US embassy cable - 03ANKARA6538

UNCLAS SECTION 01 OF 02 ANKARA 006538 
 
SIPDIS 
 
 
SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, ENRG, PREL, TU 
SUBJECT: GAS MARKET UPDATE FROM EMRA AND BOTAS 
 
This cable is sensitive but unclassified, not for internet 
distribution. Please handle accordingly. 
 
 
1.  (SBU) Summary.  Turkey's ambitious program to liberalize 
and privatize its natural gas market has stalled.  The Energy 
Market Regulatory Authority (EMRA) told us that it has 
completed the necessary secondary regulations for the 
implementation of the Natural Gas Law and has already issued 
32 licenses to new market entrants. Despite the initial 
progress, EMRA claims the transition to a competitive market 
is delayed, and an amendment to the Law is necessary because 
the Petroleum Pipeline Corporation (BOTAS), which currently 
holds a monopoly in the gas market, is reluctant to reduce 
its dominance in the sector.  While admitting that BOTAS will 
not meet its legal obligation to transfer a 10 percent share 
of its import and wholesale obligations to private entities 
every year, BOTAS officials explained that it faced 
difficulties releasing gas contracts and complained that the 
liberalization process was becoming political. Close 
cooperation between EMRA and BOTAS remains key to successful 
gas market liberalization. End Summary. 
 
 
2.  (SBU) In separate meetings, EMRA and BOTAS discussed 
developments in gas market liberalization with Econoff and 
Econspecialist. EMRA told us on September 29 that the pace of 
liberalization in the natural gas market has slowed, although 
the secondary legislation is in place and Turkey is in 
compliance with the EU's Gas Directive.  The Natural Gas Law 
passed in May 2001, and EMRA had initially envisioned a 
transiton period of 18-24 months to establish a competitive 
market.  Under the Law licenses are required in order to 
engage in any natural gas market activity, and EMRA claims 
that the licensing process only takes one month. As of 
September 2003, 32 licenses have been issued: 8 for 
compressed natural gas (CNG); 9 for imports; 3 for wholesale; 
7 for distribution; 2 for transmission; and 3 for storage. 
 
 
3.  (SBU) EMRA grants distribution licenses (10-30 years) 
through a tender process; all Turkish companies and 
registered foreign companies are elibible to participate. The 
Regulator is confident that it would be able to conclude 
tender procedures for 19 cities in 2003 as planned; tenders 
for Kayseri, Konya, Erzurum, Corlu, Gebze, Inegol, and 
Catalca have been completed.  According to EMRA's timeline, 
construction of the facilities is to begin within 6 months of 
receiving a license, gas deliveries should start within 18 
months, and the companies have 5 years to supply all eligible 
consumers.  For example, the license for the  Kayseri 
facility was issued in June and construction began on October 
5. 
 
 
4.  (SBU) In the meeting on October 8, BOTAS was very 
critical of the Natural Gas Law, claiming that the model 
envisioned by this Law is unworkable for Turkey, arguing that 
the Law should not be technical but should be a code of 
practice.  BOTAS told us that, in late September, its Board 
approved a Network Code, which establishes a code of conduct 
for all parties as the first step toward releasing gas 
contracts to permit new private entrants to import, 
wholesale, transmit, distribute, and store natural gas. 
BOTAS is legally obligated to transfer 10 percent of its 
market share annually until its wholesale market share is 
reduced to a maximum of 20 percent by 2009, but cannot meet 
the November 2003 deadline to start tranferring shares to the 
market for a variety of reasons. 
 
 
5.  (SBU) Although BOTAS has the sole authority to release 
gas contracts to buyers, most of these contracts have 
take-or-pay obligations and are liabilities instead of 
assets, making it difficult to find buyers.  BOTAS also 
claims that there are confidentiality issues that would 
preclude tender nominees from viewing contract details 
beforehand. Germany and Austria were cited as countries 
facing similar problems liberalizing gas markets, and BOTAS 
emphasized that these countries have recently opted to use 
volume release instead of contracts to liberalize the market. 
 Some contracts with project finance, such as Blue Stream and 
Shah Deniz, have debt-service issues, further complicating 
any transfer. Given these complex contracts, BOTAS maintains 
that it cannot release liabilities without agreement from 
suppliers or partners.  Another reason for the delay is that 
suppliers are reluctant to deal with new market entrants with 
an unproven record in the natural gas market, according to 
BOTAS.  Under the current system, suppliers only face 
sovereign country risk since BOTAS is implicitly backed by 
the GOT and many of the current import contracts are 
state-to-state agreements; however, with market 
liberalization suppliers would face additional business or 
market risks that could raise costs. 
 
 
6.  (SBU) BOTAS claims that the World Bank understands the 
problems with the Law and supports amendments to facilitate 
market liberalization.  The Energy Ministry is considering 
legislative fixes: the Ministry had initially planned to 
attach a clause to the pending Petroleum Law but has now 
decided to draft a separate amendment to the Natural Gas Law, 
according to BOTAS.  The proposed amendment would extend the 
deadline for tranferring shares, but BOTAS is also exploring 
other clauses to alleviate gas release problems. 
 
 
7.  (SBU) BOTAS took the opportunity to respond to criticism 
about the slow pace of natural gas market liberalization and 
complained that the problem has become political.  For 
example, BOTAS objected to charges by some politicians and 
EMRA's President that gas prices are higher because one-third 
of the cost comes from BOTAS' financial and operational 
costs. BOTAS contends that any buyer would face similar 
overhead costs.  BOTAS also noted that the current Turkish 
government has reduced its reliance on natural gas and has a 
preference for indigenous energy sources.  As a direct 
consequence, the State Electricity Generation Company (EUAS) 
used only 2 billion cubic meters (bcm) of natural gas this 
year as compared to 5 bcm in 2002.  This helps to overstate 
Turkey's gas surplus and complicates decisions on how to 
assess and manage the domestic gas needs, according to BOTAS. 
 
 
 
 
 
 
8.  (SBU) Commenting on the domestic natural gas distribution 
network, BOTAS told us that two existing distribution 
networks, Bursa and Eskisehir were transferred to the 
Privatization Administration for sale.  BOTAS also criticized 
EMRA for making price the most important criteria in the 
tender process and granting concessions mainly to 
construction companies, which may only be interested in 
building the facilities instead of operating these networks 
over the longer term. BOTAS emphasized that EMRA granted 
tenders to contractors for as low as TL 100,000 (.04 cents) 
per cubic meter, which is insufficient to lure prudent 
investors to the gas market because distributors cannot make 
a profit at such a low price when current retail prices are 
about 2.5 cents per cubic meter in big cities. BOTAS 
speculated that distribution companies eventually may levy a 
surcharge to each household to recoup losses from the low 
prices offered to win the tender.  BOTAS also is concerned 
about the guarantee letter of up to $2 million that EMRA 
requires before granting the contract.  With such a modest 
guarantee requirement, BOTAS fears that these construction 
companies would turn over the facilities to EMRA and walk 
away from the deal if unable to recover costs due to low 
prices.  The guarantee letter would be miniscule compared to 
the overall cost of running the facility at the given price 
for the specified period. 
 
 
9. (SBU) Comment. Relations between EMRA snd BOTAS appear to 
be strained and close cooperation remains essential to 
overcoming implementation hurdles and speeding up the pace of 
natural gas market liberalization. End Comment. 
EDELMAN