US embassy cable - 04ANKARA6678

UNCLAS SECTION 01 OF 03 ANKARA 006678 
 
SIPDIS 
 
SENSITIVE 
 
USDOC FOR NEWMAN AND FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, EINV, EWWT, TU 
SUBJECT: TURKEY STEAM ENERGY CONFERENCE IN ISTANBUL - 
LIBERALIZATION AND REGIONAL CHALLENGES AND OPPORTUNITIES 
 
REF: A. ANKARA 6195 
     B. ANKARA 6479 
 
1.  (SBU) SUMMARY: A well-attended energy conference in 
Turkey provided expressions of commitment on the part of the 
government to move forward on energy liberalization, but 
failure to articulate next policy, legislative, and 
regulatory steps.  The private sector is eager to move ahead 
and take advantage of potential investment opportunities, but 
is frustrated that the liberalization process and timing 
remain unclear.  Conflict between the Energy Ministry and the 
Energy Market Regulatory Authority (EMRA) contribute to the 
lack of clarity.  Because of long lead times for energy 
project finance and construction, Turkey may face a shortage 
of electric power generation capacity in 3-5 years if it 
fails to foster a positive investment environment now.  END 
SUMMARY. 
 
2.  (SBU) Embassy Energy Officer David Young and Economic 
Specialist Aysem Sargin attended the fourth STEAM (Strategic 
and Technical Economic Research Center) sponsored "Energy 
Arena" in Istanbul November 23-24.  STEAM has established 
itself as one of the premier sponsors of energy sector 
conferences in Turkey and the session was well attended by 
high-level officials from the GOT (Energy Minister, 
Undersecretary, Dep U/S, MFA, TPAO, etc.) and the private 
sector (Shell, BP, Chevron-Texaco, etc.)  Overall, government 
officials expressed commitment to energy liberalization, 
while private sector reps expressed strong interest, but 
frustration with continued questions on timing and process. 
Regional issues, including East-West Corridor and Iraq 
linkages were major topics. 
 
Electricity 
----------- 
 
3.  (SBU) The biggest domestic issues on participants' minds 
were the prospective liberalization and privatization of 
Turkey's electric and natural gas distribution networks. 
While Turkish officials stressed their commitment to move 
forward (Budak Dilli, DG Energy Affairs, MENR, was 
particularly impassioned on the topic), private sector 
players were frustrated by the many delays and lack of 
clarity.  Despite twenty municipal distribution networks for 
electricity distribution having been identified, there have 
still been legal and regulatory delays.  The World Bank 
electricity liberalization road map was viewed as very 
helpful, but again implementation has been delayed because of 
gaps in legal and regulatory underpinning.  Many licenses 
have been granted for electricity production, but, here too, 
there have been delays in implementation.  There was great 
interest from the private sector in possible privatization of 
EUAS (the state electricity production company), but still 
questions on process and timing.  (The most likely approach 
would be bundling of small, regional groups of diverse energy 
type facilities.) 
 
Natural Gas ) Volumes Not Contracts Transfer? 
--------------------------------------------- 
 
4.  (SBU) In his speech, Energy Minister Guler emphasized 
increased interest in renewables and nuclear (he recently 
announced a desire to put in place multiple power plants), as 
well as the recent tenders for transfer of BOTAS natural gas 
take or pay purchase contracts to private companies (septel). 
 Although there are press reports of significant interest, 
private comments indicated skepticism on whether the tenders 
will succeed and questions about the exact rules and process. 
 In effect, the current tender is for the "right to 
negotiate" with BOTAS' purchase contract sales partners 
(i.e., Russia) without knowing confidential existing contract 
terms.  Many observers expect legal obstacles may force 
Turkey to opt later to selling gas volumes via tenders, 
rather than the underlying gas contracts.  Public expression 
of interest may be jockeying for the presumed next step of 
transfer of gas volumes.  There were also concerns expressed 
in the corridor about Bosphorus Gas having insider knowledge 
or position in the tender process because of significant 
ownership from Gazprom (forty percent). 
 
