US embassy cable - 04ANKARA6195

UNCLAS SECTION 01 OF 02 ANKARA 006195 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, ETRD, IZ, TU 
SUBJECT: KARADENIZ STOPS DELIVERY OF ELECTRICITY FROM 
TURKEY TO IRAQ DUE TO NON-DELIVERY OF HEAVY FUEL OIL 
 
Sensitive But Unclassified.  Please Handle Accordingly. 
 
1. (SBU) SUMMARY: According to the Turkish company Karadeniz 
(KARTET), it informed the Iraq Ministry of Electricity that 
as of October 26 it was no longer able to deliver electricity 
from Turkey to Northern Iraq because of non-delivery of 
contractual heavy fuel oil (HFO) from Iraq.  According to 
KARTET, the company installed 200 MW of 
generation/transformer capacity at its Silopi facility, but 
had received no shipments of HFO from Iraq.  In good faith 
efforts to advance the deal, KARTET said it purchased some 
HFO and electricity from within Turkey, but was unable to 
continue doing so, and blamed administrative/logistical 
problems and now security problems in Iraq for the inability 
of Iraq to provide the contractual HFO.  End Summary. 
 
Heavy fuel oil for electricity partial barter deal 
--------------------------------------------- ----- 
 
2.  (SBU)  Turkish company Karadeniz (KARTET) rep Orhan 
Karadeniz explained to ECONOFF on November 1 the 
circumstances which led the company to inform the Iraq 
Ministry of Electricity (MOE) that it was stopping delivery 
of electricity to Northern Iraq on October 26 because of 
non-delivery of contracted heavy fuel oil (HFO) from the 
Baiji refinery in Northern Iraq.  Karadeniz said that per the 
December 2003 renegotiated contract with the Iraq MOE, KARTET 
was to provide 110 million kilowatt-hours per month (150 Mega 
Watt average - to increase to 240 MW in 2005).   For its 
part, Iraq was to provide 30,000 tons of HFO per month at a 
fixed price to generate the electricity to be transmitted and 
to contribute to the compensation to KARTET.  The partial 
barter deal allowed the Iraqi MOE to at its option pay the 
balance for the electricity (6.6 cents per kwh) by up to 
30,000 tons of HFO at market price and/or cash.  According to 
Karadeniz, Iraq had delivered not a drop of HFO to date. 
 
3.  (SBU) According to Karadeniz, the Iraqi MOE had faced a 
series of problems in delivering the contractual HFO.  First 
the main Northern Iraqi refinery at Baiji had shut down and 
was then restarted.  Subsequently, MOE had not been able to 
work out financial/administrative arrangements with the Iraqi 
State Oil Marketing Organization (SOMO).  More recently, 
KARTET had worked out a trilateral arrangement with MOE and 
SOMO, but the security situation had become prohibitive. 
According to Karadeniz, KARTET had arranged for Iraqi truck 
drivers to ship the HFO to Zakho on the Iraqi side of Harbur 
Gate; then Turkish truck drivers would take the shipment on 
to Silopi.  Karadeniz said that two "terrorist/mafia" groups 
were currently stopping all truck traffic. 
 
Good Faith Efforts to Deliver Electricity 
----------------------------------------- 
 
4.  (SBU) Even in light of non-delivery of Iraqi HFO, 
Karadeniz said KARTET endeavored to deliver electricity in 
good faith to Iraq by purchasing HFO from Turkish refineries 
and/or electricity from the Turkish state electricity trading 
company (TETAS).  Karadeniz said that Turkish HFO was no 
longer physically available from the nearby Batman refinery 
and the arrangement with TETAS was very restrictive and 
expensive (necessitating delivery of electricity at night 
prior to the shut-down).  Karadeniz said that the arrangement 
with TETAS provided for the purchase of one MW from the grid 
for each MW generated at Silopi.  This was, however, very 
restrictive if there was no generation (current situation) 
and the GOT had been to date unable to be more flexible for 
legal reasons.  He explained that KARTET had to notify TETAS 
two months in advance and then commit to a take-or-pay cap 
arrangement for the amount, subject to substantial penalties 
for any excess electricity taken.  According to Karadeniz, 
although the GOT had allowed KARTET to begin electricity 
export very quickly without finalizing pricing, the company 
had had to pay an excessive price to TETAS for electricity 
taken off the grid for the first nine months. 
 
5.  (SBU) Karadeniz claimed that his company had complied 
early with its commitment to increase and test transformer 
and production capacity to 240 MW by 2005.  In short, he said 
his company had met all technical and contractual 
requirements to provide reliable capacity at or above 200 MW. 
 The KARTET rep said that at this level of production, his 
company could provide significant electricity as far as 
Mosul.  Karadeniz said his company had sought to cooperate 
and be flexible and was still seeking alternative sources of 
HFO, but was now aiming to rely on his plants' own 
generation. 
 
6.  (SBU) In a subsequent conversation, Karadeniz said that 
KARTET had been able to source a limited quantity of HFO in 
Turkey to allow limited operation over the next week. 
Karadeniz also said that he understood that there would be 
HFO available at the Daura refinery in Baghdad and was having 
his logistics people evaluate potential trucker routes based 
on the security environment.  He said that he would welcome 
any potential help from the U.S. military. 
7.  (SBU) A senior official at the Turkey Ministry of Energy 
said it was aware of Karadeniz, difficulties and earlier 
compulsion to deliver electricity purchased from the Turkish 
grid only at night.  He said the GOT was working to change 
the Karadeniz electricity purchase contract to provide a more 
facilitative "market mechanism". 
 
8.  (SBU) COMMENT:  Embassy cannot verify all the specifics, 
but the Karadeniz version appears credible.  Our 
understanding is that the GOT in fact played a supportive 
role in quickly providing special permits for the Silopi 
plant to sell electricity to Iraq, but purchases from the 
Turkish grid were meant to supplement, not wholly supply, the 
contracted amount of electricity.  Ministry of Energy 
officials claim to be working to help resolve the situation, 
but state that changes in legislation and/or regulation will 
be required to allow significant export of electricity from 
the Turkish grid. 
 
9.  (U) Baghdad Minimize Considered. 
EDELMAN