Spring 2003 (11.1)
Pages 74-79

BTC Section - Pipeline Construction Begins
Beginning the Journey Westward



Above: Winter conditions near Erzurum in eastern Turkey. Pipeline construction must wait until the snow has melted.

This April, the eagerly awaited Baku-Tbilisi-Ceyhan (pronounced jey-HAN) (BTC) oil pipeline will move one more step closer to reality with the start of construction at sites in Azerbaijan, Georgia and Turkey along the 1,760-km route. It has been more than 10 years since the idea was first proposed.

For the past nine months, the efforts of the BTC consortium have been focused on planning: creating a project team, carrying out preliminary environmental and social impact assessments, designing the pipeline, raising financing, acquiring land, mobilising contractors, hiring and training workers, defining health, safety and environmental standards and ensuring that pipe was ordered, manufactured to specification and delivered on time.

Left: A key environmental benefit offered by the BTC project is reduced growth in the future volume of tanker traffic having to navigate the narrow and congested Turkish Straits in the world heritage city of Istanbu, Turkey.

With most of these efforts firmly on track, the spotlight has now shifted to the complex practical and technical challenges involved in actually laying a pipeline that will cross three countries, bisect some of the more isolated and earthquake-prone regions to be found in Europe or Asia, rise to a height of 2,800 metres and stretch as far as the distance from London to Gibraltar or from New York to Miami.

Construction of any pipeline is a sequential process involving a number of distinct operations undertaken by specialised and general machinery that is known as the "construction spread." Within each spread there are eight or nine teams, each doing different tasks. A typical sequence of activities includes surveying, preparing the land, stringing out the pipeline sections along the route, excavating the trench, welding and laying the pipeline, backfilling the trench with soil, and reinstating the land as close as possible to its original condition.

Beginning in April 2003, at least one construction spread will be active at any given time in each country, supported by special section crews that will be responsible for work at hundreds of river crossings and other places requiring specialised installation equipment and techniques.

In Azerbaijan, one spread will start at the Sangachal terminal on the shores of the Caspian Sea and then move in a westerly direction to the border of Georgia 442 km away. Much of the terrain is flat and semi-arid. That section of the route is expected to be completed in about 12 months.

In Georgia the 248 km-long corridor bisects flat terrain for two-thirds of the way before moving through a zone that stretches nearly 100 km across a region notable for its remoteness, poor weather, height (at some points the route rises above 2,500 metres) and hard rock conditions.

Left: Typical scene in eastern Anatolia.

In Turkey, which accounts for about 60 percent of the pipeline corridor (1,070 km), half of the route goes through uplands above a height of 1,500 metres. Weather conditions could be a problem here in winter - not to mention the route must also move across two of the world's most active earthquake zones.

Vast quantities of pipe will be used-39,000 sections of pipe each 11.6 metres long in the Azerbaijan section alone. All the pipes needed for Azerbaijan and Georgia are being manufactured in Japan by Sumitomo before being covered in a special protective coating in Malaysia. Transporting these pieces by sea to the region will take nearly seven months, with each vessel carrying enough pipe to cover a 25 - to 30-km section of the route.

The first actual laying of the pipe is scheduled for June 2003. Depending on local conditions, an average of 1,000-1,500 metres of pipe will be laid per spread, per country, per day. The period between initial excavation and the reinstatement of right of way across the pipeline corridor is expected to take between two and three months. Reinstatement will include the removal of all construction facilities, such as workers' camps, pipe storage yards and temporary access roads.

At full capacity, the line will transport up to one million barrels of oil a day. Seven intermediate pump stations will be built - one in Azerbaijan, two in Georgia and four in Turkey, where a pressure reduction station will also be located. Around 100 block valve stations will be installed to improve safety and ease maintenance. The line will use several pipe diameters, varying between 34 and 46 inches. These pipes are protected against external corrosion by a three-layer, high-density polyethylene coating.

