PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB1468

Project Name / GAS SECTOR DEVELOPMENT
Region / EUROPE AND CENTRAL ASIA
Sector / Oil and gas (100%)
Project ID / P093765
Borrower(s) / BOTAS, TURKEY
Implementing Agency
BOTAS
Bilkent Plaza, 4. Cadde
A-1 Blok, Bilkent
Turkey
06530
Tel: +90 312 297 2295 Fax: +90 312 266 0619
Environment Category / [X] A [] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / March 18, 2005
Estimated Date of Appraisal Authorization / September 12, 2005
Estimated Date of Board Approval / December 13, 2005
  1. Key development issues and rationale for Bank involvement

Background:

Turkey, with a population of 70 million and a rapidly growing economy, has had one of the fastest growing gas markets in the world in the past decade. Moreover, as shown in table 1, the growth of demand for gas has not been significantly affected by its three economic crises. There is also a substantial unrealized potential for gas demand, given the relatively low share of gas in its TPES (Total Primary Energy Supply) in Turkey, about 18% in 2001, which is well below the European average of 23% and significantly lower than in the Netherlands (40%), the United Kingdom (39%) and Italy (33%).

Table 1 Growth in GDP and Gas Consumption in Turkey

Year / GDP growth rate (%)a / Gas consumption (bcm) / Growth in gas consumption (%)
1991 / 0.3 / 4.097 / 22
1992 / 6.4 / 4.461 / 8.9
1993 / 8.1 / 4.975 / 11.5
1994 / -6.1 / 5.377 / 8
1995 / 8.0 / 6.859 / 27.6
1996 / 7.1 / 8.041 / 17.2
1997 / 8.3 / 9.874 / 22.8
1998 / 3.9 / 10.383 / 5.2
1999 / -6.1 / 12.657 / 21.9
2000 / 6.3 / 14.975 / 18.3
2001 / -9.5 / 16.368 / 9.3
2002 / 7.8 / 17.624 / 7.7
2003 / 5.8 / 21.182 / 20.2

Source: State Statistics Institute (DIE)

The key development and strategic issues faced by Turkey’s gas sector and the economy are summarized in table 2 which presents a simple SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats) excerpted from the World Bank Gas Sector Strategy Note, September 2004 (Report No. 30030-TR).

Strengths
§  High demand growth potential
§  Favorable supply geography and infrastructure
§  Extensive transmission backbone
§  Lack of clean energy substitutes /
Weaknesses
§  Excessively concentrated industry structure
§  High risk-bearing by the Government of Turkey
§  Lack of gas storage
§  Unproven environment for investors
§  Little indigenous supply
Opportunities
§  Access to multiple sources of supply
§  Potential role as a transit corridor
§  Potential social and economic improvement
§  Potential for domestic and foreign investments / Threats
§  Supply overhang
§  High leverage of incumbent suppliers
§  Unfair competition by Gazprom
§  Security of pipeline/LNG supply
Rationale for Bank Involvement

Bank involvement in the Turkish gas sector will help Turkey meet its growing economic and social demand for gas, while gradually overcoming the present weaknesses in the sector. The following are the main reasons for engaging in the Turkish gas sector:

§  Implementation of the Gas Sector Development Strategy and Linkage with EU: In September 2004, the World Bank issued a Gas Sector Strategy Note that was prepared in close collaboration with a Government of Turkey working group. The strategy has been very well received by the Government. There are several policy, legislative and governance recommendations that have been made in the Strategy Note, and through this project, the Bank is well-positioned to support the Government in dealing with some of these issues.

Turkey, and BOTAS, will also have an important role to play in the South East European (SEE) gas market, since it will play as a bridge transiting gas from the Caspian and Middle East areas to demand centers in Europe. Supporting BOTAS and Turkey in gas sector development will therefore, eventually support Turkey’s entry into the SEE gas market.

