Turkey - Baku-Ceyhan Oil Export Pipeline Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 20539 IMPLEMENTATION COMPLETION REPORT (SCL-40890) ON A TECHNICAL ASSISTANCE LOAN IN THE AMOUNT OF US$ 5.0 MILLION TO THE REPUBLIC OF TURKEY FOR A BAKU-CEYHAN OIL EXPORT PIPELINE TECHNICAL ASSISTANCE PROJECT June 12, 2000 Energy Sector Europe and Central Region This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Elxchange Rate Effective June 1, 2000) Currency Unit = Turkish Lira (TL) TL618,633 = US$ US$ 1= = TL618,633 FISCAL YEAR January I to December 31 ABBREVIATIONS AND ACRONYMS AIOC Azerbaijan International Operating Companies BOTAS Boru Hatlari ile Petrol Tasima A.S. CAR Central Asia Region GoT Government of Turkey MENR Ministry of Energy and Natural Resources PIU Project Implementation Unit SOCAR Azerbaijan National Oil Company TPAO Turkiye Petrolleri Anoniin Ortakligi Vice President: Johannes F. Linn Country M[anager/Director: *Ajay Chhibber Sector M[anager/Director: Peter D. Thomson Task Team Leader/Task Manager: James S. Moose  FOR OFFICL USE ONLY CONTENTS Page No. 1. Project Data l 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 1 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 4 6. Sustainability 4 7. Bank and Borrower Perforrnance 5 8. Lessons Learned 6 9. Partner Comments 7 10. Additional Information 8 Annex 1. Key Performance Indicators/Log Frame Matrix 9 Annex 2. Project Costs and Financing 10 Annex 3. Economic Costs and Benefits 12 Annex 4. Bank Inputs 13 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 14 Annex 6. Ratings of Bank and Borrower Performance 1 5 Annex 7. List of Supporting Documents 16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   Project ID: P045073 Project Nanle: BAKU-CEYHAN TECHNICAL ASSISTANCE Team Leader: James Sayle Moose TL Unit: ECSEG ICR Tvpe: Core ICR Report Date: June 12. 2000 1. Project Data N/ame: BAKU-CEYHAN TECHNICAL ASSISTANCE L/C/TF Nwmber: SCL-40890 Coruntry/Department: TURKEY Region: Europe and Central Asia Region Sector/subsector: GP - Oil & Gas Transportation KEY DATES Original Revised/Actual PCD: 03/22/1996 EJfective: 12/30/96 03/20/97 Appraisal: 00/00/0000 MTR: 12/30/98 03/17/98 Approval: 09/12/1996 Closing: 06/30/98 03/31/99 Bon-iowerl/Implementing Agency: GOVERNMENT OF TURKEY/BOTAS Other Partners: STAFF Current At Appraisal Vice President: Johannes F. Linn Johannes F. Linn Cotuntry Manager: Ajay Chhibber Kenneth Lay Sector Manager: Peter D. Thomson Franco Batzella Team Leader at ICR: James S. Moose Akin 0. Oduolowu ICR Primary Autthor: Sanjay Sinha; Surekha Jaddoo 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory. HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Ouitconie: S Sustainabihit: L Institutional Developmnent Impact: M Bank Performance: S Borrowver Perfot7nance: S QAG (if available) ICR Qzuality at Entry: Project at Risk at An! Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Backiground The countries of Azerbaijan, Kazakhstan and Turkmenistan in the Central Asia Region 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 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 develop rapidly 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, Russia Turkey etc.). 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 oil from Azerbaijan and the Central Asian countries could be a viable option for resolution of this problem. In this regard, Turkey hadl 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 oil from Azerbaijan and the Central Asian countries, and hence stimulate the rapid development of crude oil in those countries; second, it would serve as a bypass around the congested Straits (Istanbul Strait, Marmara Sea and Canakkale Strait) that link the Black Sea to the Aegean Sea; and third it would provide an additional reliable source of crude oil supply for domestic consumption. Orieinal Obiectives The objectives of the proposed project were to: (a) identify and evaluate technically viable and environmentally sustainable pipeline routes for the export of up to 45 million metric tons per annum of crude oil from Baku in Azerbaijan to Ceyhan in Turkey; (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 and financing scheme for building/constructing and operating the selected pipeline. The scope of the project was limited to a feasibility study as the actual thruput of the pipeline was not known at the time of the study. A detailed engineering study would have been premature. 3.2 Revised Objective: There was no change in the objectives of the project. 