Azerbaijan International

Winter 2003 (11.4)
Pages 84-89

BTC Section - From Pipedream to Reality
Moving Along - The Pipeline is Being Laid

Above: A quarter of the BTC pipeline will be physically complete by the end of 2003 and work will continue on many sites throughout the winter months.

As 2003 ended, virtually all the arrangements needed to secure the financing of the Baku-Tbilisi-Ceyhan pipeline project had fallen into place. The last act of a highly complex two-year process began in early November with the decisions of the International Finance Corporation (IFC)-the private finance-lending arm of the World Bank - and the European Bank for Reconstruction and Development (EBRD) to supply credits of $250 million for the BTC pipeline.

In the weeks that followed, these decisions opened the way for export credit guarantee agencies in six countries - France, Germany, Italy, Japan, UK and USA - to finalise commitments to provide funding, guarantees or insurance cover on the loans being raised to fund the pipeline.

In parallel with these developments, four commercial banks - Societe Generale, ABN Amro, Citibank and Mizuho-selected by the BTC Company to lead efforts to raise internationally - syndicated funding of $1.2 billion for the project, were approaching other commercial banks. By mid-November, a total of 15 banks had agreed to underwrite debt of $1.8bn, which is $700ml more than is envisaged necessary in what amounted to an enormous vote of confidence in the viability of the project.

Subsequently, framework documentation in a number of languages has been produced and agreed upon by lawyers representing the many commercial and governmental interests underwriting the pipeline, with a view to wrapping up legal agreement around the borrowing regime by the end of the year. The first drawn down loan is likely to be made in January or February 2004.

Debt will comprise 70 percent of the BTC project's funding with the other 30 percent coming from equity funding from the Sponsor companies of the BTC Co. The consortium's share was agreed upon earlier in 2003 and has been in place since the summer in order to facilitate construction. The total bill for the project - including construction costs, borrowing and interest payments, professional fees, contingency reserve funds and line fill (the cost of initially filling the pipeline with oil) - is likely to reach $3.6bn.

The IFC/EBRD approvals followed more than two years extensive scrutiny of the project's environmental and social impact by the two institutions. The loans have been made at commercial rates of interest and are conditional on the project meeting its public commitments. They will be subject to regular audits by the lenders.

BP plc, the main sponsor of the BTC project, has also agreed with the EBRD to launch a Regional Development Initiative to create long-term jobs and sustainable development after pipeline construction is complete.

Below: Working on the pipeline right of way to the West of Tsalka in Georgia.

The IFC Rationale
On making its decision to back the BTC project, the International Finance Corporation (IFC) issued a report explaining its rationale and answering criticisms made by some non-governmental organisations (NGOs).

"The IFC feels strongly that these projects are sound," the report states. They are led by "strong project sponsors that take environmental and social issues seriously...The projects have carried out world-class Environmental and Social Impact Assessments and mitigation measures, implemented significant programmes and allocated over $37 million for environmental, social and community development."

Nine distinct benefits from BTC and associated projects are highlighted in the report. They include transit fee revenues, the establishment of high quality operations to international standards, the creation of a new route to international markets that will make the Caucasus region a major international energy player, and the provision of gas into domestic energy networks in Azerbaijan, Georgia and Turkey.

Other benefits mentioned are employment during construction, opportunities for local business, follow-on foreign direct investment, community investment programmes, and help in promoting economic and political links between the region and the West.

The report responds directly to claims about the project made by some international NGOs:

· On the route: "The route chosen was the only viable one..." Sections near Lake Tsalka and the Borjomi area in Georgia "will be the two most protected sections of pipeline in the world."

· On oil spills: "IFC is satisfied that the risks have been an acceptable level."

· On consultation: The many meetings held in the past two years make this "one of the most community and NGO interactive projects completed to date." The report states that Borjomi residents felt "they had been made fully aware of the risks from an oil spill and found them acceptable."

· On accountability: "IFC believes that the level of monitoring and transparency is unprecedented."

