The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) REPORT NO.: RES44670 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF GAS SECTOR DEVELOPMENT PROJECT APPROVED ON NOVEMBER 29, 2005 TO BORU HATLARI ILE PETROL TAŞIMA A.Ş. (BOTAŞ) ENERGY & EXTRACTIVES EUROPE AND CENTRAL ASIA Regional Vice President: Anna M. Bjerde Country Director: Auguste Tano Kouame Regional Director: Lucio Monari Practice Manager/Manager: Sameer Shukla Task Team Leader(s): Manuel Berlengiero The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) I. BASIC DATA Product Information Project ID Financing Instrument P093765 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 29-Nov-2005 31-Dec-2020 Organizations Borrower Responsible Agency BORU HATLARI ILE PETROL TAŞIMA A.Ş. (BOTAŞ) BORU HATLARI ILE PETROL TAŞIMA A.Ş. (BOTAŞ) Project Development Objective (PDO) Original PDO The Project objective is to increase the reliability and stability of gas supply in Turkey by implementing critically needed gas storage and network infrastructure, and support BOTAS in strengthening its operations as a financially stable and commercially managed corporation. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83490 02-Jul-2014 02-Oct-2014 20-Nov-2014 31-Dec-2020 400.00 338.28 61.72 IBRD-73420 29-Nov-2005 02-Feb-2006 07-Mar-2006 30-Sep-2014 325.00 325.00 0 The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES PROJECT BACKGROUND 1. By scaling up the country gas storage capacity, the Gas Sector Development Project (GSDP) is aimed at improving Turkey’s energy security and ability to cover natural gas demand during winters, lowering the cost of gas imports by providing seasonal storage and improving the system operations. Natural gas accounts for almost one-third of Turkey’s primary energy supply and fuels almost 50 percent of electricity generation. At completion, GSDP is expected to increase natural gas capacity by 0.96 bcm. 2. To achieve such objectives, the project consists of two components: (i) Underground Gas Storage and Associated Facilities: establishment of a gas storage facility in an underground salt formation located close to Tuz Golu through the provision of financing for: (a) surface and subsurface facilities including engineering and construction, solution mining, the gas pipelines and the compressor facility; (b) water and brine discharge pipelines; (c) cushion gas; and (d) consultants’ services to assist in the supervision and monitoring of the implementation, environmental monitoring and regulatory aspects of the Project; and (ii) Gas Network Infrastructure: construction of two compressor stations in Erzincan and Corum and other network infrastructure to assist in transmitting the increasing volumes of gas expected to be imported into the Republic of Turkey from existing and new sources. 3. The Gas Sector Development Project was approved on November 29, 2005. The original IBRD loan amount was US$325 million. The loan became effective on March 7, 2006. The original closing date was December 31, 2012. A one- year extension to December 31, 2013 was granted in December 2012 to continue Bank support for project implementation through exhaustion of loan proceeds. The original loan was fully disbursed in July 2013. A six-month extension of the closing date to June 30, 2014, and a further three-month extension to September 30, 2014 were, nevertheless, granted in December 2013 and May 2014, respectively, to respond to delays in the finalization of the proposed Additional Financing, which was eventually approved in July 2014 and became effective on November 20, 2014. PROJECT STATUS 4. The Project’s Development Objectives remain achievable and the Borrower’s performance continues to be satisfactory. During the past 12 months, the progress towards achievement of the PDO was rated as Satisfactory and the Implementation Progress was rated as Moderately Satisfactory. After substantial delays in the early years of the project, GSDP implementation has proceeded steadily since then and after the approval of the additional financing. As of October 2020, project implementation continues to progress well, with all surface facilities completed and undergoing commissioning. As for the underground storage facilities, the Phase 1 caverns (six caverns) are all operational. The testing of the first three of the remaining six caverns of Phase 2 was expected to be completed by end-October 2020 and was delayed due to COVID-19 issues (less personnel available on site). BOTAŞ has confirmed that these caverns will not be available for the coming winter season. The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) 5. The project has already demonstrated the additional value of the gas storage facility as per its original intended objectives. BOTAŞ has already been able to withdraw from operational caverns since the 2018-2019 winter season, based on demand. Additionally, BOTAŞ has benefitted from the facility during peak demand periods by withdrawing small volumes of gas (no more than 20 percent of each cavern) for commercial purposes (i.e. when gas prices in the market were above a certain price). On the occasion when LNG cargos were docked at the newly constructed LNG terminals and gas demand was not sufficient to withdraw agreed quantities from contracted LNG volumes, this gas was diverted to the storage site for use in commissioning its compressors o r for injection purposes. 