3.3 Original Components: There were three components to this project. Component 1: A Feasibility Study including conceptual design, cost estimates, economic analysis and financing scheme. Component 2: Route Survey and Environmental Audit. - 2 -  Component 3: Training 3.4 Revised Components: The original components generally remained the same, only with minor changes. The survey of the alternate routes via Armenia was not done. 3.5 Quality at Entrv: Not rated. 4. Achievement of Objective and Outputs 4.1 Outcomelachietvementofobjective: The overall outcome of the project is rated as satisfactory, the feasibility study was completed and the results discussed between the Borrower, the implementing agency and the Bank's supervision team. 4.2 Outputs by components: Component l:Feasibility Study This component was fully completed. The feasibility study included a diameter optimization, conceptual design of pipeline, pump stations, terminal and ocean tanker loading facilities in Ceyhan, cost estimates, pipeline tariff calculation and determination of economic feasibility and a financing scheme for the proposed pipeline project. The component output is rated satisfactory. Component 2: Route Survey This component was fully completed in 1998. The route survey within the territory of Turkey included several alternative routes. In accordance with OD4.01, the proposed Project has been classified as Category C as it would not involve any construction activity; however, an environmental audit for the selected route was carried out. The component output is rated satisfactory. Component 3: Training Training was given to the PIU on pipeline optimization techniques, route selection, environmental audits, tariff calculations and economic analysis. The component output is rated satisfactory. 4.3 Net Present Valute/Economic rate of return: Net Present value or Economic Rate of return was not calculated for this project. 4.4 Financial rate of return: Financial Rate of Retum was not calculated for this project. - 3-  4. 5 Institutional developmenit impacie: BOTAS is the state owned company in Turkey authorized to design, construct and operate Oil & Gas pipelines. Only a very small number of staff from BOTAS were involved in the implementation of the study, therefore the development irnpact of the study on BOTAS was limited though not negligible. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors ouitside the control of government or implemienting agency: A factor that positively affected the project is that there is significant concern in the Turkish population about the potential increase in crude oil tanker traffic via the Turkish Straits (Bosphorus and Dardanelles) originating from the Caspian Region, and the enviromnental risks associated with it. Therefore the project received a significant amount of attention and interest from the Turkish population, which on balance favors a pipeline which would avoid the straits. This view was strengthened by forthright support from the US government which strongly favored a Baku-Ceyhan pipeline route for Caspian oil, long before the results of the feasibility study were known. 5.2 Factors generally subject to government control: For geopolitical reasons, the GoT had a strong interest in the prompt implementation of this project. The positive effect of this was that the study received full govemment backing and support throughout all stages. However, there was also a perception that the GoT had a considerable interest in a favorable evaluation of the Baku Ceyhan route compared to alternate pipeline routes. 5.3 Factors generally subject to implementing agency control: A key factor which positively affected the implementation of the project was that BOTAS as the implementing agency was able to provide very experienced staff which were able to give qualified support to the consultant for the Turkish pait of the pipeline section. 5.4 Costs and financing: The estimated cost for the project was 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 was provided as a fixed rate single currency loan, for US$5.0 million, and would cover the foreign currency requirements of the project. The loan was made to the Government of Turkey (GoT), but onlent to BOTAS in US dollars under similar conditions. The local costs were borne by BOTAS in the form of support services, office space and facilities. Actual costs were $2.94 million paid from the Loan and $0.25 million paid by BOTAS. 