US embassy cable - 03ANKARA7878

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 007878 
 
SIPDIS 
 
 
E.O. 12958: DECL: 12/22/2013 
TAGS: ECIN, ENRG, EPET, IZ, PREL, TU 
SUBJECT: AMBASSADOR MANN, TURKISH OFFICIALS DISCUSS NEXT 
STEPS ON CASPIAN ENERGY AND THE EAST-WEST ENERGY CORRIDOR 
 
 
Classified by Economic Counselor Scot Marciel for reasons 1.5 
(b) and (d). 
 
 
1.  (C) Summary:  Ambassador Steven Mann, State Department 
Special Representative for Caspian Energy Diplomacy, visited 
Ankara, December 16-18 to discuss Caspian issues with senior 
Turkish officials, who confirmed Turkey's commitment to the 
East-West Energy Corridor and expressed confidence that BTC 
would be completed, despite managerial problems in Turkey. 
Turkish officials were optimistic in their appraisal of 
Turkey's development as an energy hub -- the core of the 
East-West Energy Corridor.  Turkey and Greece will soon 
announce agreement on the long-awaited natural gas 
interconnector, opening the door for eventual natural gas 
exports via Turkey to Europe.  Turkey completed successful 
negotiations with Russia to reduce price and take or pay 
commitments for Blue Stream and is looking ahead to similar 
success with Iran.  Ambassador Mann emphasized that the 
aggressive policies of Gazprom and Transneft and of Iran made 
U.S.-Turkish coordination essential on Caspian energy.  Mann 
said his top priorities in the coming months would be the 
Aktau-BTC connection and promoting pipeline options from 
Turkey to Europe; both sides agreed to work closely together 
in pursuit of these priorities.  Turkish officials also 
expressed interest in the prospect of importing Iraqi natural 
gas to Turkey and onward to Europe, and TPAO conveyed to Mann 
its interests in Iraq oil as well as gas, and requested to 
begin a dialogue with CPA Baghdad.  End Summary. 
 
 
Energy Ministry 
 
 
2.  (C) BTC:  Ambassador Mann met December 16 with Energy and 
Natural Resources Minister Hilmi Guler, who opened by saying 
that Turkey was not concerned that recent political 
instability in Georgia and Azerbaijan would threaten 
completion of the BTC pipeline.  The government was aware of 
BP's concerns about construction delays in Turkey.  He 
recognized how important it was to stay on schedule and 
pledged that BOTAS would finish the job on time.  Ambassador 
Mann said that the USG continues to strongly support Turkey 
as an energy hub to Europe.  However, Turkey's performance on 
BTC has broad implications for Turkey and the whole East-West 
Energy Corridor.  Support for future projects, such as Shah 
Deniz, will be influenced by Turkey's record on BTC 
construction.  We need to ensure that Turkey is the most 
attractive option.  Drawing on BTC Co.'s latest readout, he 
stressed that his concerns were not with the government's 
commitment but the performance of BOTAS.  Guler complained 
that BTC conditions on environment and safety make it very 
tough to complete the work on time.  Mann replied that BOTAS 
knew the conditions when it agreed to the contract. 
 
 
3.  (U) Greece Interconnector:  Guler announced that just 
minutes before the meeting, Turkey and Greece reached 
agreement on the natural gas interconnector and that the 
signing would take place the week of December 22.  Mann 
warmly welcomed this and proposed a USG announcement 
welcoming the agreement once it had been firmly emplaced. 
 
 
4.  (C) Turkmenistan:  Guler said that Turkey remains very 
interested in Turkmen gas, because the price is the most 
attractive in the region.  Right now, he pointed out, Turkey 
gets gas from Turkmenistan, but it comes via Russia at a much 
higher price.  Ambassador Mann noted that we could have built 
a trans-Caspian Pipeline, but for Niyazov,  whose fears of 
Russia were at the heart of the pipeline's failures.  A 
Niyazov regime makes it impossible to expect progress with 
Turkmenistan on Caspian energy.  Guler responded that Turkey 
has some good cards to play with Niyazov and would like to 
work together with the U.S. on this option.  Mann expressed 
skepticism and stated that, while US support in principle for 
a Trans-Caspian line remains unchanged, he would not waste 
his time on trying to craft a new deal with the Turkmen 
leader. 
 
