US embassy cable - 04ANKARA3336

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 003336 
 
SIPDIS 
 
E.O. 12958: DECL: 06/09/2014 
TAGS: ECIN, ENRG, EPET, SENV, TU 
SUBJECT: AMBASSADOR EDELMAN URGES TURKEYS' ENERGY MINISTER 
HILMI GULER TO PUSH AHEAD WITH ENERGY SECTOR REFORM 
 
 
Classified by Ambassador Eric Edelman for reasons 1.5 (b) and 
(d). 
 
1.  (C) Summary:  In a June 8 meeting with Minister of Energy 
Hilmi Guler, Ambassador Edelman welcomed progress on the 
East-West Energy Corridor, raised concerns about Iranian gas 
exports to Europe, expressed support for Bosphorus bypass 
pipelines, and pressed the GOT to accelerate energy sector 
liberalization and to resolve investment disputes in the 
sector.  Guler explained that European companies are seeking 
to import Iranian gas via Turkey and asked for more 
information about ILSA.  He explained how the government 
hopes to proceed with energy sector reform and promised to 
honor the BOT electricity generation contracts but asked for 
help in reaching a win-win solution with the companies.  He 
believed the Petroleum Law before Parliament would resolve 
the investment complaint of Toreador Energy Resources.  End 
Summary. 
 
2.  (SBU) Ambassador Edelman congratulated Minister Guler for 
the progress BOTAS has made in recent months to get 
construction of the Turkish portion of the BTC pipeline back 
on schedule and expressed his hope that "together we will 
celebrate the pipeline's opening in 2005."  He congratulated 
Guler on Turkey's efforts to build gas pipelines to Europe 
but noted that the U.S. is concerned that some Europeans 
would like to use these pipelines to transport Iranian gas, 
as well.  He noted U.S. support for bypass options to reduce 
the growing oil tanker traffic in the Bosphorus and urged the 
Minister to push forward with reform of the domestic energy 
sector, including the resolution of continuing investment 
disputes in the sector.  Ambassador emphasized that Turkey 
will need foreign investment, especially in the energy 
sector, but that investors are discouraged by the slow pace 
of reform and privatization and the treatment of some foreign 
investors in the sector. 
 
3.  (C) Guler agreed that BTC construction was back on track, 
noting that he monitors progress on a daily basis.  He agreed 
that a bypass pipeline was in Turkey's interest and noted 
that he had forwarded the application of Thrace Development 
Corporation to build a bypass to the Council of Ministers, 
but no decision has yet been taken.   Turning to the Shah 
Deniz pipeline to bring Azeri gas to Turkey, Guler questioned 
whether the Azeri gas fields were adequate to meet the demand 
generated by the proposed interconnector pipelines to Europe. 
 U/S Demirbilek said Turkey needed to find alternative 
supplies, and there are three options:  Iran, Egypt, and 
Iraq.  He said that the Europeans are actively courting the 
Iranians for their gas, and are angry that Turkey have been 
reluctant to cooperate.  However, Guler explained, Turkey's 
Natural Gas Law to open up the sector and the EU's Energy 
Charter had the effect of limiting the government's ability 
to stop the Europeans.  Guler said he was aware of U.S. 
concerns vis-a vis Iran, but asked for more information about 
ILSA and how it could impact Turkey's role as a transit 
country.  He proposed that the U.S and Turkey should work 
together to promote Turkmen gas as an alternative to Iran. 
He suggested that the U.S. try to limit Turkmen gas exports 
to Russia and Iran.  The Ambassador responded that we do not 
have the influence to stop Russia and Iran from buying 
Turkmen gas and we do not think that Niyazov is interested or 
able to change the situation. 
 
4.  (U) On reform, Guler explained that Turkey had agreed 
with the IBRD to proceed with privatization of electricity 
generation and distribution.  However, deregulation would 
proceed more slowly in order to reduce the risks to private 
investors.  In the gas sector, he said the IBRD agreed that 
the current Natural Gas Law, which mandated that BOTAS 
transfer 80 percent of Turkey's natural gas import contracts 
to private companies was too ambitious.  He said Europe 
learned that increasing domestic competition does not 
necessarily reduce prices because Gazprom has so much market 
power.  He explained that amendments to the law will allow 
BOTAS to keep all of its current contracts; new companies 
will be able to enter into new import contracts as domestic 
demand grows.  If by 2008 this process has not worked, BOTAS 
will be forced to transfer some of the import contracts. 
 
5.  (SBU) Guler said he fully supported the need for 
attracting FDI to the energy sector, and therefore, he was 
being very careful dealing with investment disputes.  He said 
he believed that the Petroleum Law pending before Parliament 
would resolve the problem faced by Toreador Energy Resources, 
which has been unable to fully repatriate its capital because 
of a Turkish court decision overturning provisions in the 
1954 Petroleum Law.  Turning to the BOTs, Guler said the 
original BOT contracts were faulty, and as a result, the BOTs 
produce the highest cost electricity, which the government 
was forced to buy.  Guler emphasized that Turkey will fully 
respect the contracts and was seeking to talk to the 
companies to find ways to reduce their cost structure and 
pass the savings on to consumers.  He added his concern that 
the Turkey-based partners of the U.S. companies were not 
accurately reporting the situation to the U.S. companies and 
asked for the Ambassador's help.  He added that Turkey's tax 
authorities had found some evidence that the BOTs had 
falsified import receipts to increase their profits. 
EDELMAN