6. Sustainabilitv 6. / Rati(onale for suistainability riting: The study was to assist the Government of Turkey (GoT) to evaluate independently the technical and economic viability of a pipeline route for the export of crude oil from the Central Asian Region. Confirmation of the viability of such a route would: (a) strengthen its political support internationally; and (b) facilitate the ability of the Government to secure financing of the pipeline from private investors, commercial banks, and IFIs. The study did not confirn ( or not confirm) that the pipeline was the least - 4 -  cost option for exporting Caspian crude, but it did indicate it was feasible and potentially viable. The pipeline may well be built. 6.2 Transition arrangement to r egular operations: The feasibility study was fully completed, follow-up discussions with the Government of Turkey (GoT) and implementing agency are taking place on a regular basis. 7. Bank and Borrower Performance Bank 7.1 Lending: The request for this technical assistance loan was made by the Government of Turkey (GoT) to the World Bank. The project was prepared in compliance with all Bank guidelines at that time. While this project did not directly have any enviromnental impact, the borrower's obligation to conduct an environmental assessment of pipeline route options was strengthened. 7.2 Siupervision: The legal agreement drawn up by the World Bank and the technical annex states the conditionalities of effectiveness are Goverunent of Turkey (GoT) to: (i) provide evidence, satisfactory to the Bank, that the Governments of the transit countries on whose territories the project shall be carried out 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. The loan was declared effective on 03/20/1997, a delay from the original schedule of 12/3011996. World Bank staff on a supervision mission agreed to start the comprehensive analysis of the base route, and to undertake a desk study to evaluate the viability of alternative route options. 7.3 Overall Bank performance: The implementation progress was adequately monitored and reported. The performance ratings in the Project Supervision Reports (PSRs) were realistic. The Bank's supervision team, borrower and implementing agency worked together in a proactive and flexible manner. No deviations from Bank policies and procedures were made. The overall Bank performance is rated satisfactory. Borroier 7.4 Preparation: The Government of Turkey had taken certain steps to prepare for this project. (a) Political Sensitivity: The decision on the selection of export route or routes for crude oil from the Caspian Region (CAR) has been the subject of several discussions between the international producers represented by the Azerbaijan International Operating Companies (AIOC), the Azerbaijan National Oil Company (SOCAR), and the Governments of Georgia, Russia and Turkey. Although the Bank has not been directly involved in all of these discussions, it has maintained a position of neutrality and to the extent possible, expressed its willingness to assist the parties once an agreed decision has been made. There is, - 5 -  therefore, little danger that the Bank's support to Turkey's initiative to conduct this study could be construed as bias of the Bank in favor ( or against) a pipeline route through Turkey rather than through other countries. (b) Clearance from Transit Countries: Government of Turkey (GoT) initiated discussions between the Goverunents of Georgia and Azerbaijan to secure their support for the study. While the project was being negotiated with the Government, discussions were still to be initiated with other possible transit countries. It was determined that, in the event that positive responses from the Governments of these countries were not received prior to contract negotiations with the consultants, the route options through these countries would not be included in the study. (c) Cooperation with the Producers: In order to upgrade the credibility of the final route selected, it was prudent for Turkey to consult also w(ith the producers including those not represented by AIOC and also SOCAR. Turkey has confmed to the Bank that such consultation has taken place and both AIOC and SOCAR have expressed their no objection. AIOC has also informed the Bank that several of its shareholders, but by no means all of them, would be interested in financing and participating in the equity of a separate corporate entity that would build and operate a pipeline to transport oil from the CAR. The Turkish study could thus serve as a basis for AIOC shareholders' decision on their options for the pipeline issue. 