is expected to be about 150 mt per annum. In the absence of a pipeline to a Mediterranean port, the export of this volume through the Black Sea would further exacerbate the bottleneck of traffic in the Straits. The only option of interest to Turkey for overcoming this bottleneck is the construction of a cross-country pipeline for transporting oil directly from the production centers in Azerbaijan, Kazakhstan and Turkmenistan to the Turkey's export terminal at the port city of Ceyhan on the Mediterranean Sea. While all proposed pipeline routes are technically feasible, the final route would be the one that provides the most reliable, cost effective, environmentally sustainable and secure means of exporting the oil to the international market. B. Project Objectives and Scope 28. The objectives of the proposed Project are to: (a) identify and evaluate technically viable and environmentally sustainable pipeline routes for the export of up to 45 mt per annum of crude oil from Baku in Azerbaijan to the international markets through Ceyhan in Turkey, under various throughput assumptions; (b) conduct optimization studies of the routes so identified to arrive at the most robust pipeline route and configuration which merits further and more detailed technical, financial and economic evaluations; and (c) recommend a realistic commercial structure for building/constructing and operating the selected pipeline. C. Project Costs and Financing 29. The estimated cost for the proposed Project is US$5.25 million of which US$5.0 million is in foreign currency and US$0.25 million in local currency. The proposed Bank loan which is to be provided as a fixed rate single currency loan, is for US$5.0 million, and would cover the foreign currency requirements of the proposed Project. The loan would be provided to GOT to be onlent to BOTAS in US dollars under similar conditions as the loan for implementing the proposed Project. The local costs would be borne by BOTAS and would be in the form of support services, taxes, office space and facilities. Annex 2 summarizes the project cost and financing plan of the proposed project.  -9- D. Project Implementation and Procurement Arrangements 30. Project Implementation Schedule. BOTAS, the only state-owned company in Turkey authorized to construct and operate international and domestic petroleum, petroleum products and natural gas pipelines, would be responsible for implementing the proposed study with assistance of internationally reputable pipeline engineering consultants. In order to facilitate the implementation of the study, the following actions have been taken by both GOT and BOTAS: (a) GOT has established a Steering Committee, comprising representatives from the Ministry of Energy and Natural Resources, the Ministry of Foreign Affairs, the Undersecretariat of Treasury, BOTAS and TPAO to review the outcome of and oversee the progress of the studies; (b) GOT has initiated discussions with the Governments of countries through which the proposed pipeline would transit. The Government has informed the Bank that discussions between the Governments of Georgia and Azerbaijan to secure support for the study are proceeding well. However, discussions are still to be initiated or are on going with other possible transit countries. In the event that positive response and support from these other countries is not received prior to contract negotiations with the consultants, the route options through these countries would not be included in the study; and (c) BOTAS in consultation with the Bank's appraisal mission has established a Project Implementation Unit (PIU) and has assigned its managers and key personnel for supervision of the consultant and day to day operation of the study. The terms of reference of the feasibility study was finalized during the appraisal. 31. Procurement Arrangements. An internationally-reputable consultant will be selected in accordance with the World Bank Guidelines for the use of Consultants by its borrowers to conduct the study. The Bank's guidelines including the selection process as well as evaluation methodology were explained to the PIU manager during the appraisal. In addition, the Bank staff assisted BOTAS in developing the appropriate Letter of Invitation (LOI) in line with Bank guidelines for appointment of consultants. The timely selection of consultants is a key to expeditious implementation of the proposed Project. Invitations to a short list of consultants were issued on July 19, 1996 so that the selected consultants could be invited for contract negotiation in late September, and the consultant can mobilize and start its assignment by October 1996. It is expected that the feasibility study be completed by December 31, 1997 and the closing date for the proposed loan is expected to be June 30, 1998. Procurement arrangements are summarized in Annex 3, while the detailed project implementation schedule is summarized in Annex 4. 32. Introductory Meetings. Upon the consultant's mobilization and review of the available reports and data, a series of introductory meetings will be held in Ankara in order to: (a) meet with and be briefed by members of the Steering Committee; (b) present the proposed approach and methodology, i.e. draft Inception Report; (c) solicit and record all comments and suggestions made by the Committee and other participants; and (d) acquire all additional data needed to perform the study. During this meeting, GOT will inform BOTAS and the consultants of the progress of its discussions/agreements with the transit countries (such as Azerbaijan, Armenia, and Georgia) regarding support and no objection for the study. In addition, GOT would obtain, by no later than December 31, 1996, the permits and approval from the Governments of the  -10- transit countries to enable the consultants to carry out the portion of the study through these countries. 