· On the legal framework: Nothing has been identified so far by the IFC "that may be inconsistent with the rights to life, liberty, fair trials, etc., conferred by the Universal Declaration of Human Rights or the European Convention on Human Rights."

· On land acquisition: BTC procedures "will raise the bar considerably in these countries...and be the benchmark and expectation for similar projects involving land acquisition in the future."

· On resettlement issues: "There are more than 750,000 people living in villages and towns within the vicinity of the 1,768 km pipeline which makes it remarkable that there is not even one instance of physical relocation."

· On compensation: "Rates are consistently higher than local market rates for any land type that the pipe-line traverses." The money "is contributing significantly to providing developmental benefits to households."

· On the Kurds: "In all respects, the situation of Kurdish speakers in relation to the project has been found to be identical to that of mainstream Turkish villages."

· On corruption: "The BTC Company...has in place management systems which will ensure transparency and fairness.

Below: Villages such as this one near Erzurum in Turkey are already seeing benefits from the BTC Community Investment Programme.

One Year of Progress
About a quarter of the physical work needed to build the Baku-Tbilisi-Ceyhan oil pipeline will be completed by the end of 2003 at a cost of $1.5 billion - just 16 months after the ceremonial pipeline-laying that marked the formal start of construction in September 2002.

Around $2.3bn of the overall $3bn budget has been committed, the project is on schedule for completion by early 2005, within budget, and it has already exceeded its employment target of 10,000 workers.

Rapid progress has been recorded since May when actual construction began. By late-November, more than 550 km of the pipeline right-of-way corridor had been prepared on the territories of Azerbaijan, Georgia and Turkey, about 250 km of trench dug, 400 km of pipe strung out alongside the trenches prior to welding and laying, 350 km of pipeline welded and another 300 km of pipe prepared for welding. Several construction camps had been built and about 11,300 people were working on the project.

During the winter months, pipe-laying and other construction activities will continue in accessible regions in each country. Completion of the foundations for most of the eight pump stations before the worst weather set in will make it possible for construction to be maintained even at sites in mountainous terrain. Equipment for the stations will be delivered during the winter.

Good progress also is being made on developments at the Mediterranean port of Ceyhan where work is moving ahead on construction of a new 2.5 km long jetty and seven storage tanks, each with a capacity of 950,000 barrels. On completion, the expanded terminal will be able to load two VLCC (very large crude carrier) tankers simultaneously, each at a rate of 60,000 barrels of oil per hour.

Left: The Director of the Centre for Archaeological Studies in Tbilisi, Georgia, with finds from the BTC route.

At the other end of the line, terminal expansion at Sangachal, involving work for both the BTC project and development of the Azeri-Chirag-Gunashli oil field, is about two-thirds done. Two new storage tanks, each 22m high and 100m in diameter, are being built and construction of the BTC head pumping station has commenced. Sangachal's storage capacity will reach 2.5mn barrels of oil on completion of the work.

These achievements have coincided with complex financial agreements in Washington and London, discussions with 450 communities along the route and agreement with many on a $37 million programme of social and environmental investment. Numerous regulatory authorities, civil society organisations and international financial bodies have been involved, 11,000 pages of documentation have been prepared and issued by the BTC Co. and compensation payments made to about half the 50,000 individual land owners, municipalities and government departments.

According to the present plans, the Azerbaijani segment of the line will be commissioned in September 2004, with the Georgian segment following in November and the three Turkish segments by the end of the year or early 2005. Several months of pipeline integrity testing and filling of the line will follow, with loading of the first tanker at Ceyhan expected in Spring 2005.

By the time the BTC pipeline is completed, it is expected to have involved 52 million manhours of effort. Almost 150,000 joints of linepipe, each 12m in length and weighing some 655,000 tonnes in total, will have been laid.

Eight pump stations, each covering 15-20 hectares, will have been built. And more than 100 block valves, typically measuring five meters high and weighing about 30 tonnes, will have been incorporated into the pipeline to enable it to be isolated in sections.

