US embassy cable - 04ANKARA4601

UNCLAS SECTION 01 OF 02 ANKARA 004601 
 
SIPDIS 
 
SENSITIVE 
 
STATE ALSO FOR EB/CBED AND EUR/SE 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, ETRD, IR, TU 
SUBJECT: TURKISH ENERGY OFFICIALS ON LIBERALIZATION, IRAN, 
AND INVESTMENT ISSUES 
 
REF: ANKARA 4443 
 
This cable is sensitive but unclassified.  Please handle 
accordingly. 
 
1.  (SBU) SUMMARY: Turkey's BOTAS (Petroleum Pipeline 
Corporation) Director Mehmet Bilgic expressed confidence in 
Turkey and BOTAS' growing role as an energy transit country 
for oil and gas, citing that the Baku-Tbilisi-Ceyan oil 
pipeline and Shah Deniz gas pipeline (tendering process) were 
on schedule.  He lamented the continued problems with the 
pipeline from Northern Iraq, complaining about the 
significant costs incurred by BOTAS to maintain the often 
unused line.  Bilgic expressed frustration that BOTAS' 
repeated offers to provide help in Iraq, and specifically in 
maintaining the Northern Iraq pipeline, had not been taken. 
While the BOTAS Director expressed support for eventual 
privatization of BOTAS, he strongly criticized requirements 
under the Natural Gas Law for transferring 80 percent of its 
purchase contracts to the private sector in four years.  He 
emphasized that BOTAS' contracting parties did not want to 
reveal terms or have a private entity substituted for BOTAS. 
Finally, Bilgic expressed respect for U.S. policy on Iran and 
Turkey's prioritization of transit of gas from the Caspian; 
however, he noted that long-term Turkey could not stand in 
the way of demand from Europe and supply from Iran.  The 
Deputy U/S at the Energy Ministry provided pessimistic views 
on resolving Build-Operate-Transfer electric projects and 
provided views on Bosphorus Bypass possibilities.  END 
SUMMARY. 
 
BOTAS - Privatize shares not purchase contracts? 
--------------------------------------------- --- 
 
2.  (SBU) In a August 9 meeting with Econoff and 
EconSpecialist, Turkey's BOTAS (Petroleum Pipeline 
Corporation) Director General Mehmet Bilgic expressed 
confidence in the strength of his company, while noting the 
challenges of developing a robust domestic network to satisfy 
natural gas "take or pay" contracts (4000 km under 
construction).  (Note: BOTAS is Turkey's state pipeline 
company, handling both oil and natural gas transit.  End 
Note.)  According to Bilgic, Turkey had been successful in 
revising its gas purchase price with Russia and would 
continue discussions with Iran and Algeria.  He noted that 
the Baku-Tbilisi-Ceyhan (BTC) oil pipeline was on-track, 
including the Turkish side.  The Director said that Shah 
Deniz pipeline contract tendering was underway and expected 
formal ground-breaking later this year for end of 2006 
completion.  Bilgic lamented the on-going problems and 
sabotage affecting the oil pipeline from Northern Iraq, and 
complained about the costs incurred by BOTAS to maintain its 
portion of the pipeline given infrequent flows.  The Director 
reminded Econoff that BOTAS' repeated offers to provide help 
in Northern Iraq had not been taken up. 
 
3.  (SBU) While expressing support for privatization of 
BOTAS' ownership, and claiming the current government 
supported this, the BOTAS Director was extremely critical of 
the 2001 Natural Gas Law (part of intended broad reform and 
dismantling of government monopolies) which mandated transfer 
of 80 percent of BOTAS' import purchase contracts by 2009. 
He flatly rejected the law and said that BOTAS would not be 
able to accomplish the mandate.  Warming to the topic, Bilgic 
said the law was a flawed reaction to the State's past 
mishandling of contracts, and the law's supporters wrongly 
presumed that this would create enhanced competition. 
Moreover, he stressed that contracting parties (Russia and 
others) did not want to reveal contract terms and would not 
agree to have a private entity substituted for BOTAS (and the 
implicit state guarantee).  (Embassy has heard similar 
complaints before from BOTAS.) 
 