7.5 Governmenit inmplen7entation pefformance: BOTAS, the sole state-owned company in Turkey authorized to construct and operate intemational and domestic petroleum, petroleum products and natural gas pipelines, was appointed by the Government to be responsible for implementing the study with assistance of internationally reputable pipeline engineering consultants. A Steering Committee composed of MENR, Ministry of Foreign Affairs, the Undersecretariat of Treasury, BOTAS and TPAO was established by Government of Turkey (GoT) to review the outcome of and oversee the progress of the study. The performance of this committee was satisfactory. 7.6 Implementing Agency: BOTAS established a Project Implernentation Unit (PIU) and assigned managers and key personnel for supervision of the consultant and day-to-day operation of the study. BOTAS and the government were in agreement with the World Bank that, since the actual throughput of the pipeline system is not yet known, a detailed engineering study at this stage is premature. The scope of the project was limited to a feasibility study that would evaluate the viabilily of the route options. This approach would contain the cost and complexity of the study and would facilitate its rapid implementation.The terms of reference for the study and the short list of consultants were finalized by the PIU in agreement with the Bank. The performance of the PIU was satisfactory 7.7 Overall Borrowver perfonnance: Satisfactory. 8. Lessons Learned This was a very small but highly visi'ble project. BOTAS could have easily financed the study itself but -6 -  requested Bank assistance in order to enhance the credibility of the study. For the Bank, this was quite an expensive project per dollar loaned. However, it places the Bank in a better position to evaluate the export pipelines from the Caspian (both oil and gas) and possibly to assist with their financing. 9. Partner Comments (a) Borroit'esr/inmplenienting agency: The implementing agency emphasizes that as an Independent engineering Firm, PLE GmbH has perforned the tasks within its scope of work at its Home Offices in Germany. BOTAS has attended the review and approval sessions as well as the seminars and trainings as set forth in the agreed project schedule. B. FURTHER REMARKS Background (3.1 third last paragraph) Although initially it might be the objective of the project to utilize the surplus crude handling capacity of the Ceyhan Terminal, it has eventually been decided to consider a new terminal exclusively dedicated to the project instead. Revised Components (3.4) The original components remained to a large extend the same, except the inclusion of the construction of a new export Terminal in Ceyhan and the Back-up consultancy Services acquired through an additional Agreement. Outputs by Components (4.2) The Feasibility Study was fully completed by the end of 1997 and approved by the World bank in August 1998. Net Present Value (4.3) IEconomic Rate of Return and Financial Rate of Return (4.4) Although they were not calculated, a software has been developed to reflect impact of alternative organizational structures and financing scenarios on basic economic and financial indicators like the Net present Value or Economic Rate of Return. Ratings for Achievement of Objectives/Outputs of Components (Annex 5) Content with the positive progress regarding the Project following the reaching of Agreement on basic Project Documents and Agreements, borrower/implementing agency perceive that main objectives of the study have been to a large extent attained, and therefore would be high rated. (h) Colinanciers: There were no other cofinanciers. (c) Otilerpurtne)s (NGOs/privatesector): There were no other partners. -7 -  10. Additional Information N.A. - 8 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: IndicatorlMatrix Projected In last PSR ActuallLatest Estimate Agreement on a specific most viable route N.A. No-objection given to Turkey by transit that is technically and environmentally country govemments of Azerbaijan and sustainable for export of crude oil from the Georgia to conduct survey. Caspian region through Turkey. Decision to build pipeline. Pipeline might be built. identification of source of funds for Source being identified. construction of pipeline. Output Indicators: IndicatorlMatrix Projected In last PSR ActuallLatest Estimate Identification of a viable pipeline route. N.A. Feasibility Study (including financial and economic analysis and environment audit) of pipeline to transport crude from Central Asia (Baku) to port of Ceyhan (Turkey) completed - pipeline feasible and potentially viable. Report accepted by BOTAS and pipeline might be built. Quantification of the environmental problems that would occur as a result of exporting large volume of crude through the