"This is a huge project by any standard," says Phil Allison, Technical Director of the BTC Company. "The overall environment is difficult and the timeframe is very tight. It's not an easy job, and we're taking a big step forward in several ways, especially in terms of training, safety and care of the environment."

Left: Typical scene in eastern Anatolia.

Add the overriding need for tight security and the best possible relationships with hundreds of rural communities along the route, and the scale of the challenge is clear that the BTC construction crews are facing as they begin work. For the moment, the emphasis is squarely on getting a hugely complex organisation working safely and efficiently to its full potential.

Acquiring the Land Rights
The process of acquiring about 6,000 hectares of land needed permanently or temporarily to permit the building of the BTC pipeline began towards the end of 2001. Since then, much progress has been made, but much still remains to be accomplished.

No one will be forced to leave their homes. However, an estimated 35,000 individual landowners or users, and more than 22,000 parcels of land, will be affected by the land acquisition programme. Under the terms of the Intergovernmental Agreement (IGA) and Host Government Agreements (HGAs), compensation will be paid to everyone. An appeals system, involving national courts, if necessary, has been built into the procedures. The precise terms will vary, reflecting differences in land ownership laws and customs in each of the host countries.

No project of this scale or complexity has been attempted in the region before. Land reform is in process in Azerbaijan and Georgia, and the land market in these countries has not developed very much yet, making it a complex task to determine compensation. In Turkey, ownership has sometimes proved hard to establish as some landowners live in cities or abroad and many of the land parcels have multiple owners. In addition, land along the length of the route is being classified according to its potential future value as well as its current agricultural yields.

Despite these challenges, significant progress has been recorded in the past 15 months. During this period, land acquisition teams have been recruited and trained in each country and comprehensive land inventories have been drawn up.

Left: Computer generated image of one of the BTC pumping stations.

In Azerbaijan, more than 4,150 individual agreements and nearly 100 agreements with municipalities will be signed by the end of the process. In Georgia the acquisition process was concentrated initially on the difficult mountainous region to allow construction to begin in the summer months. In Turkey much of the land along the route is state-owned. In the areas where it is not, a major drive is now underway to determine legal title.

As of March 2003, approximately 85 percent of the individual land lease agreements needed in Azerbaijan, and 50 percent of those in Georgia had been settled. Most of the compensation - which will be paid to recipients free of taxes and government or legal fees - is expected to be made by mid-2003 directly through the various national banking systems.

Once each construction phase is completed along the route, and the land above the pipe reinstated to its original condition, the landowner or user will be able to farm the corridor above the line.

On average, the pipeline will be buried at a depth of one metre below the surface. Shallow-rooted crops and shrubs will be permitted, but there will be restrictions on tree-planting, deep excavation and ploughing. No structures will be permitted to be built close to the pipeline corridor. The BTC Company will retain control of the corridor during the entire construction phase to permit access for pipeline testing and commissioning.

Enhancing Safety
Approximately 50,000 vessels a year navigate the narrow stretch of water known as the Turkish Straits, which bisect the city of Istanbul and link the Black Sea to the Sea of Marmara and eventually the Mediterranean. In addition to the tankers and ships that transit the 31-km-long Straits, there are ferries, fishing boats, pleasure boats and tourist cruisers, which jostle for space in the narrow waters.

Left: BTC land acquisition teams meeting villagers in eastern Turkey.

During the last 24 years more than 300 accidents have been documented in the Bosphorus, resulting in about 100 deaths.

Two major oil spills took place in 1979 and 1994. In 2002 approximately 910 million barrels of oil - crude and refined products - passed through the Straits. With the growth of oil production in Russia, Azerbaijan and Kazakhstan, this figure will certainly increase if nothing changes.

In 1994 rules were drawn up to deal with this situation including a mandate related to the vessels' movements according to their length. However, collisions are still averaging about three a year, and a large number of vessels transit without proper insurance.

Since the collapse of the Soviet Union, more nations are using the Bosphorus, making it harder than ever to get the broader agreement necessary to improve safety, given the status of the Turkish Straits as an international waterway.