 
5.  (C) Kazakhstan:  Turkey is very positive about 
Kazakhstan, Guler remarked, especially Turkish exploration 
there, and is hopeful that Kazakhstan will be in the BTC 
coalition.  Ambassador Mann agreed, pointing out that it 
makes economic sense for Kazakhstan, but we need to overcome 
the problem of the Kazakh and Azeri regimes seeking to lock 
up a monopoly on transport across the Caspian.  Mann pledged 
to work together with Turkey to push this issue forward. 
 
 
6.  (U) Iraq:  Guler said that Turkey is interested in Iraq 
gas exports via Turkey.  Mann noted that his recent 
involvement in Iraq was centered on the UN Oil for Food 
program, but offered an observation that Iraqi gas was years 
in the future as an issue.  Guler pressed for information on 
Kirkuk-Yumirtaluk and noted that Turkey has made several 
offers (with no response) to assist with pipeline security 
issues in northern Iraq.  Ambassador Mann pledged to convey 
the Minister's request for formal consultations to CPA. 
 
 
7.  (U) Guler noted that Turkey has exported power to Iraq 
and wants to do more.  For example, Turkey could dedicate the 
production of certain coal-fired plants in Turkey for Iraq. 
Another alternative would be to send some mobile generator 
stations to Iraq.  The big advantage was that these 
generators use fuel oil, which is in surplus in Iraq.  He 
added that Turkey is ready to send fresh water by rail to 
Iraq. 
 
 
8.  (C) Iran:  Turkey is in discussions with Iran about 
reducing the price its pays for imported gas and reducing the 
take or pay volume, just as it did with Russia.  Guler 
remarked that Iran has been very active in seeking contracts 
in Europe.  Referring to the prospect of gas pipelines from 
Turkey to Europe, Guler said we could use their expectations 
to our advantage in the negotiations.  Mann responded that 
Iran remains a sharp issue for the U.S. and pointed out that 
it is not just policy but a matter of U.S. law.  He said that 
it was good to seek a price reduction, and the USG understood 
that the GOT would use Iran's Europe ambitions to its 
tactical advantage in the negotiations, but it was important 
to go no further.  He warned Guler not to make a commitment 
to transship Iran's gas because that would raise ILSA issues 
and call into question US support for the Turkey-Greece 
interconnector. 
 
 
9.  (U) BTC:  In a meeting December 17th, Energy Under 
Secretary Demirbilek affirmed that BTC and the Shah Deniz 
 
SIPDIS 
pipeline were top priorities for Turkey.  He said that delays 
in BTC construction were one of many energy problems the AK 
government inherited.  The Ministry has been in talks with 
the subcontractors to BOTAS and all but one has signed 
recovery plans to bring the construction back on schedule. 
Demirbilek said he has stressed to the subcontractors that 
they get all logistical preparations taken care of so that 
they can resume operations in March, after the winter season 
ends, with no restraints. 
 
 
10.  (SBU) Greece:  Demirbilek said that relations with 
Greece have been improving in general, and BOTAS, in 
particular, was encouraged after successfully negotiating a 
price reduction with Russia.  Price had been the sticking 
point, but Greece agreed to pay the average cost of Turkey's 
gas imports plus a USD 10-15 transit fee.  The final price 
will not be known until the Shah Deniz gas begins to arrive 
in Turkey.  Greece also was considering a Turkish proposal to 
increase the size of the pipeline from 36 to 42 inches. 
 
 
11.  (C) Mann said his emphasis in 2004 would be on Aktau-BTC 
and the Balkans, specifically the three options for gas 
transit from Turkey to Europe (via Greece to Italy, via 
Greece to Macedonia and Albania, and via Bulgaria and Romania 
to Central Europe).  He noted that the Baumgarten option was 
not viable until Turkey's contract for Russian gas via the 
west pipeline expired in 2012.  Demirbilek argued that Turkey 
would extend the pipeline and continue to import gas from 
Russia; otherwise, Russia would use the pipeline to compete 
with Turkey and deliver Russian gas to Greece and Italy. 
Mann countered that Turkey could reverse the flow and use the 
pipeline for deliveries to Hungary. 
 