33. Preparation and Review of Inception Report. Within six weeks of contract effectiveness, the consultant shall prepare and submit a draft Inception Report for review and comments by BOTAS, World Bank and the Working Group describing: (a) consultant's understanding of the project scope and objectives; (b) the methodology to be applied in preparing the feasibility study; and (c) consultant's proposed table of contents and organization of the final feasibility report. 34. Environmental Aspects. In accordance with OD 4.01, the proposed Project has been classified as Category C as it would not involve any construction, or laying of line pipes. However, a general environmental audit of the selected inland route highlighting areas of delicate, unusual or special ecology, major archaeological sites and national parks would be carried out. In addition, an assessment would be made of the impact of the route conditions on the integrity of the pipeline by identifying the portions of the route susceptible to frequent earthquakes, landslides, avalanches, floods and other natural disasters. Furthermore, an assessment of the cost of the preventive measures necessary to reduce the environmental impact of the route on the integrity of the pipeline system to an absolute minimum would be undertaken. This environmental audit would be undertaken in accordance with the Environmental Impact Assessment guidelines of Turkey which are consistent with internationally accepted standards. 35. Draft Final Feasibility Report. About seven months after approval of the Inception Report by BOTAS, the consultants shall prepare and submit for review a draft final report covering all agreed items included in the approved table of contents. The draft report shall contain a complete description of the recommended pipeline route and configuration as well as the corresponding technical, financial, economic and environmental justifications. Within one month after the receipt of the draft final report, BOTAS/PIU will organize a joint session of the Steering Committee. The PIU and representative of the World Bank will review the consultant's findings. The consultant shall attend this meeting to present the findings of the feasibility report, provide answers to the questions raised and record all comments, modification, and revisions suggested by the attendants 36. Submission of Final Feasibility Report. Within two months after the joint session, the consultant shall prepare and submit the Final Feasibility Report after incorporating all the above comments and suggested revisions. The work done under the proposed feasibility study will be documented in a final report comprising: (a) Executive Summary; (b) Preliminary Design and Implementation Plan and Schedule (Volume I); (c) Capital Cost, Economic and Financial Analysis based on various throughput assumptions to be agreed with BOTAS (Volume II);  -11- (d) Commercial Structure (Volume III); (e) Audit (Volume IV). E. Disbursements and Audit of Accounts 37. Disbursements against the proposed Bank loan are to be financed at 100 percent for consultants' services. The schedule of disbursement for the proposed Bank loan is summarized in Annex 3. The disbursement profile is judged realistic because: (a) the study period is of a short duration (less than two years); and (b) the Bank would provide all the necessary assistance during the course of the study. 38. In order to expedite urgent payments to be made locally, a Special Account with a ceiling of US$500,000 would be established in the Central Bank of Turkey and managed by the Treasury and would be replenished in accordance with Bank procedures. Urgent small payments in local and foreign currencies would be effected locally through this Special Account. All other payments to consultants would be made directly through the Loan Account (direct payment procedures). The Bank would replenish the Special Account on the basis of monthly statements of actual expenses. Special Account replenishment application should be submitted on a monthly basis or more frequently if one-half of the amount deposited has been withdrawn. Supporting documentation would be retained by the Treasury and BOTAS and be made available for review by the Bank supervision missions and by external auditors. As it is anticipated that there would be only one contract, all withdrawal applications would be fully documented. The Special Account and the project accounts would be audited and the audit certificate should be furnished within six months at the end of the financial year. The audit reports should include a statement verifying that the amounts disbursed against the SOEs have been used for the purpose they were intended. The signing of a separate Subsidiary Loan Agreement by the Treasury and BOTAS has been set as a condition of effectiveness of the Loan. 39. At the request of the Borrower and, based on the project needs, the Bank would make an appropriate initial deposit or deposits into the Special Account up to the amount of the authorized allocation. The estimated schedule of disbursements is based on the proposed Project being completed within two years of loan effectiveness and this is summarized in Annex 3. 