Economic Impact
With BTC construction a reality, statistics from the Azerbaijani and Georgian governments are reflecting the impact the BTC project is having on national economies.

Thanks in part to new export opportunities being opened by the BTC route, Azerbaijan's oil and gas sector expects $2.5 billion to be invested in the industry in 2004 - 90 percent of all the new resources likely to be invested in the economy next year. Total foreign direct investment in Azerbaijan in 2004 is expected to reach $3bn - the great majority being in the hydrocarbons sector. The national economy is set to grow at an annual rate of 9 percent in 2004 on the back of rising oil and gas production.

In Georgia, economic growth is at a six-year high, with the influence of the BTC project accounting for about half the upsurge. A recent report by The Economist Intelligence Unit (EIU) found that activity associated with construction of the BTC route is having a significant impact in every sector of the economy.

"The only foreign direct investment (FDI) of note is the construction of the BTC oil pipeline," it stated. "Inflows of FDI will be sufficient to finance the external deficit, and activity in this sector will result in an increase in employment and wages, spurring a resurgence in domestic demand. Pipeline activity will also have important knock-on effects in some related sectors, such as telecommunications and transport."

The EIU predicts 8 percent growth in Georgia in 2004 rising to 10 percent in 2005. According to figures issued by the Georgian International Oil Corporation, almost 2,700 Georgian citizens were engaged in pipeline construction at the end of October 2003, including more than 1,000 in building processes and 1,100 in construction of BTC infrastructure. Figures released by the IFC and EBRD in November indicate that over the life of the pipeline, Azerbaijan can expect revenues worth between $31-42bn and Turkey about $1.5bn. For its part Georgia anticipates transit fee income of $508mn over 20 years - equivalent to a 15 percent boost to its annual gross domestic product.

Local companies are already experiencing many benefits. In Azerbaijan, more than 100 local businesses have been awarded BTC-related contracts. RT Services won a tender in October for waste collection and transportation. The company, established in 2002, has a plant in Sumgayit that recycles plastic waste and makes plastic pipe for export. Azad - a business that collects waste from communities and recycles it into polyethylene products - will be supplying bags to REM, the catering services provider for the BTC project. Another Azeri company, Janubsanayetikinti, has been awarded a contract for work at block valve stations and local equipment rooms along the pipeline in Azerbaijan.

BP's spend with small-to-medium sized enterprises in Azerbaijan in 2003 will far surpass the target of $20mn, having hit $15mn during the first half of the year. This total does not include contract awards won by major sub-contractors to the BTC project.

Community Investment
Since grants were made in July to fund BTC's individual country community investment programmes along the pipeline route, scores of quick-impact community projects have gotten underway. In many instances, they are already completed.

In Azerbaijan, $8mn allocated for the programme was increased to $1m through matching funds provided by international non-governmental organizations, which will implement the programme. Four organizations: Save the Children (SC), International Rescue Committee (IRC), International Medical Corps (IMC) and the Foundation for International Community Assistance (FINCA) have been selected by the BTC Co. Over 80 communities are expected to benefit over a three-year period up to the end of 2005.

Save the Children and the IRC each received $1.5mn to target villages along the pipeline route and take the communities through a hands-on, learn-by-doing process called community mobilization. Each community will elect a number of their own members to Community Action Groups, or Ijma groups, as they have been called in Azerbaijan. With the assistance of the IRC and SC trainers, the Ijma groups will identify and prioritize community needs and develop a plan of action to address those needs. Villagers themselves will design, implement and manage small community-driven projects that could include the rehabilitation of schools, transformers, irrigation systems, etc. The key to this process is the community's involvement and ownership of the resulting project.

They are required to contribute 25 percent of the total cost of the implemented projects - usually through in-kind donations of labour and materials. BTC Co.'s aim is to do something together with the community rather than just for it-above all, by encouraging people to identify what they need and then get commitments from all participants that will enable them to achieve their goals.