Bosphorus Strait. Technical design of route and identification of materials and equipment required for constructing the pipeline. Establishing of a financing plan for the pipeline. End of project -9-  Annex 2. Project Costs and ]Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million 1. Financial and Economic Analysis, and Environmental 3.70 3.19 86.2 Audit 2/ 2. Route Survey I/ 1.45 0.00 0 3. Training I/ 0.10 0.00 0 Total Baseline Cost 5.25 3.19 Total P'roject Costs 5.25 3.19 Total Financing Required 5.25 3.19 1/Alternate route survey via Armenia was not carried out. Route surveys in Turkey were conducted. Feasibility Study was done by PLE. Some training was given to BOTAS personnel and training was given to the PIU on pipeline optimization techniques, route selection, environmental audits, tariff calculations and economic analysis. 2/ Total for PLE contract including all three components. Note: Total of 3.19 consists of actuals of 2.94 from World Bank and 0.25 from Government of Turkey (GoT). Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) _ ~~~Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works 0.00 0 0 () () _ () _ _ ()_ (0.00) 2. Goods 0.00 _ () () () () (0.00) 3. Services 4.90 0.25 5.15 Consulting Services a/ 0 (4.90) (0.00) (4.90) 4. Training 0.00 0.00 0.10 0.00 0.10 (0.00) (0.00) (0. I 0) (0.00) (0. I 0) Total 0.00 0.00 5.00 0.25 5.25 _ (0.00) (0.00) (5.00) (0.00) (5.00) a/Finn PLE was selected on a competitive basis in accordance with World Bank guidelines for Selection and Employment of Consultants, under the QCBS method, and was awarded a contract in the amount of US$2.94million. Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencics. - 10-  ' N.B.F= Non Bank Financed Project Financing by C omponent (in USS million equiv alent) Percentage of Appraisal Appraisal Estimate ActuaULatest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. 1. Financial and Economic 3.50 0.20 2.94 0.15 84.0 75.0 0.0 Analysis and Environmental audit 11 2. Route Survey 1.40 0.05 0.05 0.0 100.0 0.0 3. Training 0.10 0.05 0.0 0.0 0.0 1 / US$2.94m is total for PLE contract including all three components. -11-  Annex 3: Economic Costs and Benefits This was a technical assistance loan to finance a feasibility study; therefore, financial estimates were not made at appraisal nor at ICR. However, the firm PLE did an economic analysis on building of the pipeline in their study (see Appendix III of PLE report). It should be noted that the study did not confirm whether the pipeline was the least cost option for exporting Caspian crude. - 12 -  Annex 4. Bank Inputs (a) Missions: __ Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress ObjectSve IdentificationlPreparation 02/96 4 1 Task Manager I Senior Pipeline Specialist I Operations Analyst I Economist/Procurement Specialist Appraisal/Negotiation Appraisal 05/96 4 1 Task Manager I Senior Pipeline Specialist I Operations Analyst I EconomistJProcurement Specialist Negotiations 07/96 3 1 Task Manager I Operations Analyst I Procurement Specialist Supervision 07/97 S S 07/98 1 Task Manager S S 03/99 1 Task Manager S S ICR (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ (,000) Identification/Preparation 30.9 99.3 Appraisal/Negotiation 11.2 32.9 Supervision 15.2 72.8 ICR Total 57.3 205.0 Note: Actual/Latest Estimate data based on COS reports of 02/00 - 13 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU-Substantial, M=Modest, NsNegligible, NA=Not Applicable) Rating fMacro policies O H OSUOM O N * NA Sector Policies O H OSUOM O N * NA 9 Physical O H OSUOM O N * NA 9 Financial O H OSUOM O N * NA ? Institutional Development 0 H O SU 0 M 0 N 0 NA f Environmental * H OSUOM O N O NA Social 0 Poverty Reduction O H OSUOM O N * NA Gender OH OSUOM ON *NA f Other (Please specify) OH OSUOM O N * NA S Private sector development 0 H 0 SU O M 0 N 0 NA IZ Public sector management 0 H O SU O M O N 0 NA s Other (Please specify) O H OSUOM O N * NA - 14 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating ER Lending OHS OS OLu OUHU I Supervision OHS OS OU OHU 3 Overall OHS OS O U O HU 6.2 Borrowerperformance Rating s Preparation OHS OS O U Q HU I Government implementation performance O HS O S 0 U 0 HU I Implementation agencyperformance O HS OS 0 U 0 HU 9 Overall OHS OS 0 U O HU - 15 -  Annex 7. List of Supporting Diocuments (Available in Files) Memorandum and Recommnendation of the President (MOP) - Report #P-6970-TU Technical Annex - Report #T-6970-TU Loan Agreement -- Report # 4089-TU Feasibility Study (final report) by consulting firm PLE on transportation of crude oil from Baku to Ceyhan. Maps - 16 -