40. Agreements Reached. During negotiations, GOT agreed to: (a) obtain for the consultants by December 31, 1996, necessary permits and approvals required from the transit countries on whose territories the consultants will implement the study; and (b) provide the guidelines for implementing the environmental audit to the Bank for review and no objection before finalizing the contract for the study with the consultants. Further, it was agreed that, as conditions of effectiveness, GOT should: (i) provide evidence, satisfactory to the Bank, that the Governments of the transit countries have no objection to the study; (ii) sign a Subsidiary Loan Agreement with BOTAS, the loan beneficiary; and (iii) ensure that BOTAS signs the contracts with the consultants to carry out the study.  -12- 41. Project Sustainability. The proposed study would assist GOT to independently evaluate the technical and economic viability of a pipeline route for the export of crude oil from the CAR. Confirmation of the viability of such a route would eliminate the delay in establishing a viable option that would provide a reliable source for the supply of crude to Turkey and for export of crude oil from the region. 42. Lessons Learned from Previous Bank Involvement. Lessons learned from previous Bank activities in Turkey and in comparable projects elsewhere, are part of the project design. These include: (a) ensuring full involvement and commitment of both the Borrower and the Beneficiary in the planning and implementation of the project. The Borrower has initiated discussions with the Governments of transit countries to obtain their no objection and support for the study. The receipt of confirmation of such support by the transit countries is one of the conditions for loan effectiveness. The Beneficiary has already instituted a group of highly qualified staff for the PIU to supervise and work closely with the consultants; (b) ensuring that the study is comprehensive and done in a timely manner by requiring that the study be undertaken with the assistance of an internationally- reputable engineering company to be selected in accordance with Bank procedures; and (c) ensuring timely and effective implementation by making a conscious and planned effort to allocate adequate resources for the supervision of the study. F. Project Reporting, Monitoring and Supervision Plan 43. BOTAS would be responsible for maintaining the Project Account and the Treasury would maintain the Special Account in accordance with accounting practices and standards which are acceptable to the World Bank. The project account, together with the Special Account would be audited in accordance with generally accepted accounting practices and standards commonly used in Turkey by suitably qualified independent auditors acceptable to the World Bank, and the audit report would be submitted to the World Bank within six months of the close of GOT's fiscal year. Auditors acceptable to the World Bank will be retained by BOTAS to review the accounting systems and supporting internal procedures and practices and recommend any needed changes as in other banks. As is the case for most Bank-financed projects in Turkey, Treasury controllers and seven bank auditors (of Treasury) are acceptable to the Bank and would be used for auditing the accounts. 44. In order to facilitate Bank monitoring, quarterly reports would be required no later than one month after the close of the relevant quarter, as well as consolidated reports on project implementation covering the conduct of studies and decisions taken or proposed to be taken on key issues to enhance the quality of the studies.  -13- 45. Supervision Arrangements. The World Bank supervision mission would take into account the urgency of the studies and achievement of its milestone so that GOT, the Steering Committee and BOTAS' decision-making will be aided by the Bank supervision missions which would consists of a task manager and members with specialty in engineering, procurement, finance and economics, as may be required. The World Bank supervision with estimated 24 staff weeks (over one and half years) would take the following form: (a) October 1996. To launch the project and participate at the PIU and consultant's review meeting; (b) November 1996. To review the consultant's inception report with the PIU and Steering Committee; (c) March 1997. To review progress of the study with the PIU; (d) June 1997. To review the consultant's draft final report with the PIU and the Steering Committee; and (e) October 1997. To review the consultant's final reports and review with GOT the possible follow up measures on implementation of the Baku-Ceyhan oil export pipeline and prepare for the loan closing. 46. Govermnent of Turkey and BOTAS' Contribution to Supervision. In addition to the periodic reports to be provided to the World Bank, PIU with the assistance of the consultant will prepare an issues paper in preparation for each supervision mission. At the end of each mission, an aide memoire will be prepared summarizing the mission's major findings, the issues requiring GOT's and the Bank's attention and proposed actions to resolve identified problem areas.  BOTAS Organization Chart Chairman & General Manager Foreign Assistant Assistant Assistant Assistant Inspection Economic Goeneral Manager General Manager General Manager General Manager Board Relations _ Anakara - _ General Manager, District Constructlon Petroleum Project F I nancial Chief Adminstrator Managemnt Department Activities Department Accounting _ & Advisors Department [He j Department C yhan--,-- - ,, -- 1 ; at Legal Districnt [Maritime & Natural Gas ;Research,. Personnel & Adio I Management Custom Works Department I Planning & | Training AdIvs ] | Department ______ Coordination | Department I _ _ _ _ | |