Taking this approach, IMC is using its grant to train at least 265 doctors and nurses in primary healthcare along the pipeline route, as well as rehabilitating clinics and equipping them with equipment and medicines in 30 communities. IMC will also establish community-supported health funds or health insurance mechanisms as a way to make the projects sustainable. The funds will defray or eliminate fees for medical services and medicines and supplement the salaries of clinic staff.

Working a completely different sector, FINCA made its first loan to small business recently, extending $890 credit to a group of six entrepreneurs in Ganja, northwest Azerbaijan, to enable them to start up a small clothes trading business.

Across the border in Georgia, Mercy Corps - one of two NGOs chosen to run the $5mn Georgian community investment programme - is playing a similar catalyst role in assisting communities in identifying and implementing priority projects. Villages such as Pobeda, Karatagla, Samshvilde, Birliki and Kalinino are refurbishing school buildings. At Tsintskaro, a health clinic is being refurbished and the water system improved.

Elsewhere irrigation systems are being rehabilitated and loans disbursed to micro-entrepreneurs. In all, more than 150 infrastructure rehabilitation initiatives will be implemented in Georgia between now and the end of 2005. In addition, agricultural support, energy efficiency projects and other capacity building activities will run parallel. CARE, which implements the programme in the West of the country, has set up more than 200 demonstration farms to train farmers in best agricultural practices which are already resulting in increased potato yields.

In Turkey, $9m was allocated for a community investment programme. Approximately $3m was granted in July and August to fund a first phase in the poorest regions of North East Anatolia. The grantees and local communities are required to contribute at least 20 percent to the cost of the projects in cash, sweat equity (labour) or land. The intention is to contribute to sustainable rural development in the five provinces of Ardahan, Kars, Erzurum, Gumushane and Erzincan through long-term partnerships with local communities and local authorities in more than 130 villages. Grants were awarded to four local organizations - two NGOs (IBC and SURKAL), Ataturk University and a private consultancy - PAR Consulting in partnership with an NGO (RUDF).

The first results of quick impact projects are now coming through. At Hocuvan Haskoy - a cattle-rearing village of about 1,500 residents in the Ardahan province in northeast Turkey - the International Blue Crescent Foundation has organised the construction of a large storage tank and a 16km water distribution system for the village. Clean drinking water is now available from taps installed in the houses. Hocuvan Haskoy is one of 17 settlements in the pipeline corridor in Ardahan that will benefit from the programme, which has been made possible with the help and support of the local state authorities. The main focus for IBC, however, will be in implementing long-term sustainable programmes focusing on agriculture and livestock improvements, cooperative development, milk collection and processing centres, and health care improvements.

Human Rights Reinforced
At the end of September the BTC Co. formally agreed that it will not seek compensation from the governments of Azerbaijan, Georgia and Turkey for any breaches of the Host Government Agreements (HGAs) where the host government is acting on an obligation under international human rights, environmental or other treaties to which it is a party.

Called the BTC Human Rights Undertaking, the agreement is legally binding and has been developed following discussions with Amnesty International and other NGOs. It was signed in London by BTC chief executive Michael Townshend.

The Undertaking clarifies clauses in the HGAs - part of the legal framework governing the BTC pipeline - that provide stability for the project in the event of changes to the legal or fiscal regimes in the three countries. It confirms that the HGAs' arbitration provisions will not be used to hinder individuals' access to domestic courts and that the standards applicable to the BTC Company will evolve as international standards evolve.

The BTC Co also decided to make the project's complex legal arrangements more accessible by publishing an HGA summary in Azeri, English, Georgian and Turkish. These summaries can be viewed on the project's website: by accessing the Citizen's Guide section.

Meanwhile, the first report of an expert panel asked to review the project's Resettlement Action Plans (RAPs) and its environmental and social action plans was issued at the end of October. A second review will take place in February 2004.
The panel made four recommendations:

(1) That "a definitive strategy and implementation plan for returning rights of use to the former owners and/or lessees of the pipeline corridor needs to be developed...and adequately disclosed."