 
12.  (U) Domestic Gas Market:  Another problem that the AK 
government inherited, according to Demirbilek, was the 
restructuring of the domestic energy market.  He said that 
the current plan will not work and he plans to work hard over 
the next six months to arrive at a solution, including 
amendments to the gas and electricity laws.  (Note:  the laws 
mandated liberalization but have gone largely unimplemented.) 
 Reform is especially important to prepare the market for the 
influx of Shah Deniz gas, he said. 
 
 
Foreign Ministry 
 
 
13.  (C) Russian Energy Policy:  Ambassador Mann met December 
17 with Deputy Under Secretary Kilic, who emphasized Turkey's 
confidence that BTC is irreversible.  Kilic said the 
government is looking ahead to what he considers the more 
important issue of natural gas.  Mann emphasized that BTC was 
still important because how well the project is accomplished 
will affect confidence about other Caspian projects. 
Ambassador Mann expressed his concern about increased Gazprom 
and Transneft activism, including Niyazov's 25-year gas deal 
with Russia, the corrupt and distasteful Georgian gas deal in 
July, and Russian attempts to reverse Odessa-Brody.  Kilic 
responded supportively.  He and Mann agreed that the most 
promising immediate area for US-Turkish cooperation is in 
making final an Aktau-BTC agreement, and they agreed to a 
joint negotiating mission with the ABTC parties in the first 
quarter of 2004.    Kilic urged that we not leave 
Turkmenistan out of our considerations.  Mann responded along 
skeptical lines, as in the Guler meeting. 
 
 
14.  (SBU) Greece:  On natural gas, Kilic said that there has 
been real progress.  The Greece-Turkey Interconnector 
agreement will be an important step.  He noted that Greece 
sees itself as a regional hub and has been promoting Caspian 
gas within the EU, which is showing signs of growing 
interest.  He urged that we keep all three options for 
pipelines to Europe open.  Kilic urged that Turkey, Greece 
and the U.S. jointly talk to consumer countries in the 
Balkans and Europe; Mann agreed to consult with our embassies 
in the region and consider this. 
 
 
15.  (C) Iran:  Kilic said Turkey wants to make itself a 
transit hub for Iran's massive gas reserves but recognized 
that under current conditions not much can be done.  He said 
Turkey wants to keep its options open with Iran to keep 
Teheran on the hook.  He added that Greece and the EU see 
Iran as an important supplier to Europe and Iran has been 
very aggressive in seeking contracts in Europe.  Mann 
stressed that an agreement between Turkey and Iran to 
transship Iranian gas would mean the U.S. could not support 
the interconnector, and would open the door to ILSA problems. 
 As a fundamental point, we need Greece and Turkey to 
reaffirm the priority of Caspian gas.  Kilic asked Mann to 
stress this with Greece and the EU. 
 
 
16.  (C) Kilic pointed out that Iraq gas could be an 
alternative to Iran.  He said Turkish firms have contracts 
from many years back for Iraqi gas and he promised to give 
more details in a non paper, which Mann said he would send to 
Baghdad for comment.  (Embassy will e-mail the text to CBED.) 
 
 
BOTAS 
 
 
17.  (C) On December 18, Ambassador Mann met with Mehmet 
Bilgic, DG of BOTAS, the state natural gas and pipeline 
monopoly, and construction manager for the Turkey portion of 
BTC.  Bilgic remarked that Turkey has made real progress in 
reducing energy costs to the population.  The most positive 
result of lower prices has been that consumption of natural 
gas has increased and more consumers are switching from coal 
to natural gas -- where it is available.  This has helped to 
reduce air pollution in Turkey's big cities.  He said that 
BOTAS successfully re-negotiated the Blue Stream deal with 
Gazprom and to reduce the price and take or pay commitment. 
He said that Iran would be next -- Turkey will seek similar 
reductions and expects to complete a deal in January 2004. 
Further down the road, BOTAS will try to reduce expensive LNG 
contracts with Algeria and Nigeria. 
 