6. The project has reached a high level of maturity, with overall project disbursement (and physical completion) at about 91% overall, with only US$61.7 million remaining over US$725 million IBRD loan (with the original loan fully disbursed and closed). Most remaining activities consist in some leaching, testing, gas filling and transition to the operational phase. While no withdrawal requests have been submitted so far for this FY, BOTAŞ has forecasted a disbursement of about US$40 million for this FY. The delay is linked to the ongoing process for the certification of the completion of Phase 1 works, which has taken longer than expected, but is likely to be completed soon, as well as some slowdown of works due to COVID-19 (including the testing of three caverns of Phase 2). The disbursement projections are, however, in line with expected remaining activities to be carried out (mainly final payments related to the commissioning and operational acceptance of the facilities). The remainder of the funds is expected to be disbursed in FY22. However, some residual risk remains that could cause a surplus of funds at the end of the project, mainly due to a technical issue affecting two wells, as described below. 7. A longstanding issue at the technical level has been the presence of gas influx during the drilling of two wells (UGS-1A and UGS-3). Such gas influx compromises the safety of the wells and precludes the use of the wells for leaching of a cavern. After additional analysis and monitoring of gas levels over an extended period of almost two years, BOTAŞ informed the team in October 2020 that a decision was taken to abandon the two problematic wells. The delay caused by the testing and evaluation of these wells partly explains BOTAŞ’ decision to request an extension of the project. Cost overruns caused by these events, estimated at US$10 million, will be absorbed by BOTAŞ and no request for additional financing has or will been made. BOTAS position is that any well replacement should be done within the scope of the original contract of the EPC contractor. BOTAŞ and the contractor are finalizing discussions on contractual responsibility, which may either result in an amicable solution or a case for the Dispute Board. 8. BOTAŞ is now considering whether to replace the abandoned wells or to cancel them. The 10 caverns that were successfully leached have a larger volume than the contractual volume as a result of design optimization during implementation (total volume for 10 caverns is approximately 7.3 million m3 compared to a total contractual volume of 7.6 million m3 for the 12 caverns). Thus, considering the efficiency gains in the other caverns, the final project target in terms of gas storage and gas deliverability is still expected to be achieved. Constructing two additional caverns would increase project cost and timing but create valuable storage for BOTAŞ. BOTAŞ has not yet carried out an economic and financial analysis between the options. BOTAŞ and the Bank have agreed to carry out such an analysis, if the project is extended, to inform BOTAŞ’ decisions on this matter going forward. 9. The project has faced procurement and safeguard issues in the past, which have caused an MU rating for a certain period, but those have now been resolved. On the social side, registration of land on behalf of BOTAŞ has reached 100 percent indicating no pending issues on OP 4.12 or any court cases. On the environmental side, drilling mud disposal has been completed, while the insoluble wastes are still to be disposed from the site (scheduled for end of 2020). The winterization plan is also identified as practical and ready to be implemented this winter. The damages on the access roads are being repaired gradually. The environmental permit for the air emissions has been initiated. The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) The completion is expected in a year, while the project will move to its operations phase. Addressing a past grievance received from local community members regarding the odor generated from the main facility, BOTAŞ confirmed that technical engineering studies were completed, and a technical solution was found in order to prevent the odor propagation to the vicinity. BOTAŞ has agreed to implement this technical solution over the next few months. 10. During the remaining implementation period, BOTAŞ had agreed to continue ensuring compliance and close monitoring of safeguard issues, with a particular focus on the following elements: (i) finalization and implementation in a satisfactory manner of reinstatement activities (which will require the employment of a soil expert and landscape architect by the contractor); (ii) contractor to carry out soil contamination and other environmental analyses before handing over the sites to BOTAŞ for full operation; (iii) plan ahead and ensure adequate HSE capacity both at site and HQ throughout the operation period. BOTAŞ has agreed to prioritize and update BOTAŞ emergency response plans accordingly and also conduct information sharing and awareness sessions (either via online tools or published material) for the nearby communities in order to inform about the drills and necessary measures, restrictions on the site for operations. 11. The project does not have outstanding financial audits and the performance on financial management aspects has been satisfactory. BOTAŞ confirmed that there is no expected increase in the contract prices and all project contracts are planned to be completed by October 2021. No contractual issue has been reported by BOTAŞ (with the exception of the situation concerning the two problematic wells). RATIONALE FOR THE RESTRUCTURING AND NEXT STEPS 12. The objective of this extension is threefold: (i) to match the project overall duration with the effective completion of all activities on site; (ii) to resolve the situation of the two problematic caverns; (iii) to absorb delays associated with the COVID-19 pandemic, especially affecting the testing and commissioning of Phase 2. 