(2) That monitoring of temporary land acquisition be stepped up to ensure that it is compliant with World Bank guidelines.

(3) That BTC Co. and its contractors remember that land only may be occupied without prior compensation when landowners' whereabouts are unknown.

(4) That the grievance mechanism for correcting resettlement issues be improved to ensure consistency.

Overall, the panel stated: "BTC Co. has executed the processes of community preparation, negotiation, agreement signing and compensation payment for the BTC pipeline project to standards equal to, or exceeding, the requirements of World Bank guidelines. Given that 20,279 agreements had been signed at the time of the review involving consents from an estimated 50,000 co-owners or shareholders, the number of complaints that had been received was very low...There was no evidence that ethnic minorities affected by the project were any more or less disadvantaged than other project-affected groups."

The panel's recommendations have been accepted by BTC Co. and remedial action is underway.

Unearthing the Past
Significant archaeological finds continue to be made along the pipeline right-of-way. One of the most recent is near Tabatskuri in Georgia where artifacts from the Iron Age (800-400 B.C.) and the Ancient Period (500 B.C.- A.D. 458.) were unearthed in August and subsequently excavated by archaeologists from Georgia's Centre for Archaeological Studies. This is the first site in the region to be discovered with these two overlapping periods. The excavations at Tabatskuri have revealed uncovered burials, stone wall remnants, prepared floors, the remains of an oven and other iron, ceramic, stone and wooden artifacts. According to Hope Leininger, cultural heritage coordinator for BTC Co., much data that otherwise would have been lost is being preserved.

Georgia, in fact, has emerged as an archaeological treasure trove. More than 250 cultural heritage sites have been identified along the 248km pipeline corridor that crosses the country, and the line has been rerouted significantly in two places to avoid previously unknown sites dating back to the Bronze Age (3,500-800 B.C.) and Medieval periods.

More than 20 important monuments have also been identified along the Georgian right-of-way and mitigation measures introduced to protect them. BTC Co. is employing monitors to keep an eye out for discoveries during construction and to ensure that finds are treated appropriately. Among interesting discoveries made in Georgia is a necropolis at Eli Baba near Tsalka, an Early Bronze Age site at Orchosani near the Turkish border that appears to be the location of several villages, and a burial site at the PSG-2 (pump station) work area outside Tetritskaro.

Excavations are also taking place in Turkey at nine sites along the BTC route that were identified prior to construction and four that were the result of chance finds. One of the most significant finds has been made at Gökdere-Yüceören in southern Turkey where rock-cut tombs have been excavated. The tombs are characterised by a rectangular entrance called a "dromo", which typically has steps carved into the limestone leading to the tomb entrance. Similar types of tombs have been found in the ancient city of Kelenderis, within the borders of Anamur-Aydnck district. Salvage excavations have been conducted under the supervision of a scientific excavation director working with a team of 18 archaeologists and 50 workers. The site has been classified by the Ministry of Culture and Tourism as a First Degree Site and the pipeline corridor has been re-routed in this area.

In Minnetpinari along the pipeline corridor at an altitude of 1,100m, another team of 18 archaeologists and 60 villagers hired from nearby communities started work in April on a 520 metre-long site. Three months were set aside for the excavations which consists of some architectural foundations, possibly that of a church, and a cistern located in the fields to the south. During the excavations, skeletal remains were discovered. The burials are orientated in an east-west direction and some have borders formed by smoothed stones. It is believed that early Christians inhabited the site. The excavated material is to be shown to visitors to museums in Turkey.

Another sensitive area lying on BTC's route is Azerbaijan's Gobustan National Cultural Reserve, 60 kms southwest of Baku - a location rich in examples of early human settlements going back 12,000 years and pre-historic rock face drawings of animals and humans. The pipeline passes a few kilometres away from some ancient petroglyphs and every effort is being made to ensure these priceless carvings are not affected by pipeline construction activities.

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