 
18.  (U) Iraq:  BOTAS is looking to Iraq as a future, cheap 
source of natural gas -- both for domestic consumption and to 
meet rising demand in Europe.  In a non-paper prepared for 
Ambassador Mann, BOTAS and the MFA explained Turkey's 
previous efforts in the late 1990s to develop natural gas 
imports from Iraq and their hope that fields in northern Iraq 
can be developed and pipelines built to begin shipping gas 
into the Turkish grid by 2009.  Bilgic explained that 
development of the fields would depend on the private sector 
but would not involve a large investment -- much of the gas 
would be associated output from present oil fields -- and 
BOTAS would lead the effort to construct the connecting 
pipeline, which would run parallel to the Kirkuk-Ceyhan oil 
pipeline. 
 
 
19.  (SBU) Turning to the Kirkuk oil pipeline, Bilgic said 
that BOTAS had made repeated attempts to offer Turkish 
assistance on repairing and securing the Kirkuk pipeline. 
Ambassador Mann pledged to pass on the Turkish offer.  Bilgic 
said that it would be essential to include the local 
population in the security measures.  He noted that without 
the pipeline, oil and products are transported by truck -- 
bringing lots of money to the locals.  The pipeline locals -- 
on both sides of the border -- profit from the transport by 
truck.  Restoration of the pipeline will mean that most of 
that money will go to central government. 
 
 
20.  (U) BTC:  Bilgic offered a detailed explanation of the 
problems behind BTC construction delays in Turkey and pledged 
to fix the problems.  He said the main problem is managerial. 
 First, the Turkish subcontractors were not ready for the 
very stringent IBRD guidelines on resettlement and land 
acquisition -- Turkish law is much easier.  This caused a 
delay at the start as securing the right of way was delayed. 
In addition, BTC's health, safety and environmental standards 
are higher than the contractors were accustomed to, and the 
subcontractors have been passive in addressing these issues. 
Bilgic added that BOTAS failed to understand its 
responsibility as the prime contractor, which forced BTC to 
step in to keep the project on track.  Finally, BTC hiring 
requirements meant that a number of expatriate managers were 
hired, but they did not have a deep commitment to the 
project.  BOTAS will replace many of the expats with BOTAS 
managers.  He said BOTAS's attitude has changed:  "we must 
deliver, not complain."  He added that agreements have been 
reached with all but one of the subcontractors to get the 
project back on schedule.  Mann stressed the pressing need to 
repair the deficits and get the project back on track. 
 
 
21.  (U) Greece:  Turning to the deal with Greece on a 
natural gas interconnector, Bilgic explained that a few 
issues remain to be settled, but a senior Greek official will 
come to Ankara December 23 to sign the final agreement.  He 
added that Turkey appreciates U.S. support for this effort. 
To make this project a success, BOTAS must address the issue 
of reliability, and storage is the key.  Gazprom is the 
competition and they have an outstanding track record of 
reliability.  BOTAS has gotten a green light from the IBRD to 
help finance a 1.5 bcm storage facility that can be expanded 
to 5 bcm. 
 
 
TPAO 
 
 
22.  (SBU) TPAO head Osman Dinc pulled Mann aside during 
lunch at DCM's and conveyed a strategy outline for TPAO 
exploration and development in Iraq, centering on the 
following issues: 
 
 
--  concluding an agreement on the Gharraf oil field on the 
basis of an existing PSA; 
--  developing an Iraq-Turkey gas export project involving 
fields north of Baghdad; 
--  joining large field consortia, e.g. West Qurna and 
Majnoon; 
--  exploring in Blocks one and four in the western and 
southern deserts. 
 
 
Mann agreed to convey the information to CPA Baghdad along 
with Dinc's request to come to Baghdad for detailed 
discussions with Ministry of Oil and CPA.  Copy of Dinc's 
presentation will be scanned and sent to CPA Baghdad via 
e-mail from EB/CBED. 
 
 
Baghdad minimize considered. 
 
 
Ambassador Mann cleared this cable. 
EDELMAN