4.  (SBU) Bilgic stated that BOTAS would announce a tender 
for some of its contracts in ten days, so that the Energy 
Market Regulatory Authority (EMRA) and others could see that 
BOTAS was making a good faith effort, but repeated that 
tendering of contracts was not achievable.  EMRA announced 
the gas purchase contract tendering process in the press on 
August 12, after threatening to fine BOTAS for being 
delinquent in achieving contract tendering to date. 
According to the press account, TUSIAD (Turkish 
Industrialists and Businessmen's Association) convinced the 
PM to support BOTAS' tendering of gas contracts.  The BOTAS 
Director emphasized that Turkey needed to continue to focus 
on freeing up and diversifying access to Turkey from all 
directions.  He also noted that the National Assembly would 
be taking up a draft law amendment which would "improve" the 
contract purchase process (there has been debate on BOTAS' 
final targeted percentage of contracts).  Bilgic claimed the 
obligations on BOTAS should be less ambitious; rather, there 
should be guidance for BOTAS to seek to transfer purchase 
contracts "as it sees fit" and provide for direct 
negotiations with the seller, instead of by tendering. 
 
Iran natural gas potential - we respect U.S. policy, but... 
--------------------------------------------- -------------- 
 
5.  (SBU) Broaching the topic of Iran natural gas, Bilgic 
stated that while U.S. policy was important and Shah Deniz 
and Caspian egress was the priority, Iranian gas was 
attracting great interest from Europe.  He cited the number 
of European companies already doing business in Iran.  The 
BOTAS Director said that if Turkey "had the capacity and 
market, it could not continue to say no to Iran".  He cited 
the potential Nabucco consortium project for piping gas to 
Austria, noting that ABN Amro had just announced its advisory 
role.  Bilgic claimed that this and other projects would 
create demand for gas transiting Turkey which would exceed 
Shah Deniz supply.  Bilgic spoke positively of the 
Turkey-Greece natural gas agreement signed late last year, 
noting that Turkey had laid 220 km of pipeline on its side. 
More on Bosphorus Bypass 
----------------------- 
 
6.  (SBU) In a separate meeting August 10 with Econoff and 
EconSpecialist, Energy Ministry Deputy U/S Selahattin Cimen 
stated that the GOT clearly supported Bosporus bypass 
projects (recognizing that BTC is effectively in hand). 
Similar to comments from other GOT officials in reftel, he 
emphasized that these projects must be private and must 
guarantee transfer of certain pipeline volumes to evidence 
feasibility and allow the GOT to favor those providing for 
the largest volume of oil.  Cimen recognized that there had 
been lamentable delays, and he asserted that the GOT would 
facilitate issuance of permits.  He suggested that 
environmental studies and now unnecessary concern about 
waiting for BTC to reach close to completion had delayed 
permitting until now.  Comment: Cimen seemed to still 
articulate an excessive role for the GOT in identifying the 
competitive projects based on the throughput guarantees they 
would provide.  End Comment. 
 
Threats on BOTs? 
---------------- 
 
7.  (SBU) Cimen stated that the Turkish energy sector was 
undergoing significant transition to a freeer energy market, 
but lamented that some projects "contradicted this market 
model" and were not economic for Turkey.  While expressing 
the importance of assuring a welcoming and transparent 
environment for foreign investment, he delivered an only 
slightly veiled threat on the long-standing disputes with 
Build-Operate-Transfer (BOT) projects (two with American 
involvement- Enron Trakya and Edison Mission) over contracted 
electricity pricing and government purchase contracts (or 
potential government buy-out prices).  Pending resolution of 
these disuputes, the GOT has not delivered required licenses. 
 Cimen accused these companies of serious economic and 
"ethical" misconduct; moreover, he suggested that if these 
companies did not make a "gesture" and accept lower prices, 
the GOT would have to take legal action against their 
"misconduct"!  Econoff responded by emphasizing the 
importance of contract sanctity in assuring an attractive 
environment for foreign investment.  Cimen stated that the 
GOT would insure that all its actions had a legal foundation. 
EDELMAN