§  Implementing Critical Infrastructure to Meet Demand Reliably: A key weakness of the gas sector in Turkey is the lack of gas storage to meet peak seasonal and daily demand. Initial estimates indicate that peak shortages in the winter months are currently about 7%, and will increase further with increasing demand. The lack of storage is leading to curtailments of supply to power generation plants and industrial and commercial establishments at peak times. This problem is growing with the increasing demand to use gas for heating in urban centers that are being rapidly connected to the grid. Turkey will get its first storage facility in a depleted oil field in the Marmara basin in late 2005. However, this storage will be insufficient and has low gas withdrawal rates. Since storage requirements are growing rapidly and there do not seem to be medium-term private sector investment solutions to meet this demand, BOTAS, the Turkish gas pipeline company that imports gas, builds the network and supplies gas in bulk, will have to implement this infrastructure rapidly.

§  Supporting BOTAS’ Transition to Accessing Capital Markets: BOTAS, like all other state economic enterprises (SEEs), is controlled by the Government, and has restrictions on borrowings and investments. It however, is a well-run and efficient utility, and has the potential to operate commercially and to access financing on its own strength without government guarantees. The Bank has begun supporting BOTAS in this aspect through financial advisory work which will lead into a credit rating of BOTAS. Through this work, and after strengthening its capacity based on recommendations from this work, BOTAS should be able to move away from dependence on the Government in the medium to long term.


  1. Proposed objective(s)

The objectives of this Project are to increase the reliability and stability of gas supply and delivery to Turkish gas consumers by implementing critically needed gas storage and network infrastructure, and support BOTAS in strengthening its operation as a commercially run and financially independent corporation capable of accessing capital markets on its own account.

To achieve these objectives the Bank will: (a) support BOTAS with the financing of storage and associated network investments, and (b) support BOTAS in achieving an investment grade credit rating without the need for an implicit or explicit backstop of the Government of Turkey. PPIAF is already supporting BOTAS for financial advisory and credit rating work, and further work that may be required will be identified during the project preparation phase.

  1. Preliminary description

The project scope is as follows:

§  The Project will finance the Tuz Golu underground gas storage facility. This will include the surface facilities, the solution mining and cavern formation work, the water pipeline and the gas pipeline, the cushion gas, as well as consulting services such as the owner’s engineer.

§  The Project may also finance gas transmission and network infrastructure, depending on the consistency between the schedule of the Project and the preparedness of the transmission and network infrastructure.

§  The Project will support BOTAS in strengthening its institutional capacity to enable it to achieve an investment grade rating that will enable it to direct access to capital markets on its own account. The Bank is providing support, through a PPIAF grant, for financial advisors and rating services from a top international credit rating firm. During project preparation, the scope of follow-on support during project implementation will be determined.

The Tuz Golu underground gas storage facility is estimated to have a capacity of 960 million cubic meters of working[1] gas (i.e. 0.96 BCM).[2] The facility will be built in an underground salt formation that runs south of the Tuz Golu salt lake south of Ankara – the salt body has an average width of 2-2.5 km, is about 15 km long, and has an average salt thickness of 1,500 meters (exceeding 2,000 meters in several places). Geological screening has ranked Tuz Golu as the preferred location for storing large volumes of gas. The proposed salt caverns are about 20 km from a main gas trunk line near Aksaray thus making connection to the gas transmission network easy. The caverns will be “solution mined”, and the brine from the solution mining will be discharged into an area of the Tuz Golu salt lake designated for this purpose. The brine will also help preserve the lake which is receding through evaporation.

  1. Safeguard policies that might apply

[Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?]

The safeguard policies that will apply are: Environmental Assessment, Involuntary Resettlement and Safety of Dams. A comprehensive EIA has been prepared and approved by the authorities. The Bank has requested some additional information because this is a Category A project. The routing of the water pipeline, the brine discharge pipeline and the gas pipeline will follow existing alignments as far as possible, and will also avoid inhabited areas because the area especially near the salt lake is sparsely populated. The Bank team will also document the dam safety monitoring practices in place in Turkey.

  1. Tentative financing

Source: / ($m.)
BORROWER / 100
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT / 250
Total / 350
  1. Contact point

Contact: Ranjit J. Lamech

Title: Sector Leader

Tel: (202) 473-3282

Email:

[1] In addition to the working gas, there will be 240 million cubic meters of cushion gas, which is required for cavern integrity throughout the operating life of the facility and cannot be used to meet demand.

[2] The Gas Market Law (4646) requires every trader/wholesaler of gas to maintain a minimum of 10% of their forecast demand in in-country storage. This translates to a storage requirement of about 3.5 to 4.0 BCM by 2008.