Constructing the BTC pipeline is now seen as one solution of what must be a multi-faceted response to this situation. By 2008, when the pipeline is working at full capacity, one million barrels of oil a day will be flowing through the line to the Ceyhan terminal - the equivalent of several tanker transits a day through the Straits. Over the course of the 40-year design life of the BTC pipeline, this number will add up to around 30,000 transits, depending on the volume of oil actually moved by the pipeline and the application of regulations governing the size of vessels and number of shipping movements permitted through the Straits.

At the same time, the BTC project is acting as a catalyst for efforts to develop an integrated oil spill response capability in the Caspian and Black Sea regions. According to a study commissioned by a consortium of oil companies, including BP, no quick fixes are possible. "The oil spill risks in the region are significant today and will increase," observes Study Manager, Peter Taylor of IPIECA (International Petroleum Industry Environment Conservation Association). "A major incident could cause both short- and long-term disruption across the oil industry and throughout the region."

Left: Pipelines emerge from the ground at pumping stations, where access is provided for devices which travel through the line for maintenance and inspection.

As a result, the study has recommended 22 specific actions based on ideas to promote and improve cooperation between governments, international organizations and the oil industry in the region. Implementing these recommendations over five years is likely to cost around $6 million.

Financing the Pipeline
Finding the money to fund the Baku-Tbilisi-Ceyhan pipeline has turned into a global initiative involving scores of international financial institutions (IFIs) and commercial banks from around the world. In an unusual move that reflects its confidence in the viability of the project, the BTC consortium has decided to provide the necessary funds to allow construction work to progress to the end of 2003 before all the loans are finalised.

The Baku-Tbilisi-Ceyhan project is commercially robust, and the BTC Company expects to raise the financing it needs at commercial rates reflecting the current risk premium for investing in the region. No bank or other financial institution will be subsidising the link.

The actual construction costs of the project - around $3 billion - will be underpinned by more than $1 billion provided by the sponsoring companies in the form of equity investment. The balance is expected to come in the form of debt from a variety of IFIs together with shareholder loans. All told, about 30 percent of the funds will be provided on equity terms and 70 percent on debt terms.

Left: BTC will traverse agricultural land like this in western Azerbaijan.

According to John Wingate of Statoil, who heads the drive by the BTC Company to raise financing for the project, the immediate priority is to reach common terms with all potential lenders. After that, the environmental information public disclosure process of the IFI is expected to continue for several months. The governing boards of these agencies will then vote on the specific financing proposals.

Despite the complexity, BTC shareholders are optimistic that the financing can be completed on schedule. In the words of David Woodward, President of BP Azerbaijan: "This is one of the most complicated export financing projects ever undertaken. But we're very confident that everything will be finalized by the end of the year."

A wide variety of groups are involved in this process. The first group includes the IFIs of the International Finance Corporation (the IFC is an arm of the World Bank) and the European Bank for Reconstruction and Development (EBRD) which have specific mandates to support and stimulate development. The second group involves national ECGAs (Export Credit Guarantee Agencies) such as the U.S. Export-Import Bank and Britain's Export Credit Guarantee Department, which effectively underwrite lending by commercial banks.

A third group is made up of specialist organizations such as OPIC (Overseas Private Investment Corporation - an independent U.S. government agency) - and its Japanese equivalent, the Nippon Export and Investment Insurance (NEXI), which provide political risk insurance to enhance commercial activity by their national companies or banks. Finally, there are commercial banks. At the start of construction in April 2003, four banks are leading negotiations with the BTC consortium, but as many as 30 may eventually lend to the project.

Left: Jan Leschly, Caspian Development Advisory Panel (CDAP).

Why is the BTC Company raising money through sources that might end up being more expensive than normal for infrastructure projects of this sort? One reason is that the involvement of IFIs such as the EBRD and the IFC, with their stringent environmental and ethical disclosure requirements, will provide further assurance that the BTC project is carried out to the highest standards. Also, the consortium desires to operate as a single entity. In Wingate's words: "It's a way of enabling maximum participation by a number of important state-owned companies in the project.