13. The project implementation schedule has not substantially changed since 2017, when the completion of all project activities was revised to October 2021. During the early years of the implementation of the AF, BOTAŞ and its consultants determined that a technical optimization of the caverns design would have achieved an increase in efficiency. While the additional costs associated with such an optimization were deemed limited, the implementation schedule for Phase 1 and Phase 2 would have required longer completion dates. At the time, it was concluded that the optimization benefits outweighed its costs (financially and in terms of project implementation delay). The optimization has already had significant positive impacts, having already delivered 13% more gas storage volume than planned for the completed caverns. To accommodate for such optimization, the project implementation schedule was adjusted to incorporate the associated longer implementation time and shift the completion of all project activities to October 2021. At that time, BOTAŞ did not deem an extension of the project necessary, as only residual activities were expected from January 2021 onwards (to be covered by BOTAS own funds). 14. Over the past year, however, it became clear that an extension was needed to resolve the situation of the two problematic caverns, which required more time than anticipated. The extension will allow the Bank to provide technical support in finding an adequate solution for either the abandonment or the development of make-up wells. Finally, the extension will also support the absorption of any residual delays in the commissioning of Phase 2 caverns due to the unexpected COVID-19 pandemic and its impacts on the testing and finalization of Phase 2 activities. While not the primary objective, the extension will further allow the Bank to remain engaged in the project until the completion of activities on the ground and provide implementation support and safeguard supervision during the final and delicate phase of the project handover from the contractor to BOTAŞ for regular operations (commissioning). The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) 15. All project activities are expected to be completed by October 31, 2021, and therefore from a technical point of view an extension could be granted until December 31, 2021. However, BOTAŞ and the Government have requested an extension of closing date until June 30, 2022 to have the flexibility to absorb any potential delays related to COVID- 19 issues. As of now, the situation on the ground in Turkey remains fluid, with COVID-19 cases on the rise and the country likely to enter a second lockdown phase. 16. BOTAŞ has confirmed that there will be no new procurement under the project and no expected increase in price of the ongoing contracts. While the project will support BOTAS decision-making process concerning the two problematic wells, GSDP is not expected to finance any replacement wells, hence no new procurement under the project is envisaged during the extension period. BOTAŞ and the Bank have also agreed that the following actions will need to be carried out to ensure an adequate implementation and timely completion of the project within the proposed extended Closing Date: • Provide a comprehensive, structured rationale, including any documentation on the replacement of the two abandoned wells; • Submit a request for a reallocation of proceeds between disbursement categories, if needed, once the situation of the two problematic caverns is clarified; • Hold a technical follow up meeting to discuss geological risks and lessons learned that could inform BOTAŞ risk management systems for other operations; • Submit a revised reinstatement plan to the Bank and hire a soil expert by the contractor to ensure efficient implementation of the reinstatement plan (which will be supervised by the Bank); • Submit operation phase implementation arrangements and organogram; • Submit an updated Emergency Response and Action Plan to cover the operation phase and plan for community engagement/local community meetings to inform on Emergency Response and Action Plan for the operation phase; • Continue to share monthly Environmental monitoring reports to the Bank in a timely manner until project closing (including results from soil contamination and other environmental analyses). PROPOSED CHANGES 17. Based on the above, the Restructuring Paper seeks to extend the Closing Date of the Project by 12 months from December 31, 2020 to December 31, 2021. This extension is requested by BOTAŞ through its letter dated December 11, 2020. The additional 12 months are required to complete project activities and this will be the third extension of the project. The first and second extension extended the original project's Closing Date from December 31, 2012 to June 30, 2014 and then to September 30, 2014 to accommodate the processing of the additional financing. 18. The proposed extension results from a longer implementation time related to the optimization of the project design during the initial years of the implementation of the additional financing, the need to address two problematic wells and absorb some delays related to COVID-19. The extension would allow for the completion of all planned project activities and the achievement of the project development objectives in a satisfactory manner. II. DETAILED CHANGES The World Bank GAS SECTOR DEVELOPMENT PROJECT (P093765) LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 31-Dec-2013, 30-Jun- IBRD-73420 Closed 31-Dec-2012 2014, 30-Sep-2014, 23-Oct-2014 IBRD-83490 Effective 31-Dec-2020 31-Dec-2021 30-Apr-2022