Exporting Gas from the Region
In a decision made at the end of February, which had wide significance for the BTC project, seven partners in the Shah Deniz gas and condensate field in the Azerbaijan sector of the Caspian Sea agreed to commit a total of $3.2 billion to the construction of another East-West energy corridor to Turkey and beyond.

The new company, known as the South Caucasus Pipeline Company (SCPC), is comprised of the same seven partners as the Shah Deniz consortium: BP (25.5%), Statoil (25.5%), SOCAR (10%), LUKAgip (10%), NICO (NaftIran Intertrade Co.) (10%), TotalFinaElf 10% and TPAO (Turkey's State Oil Company) (9%). SCPC will have overall control of the pipeline. BP will be responsible for construction and operation of the SCPC facilities, whereas Statoil will take charge of the commercial affairs and administration.

This development, known as Stage 1, includes an offshore platform, wells and subsea pipelines in the Caspian, onshore gas and condensate processing facilities at the Sangachal terminal, and a 690 km long, $900 million gas pipeline from the terminal near Baku via Georgia to the Turkish border.

The pipeline is to be constructed along the same route as the BTC oil pipeline in order to minimise the environmental and social impact of the two projects and to achieve capital and operational cost-savings. Construction is scheduled to commence in 2004 and will be completed in time to deliver First Gas to Turkey in 2006. Environmental and Social Impact Assessments (ESIAs) for the Azerbaijan and Georgian sections of the SCP route, as well as for the related offshore/onshore facilities, have already been conducted and approved. Safety will be a top priority and an important criterion in the selection of contractors.

During construction, the SCP project will create 4,200 direct local jobs and an additional 1,300 jobs related to construction of the onshore and offshore facilities. A $7.5 million community investment programme will be implemented in Azerbaijan and Georgia as well as a $4 million environmental investment programme.

Checking the Standards
A number of key safeguards have been built into the BTC project to ensure that it sets new standards for responsible development. Among the most important is the creation of an independent external grouping, the Caspian Developments Advisory Panel (CDAP), with a three-year remit to provide objective advice on the pipeline's economic, social and environmental impact on the three host countries - and in particular on areas closest to the route.

Chaired by Jan Leschly, who is chairman and partner of Care Capital and former Chief Executive of SmithKline Beecham, the four-person panel is empowered to comment on all oil and gas developments broadly related to the BTC project, including the Azeri-Chirag-Gunashli (ACG) oilfield, the Shah Deniz gas field and the South Caucasus gas export pipeline (SCP).

Danish-born Jan Leschly is a member of the Board of Directors of American Express, Viacom Inc. and the Maersk Group. Care Capital is a $100 million life sciences venture fund. Other panel members include Jim McNeill, a Canadian diplomat and policy advisor on environmental and energy issues who is Chairman of the International Institute for Sustainable Development and a former member of the UN's World Commission on Environment & Development; Stuart Eizenstat, Deputy Secretary of the Treasury during the Clinton administration; and Mohamed Sahnoun, a former ambassador and adviser to the President of Algeria and member of the UN World Commission on Environment & Development who is now associated with the International Development Research Centre.

During the first half of 2003, the panel is scheduled to visit all three countries hosting the pipeline, including locations along the route, and to consult with community leaders, government officials, representatives of non-governmental organizations and others as it sees fit. It will use its first report later this year as a baseline for follow-up work to be done in the next two years.

The panel will be funded by BP, which operates BTC, ACG (Azeri, Chirag, deep-water Gunashli) and Shah Deniz. It will have its own Secretariat, be assisted by local representatives in each country and report directly to Lord Browne, Chief Executive Officer of BP. Its reports will be made public together with BP's responses. The panel can be contacted via e-mail at CDAP@caspsea.com.

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