Russia Connection 
----------------- 
 
5.  (SBU) BP officials also privately expressed concerns that 
some expiring Russian contracts might be extended, 
potentially putting at risk the procurement of Shah Deniz gas 
from Azerbaijan.  Separately, the GOT has tendered nineteen 
contracts for municipal natural gas distribution.  Russian 
entities have indicated interest in these.  (Note: There will 
be incentives for GOT and GOR to find energy deliverables in 
advance of President Putin visit December 5-6.  End Note) 
Although, the natural gas distribution privatization process 
is still underway; many contacts felt  pre-qualification 
procedures have not been sufficient, so it is unclear if 
early winners can achieve their commitments.  (Note: The 
World Bank and GOT released a natural gas sector strategy 
paper in September, citing domestic liberalization as 
critical from a number of perspectives, including realization 
of regional transit opportunities.) 
 
Electricity Export to Iraq 
-------------------------- 
 
6.  (SBU) Many discussions moved beyond domestic 
liberalization to regional issues.  Energy Undersecretary 
Demirbilek privately blamed EMRA (Energy Market Regulatory 
Authority) for the Karadeniz Company's problems in exporting 
electricity to northern Iraq, including excessive costs for 
purchases of electricity off the grid (Ref A).  (Note: There 
was general and frequent "bashing" of EMRA at the conference. 
 End Note.)  Karadeniz was the main conference sponsor, which 
earned them a seat on a panel to describe their challenges in 
implementing their "power for friendship" program with Iraq. 
 
Bosphorus Bypass 
---------------- 
 
7.  (SBU) MFA DDG for Energy Hakki Akil used the conference 
as a platform to articulate the Bosphorus bypass dilemma and 
the value of "Voluntary Principles" as a constructive 
public/private approach for encouraging transit of oil 
through pipelines "as long as it is commercially feasible", 
as an alternative to shipping through the Turkish Straits. 
While Akil applauded the new VTS (Vessel Transit System) as a 
great addition for safety, he emphasized the importance of 
working together to realize oil bypass pipeline solutions. 
As an example of a country limiting tanker traffic for safety 
reasons, he pointed out that Italy has forbidden passage of 
oil tankers between Sardinia and the mainland.  Akil 
rearticulated support for Samsun-Ceyhan as the best bypass 
option, given existing infrastructure and environmental 
concerns about trans-Thrace proposals.  There were some 
private comments in support of the Voluntary Principles, but 
also questions about next steps (who actually signs? how to 
engage Russians?).  On another topic, Akil noted that in 
order to avoid succumbing to the pressure of connecting to 
the large gas reserves in Iran, there should be collective 
efforts to link with Turkmenistan. 
 
8.  (SBU) In BP rep Mike Bilbo's public comments, he stressed 
the environmental standards set by BTC, noting the intense 
NGO pressure which had come to bear on the project.  Citing 
Alaska, he noted that using pipelines over tankers was 
becoming a more accepted solution for moving large quantities 
of crude oil to markets.  With respect to BTC, he noted that 
there was no room to relax, now that construction was nearly 
complete; the project would be operational fifty plus years 
and would require consistent diplomatic efforts. 
 
9.  (SBU) In an opening speech and CNN Turk interview, Ankara 
Energy Officer Young stressed the consistency of U.S. 
regional energy policy, strong support for liberalization and 
contract sanctity and a Bosphorus bypass (but we don't pick 
the winner; GOT should move forward on awarding timely 
permits to let investors take on the risk), and strong U.S. 
opposition to links to Iran.  Apart from an "agreement to 
disagree" on policy with respect to Iran, there was broad 
acceptance of U.S. regional energy policy and recognition of 
the value of the U.S. as an actor in moving the East-West 
Energy Corridor forward. 
 
10.  (SBU) Comment: Although interested in liberalization and 
privatization opportunities, companies are skeptical and 
frustrated about delays in filling in the blanks of the new 
regulatory and legal structure for the energy sector.  Lack 
of clarity resulting in further delays in liberalization is a 
clear disincentive to new investment.  This could put Turkey 
at risk in 3-5 years when the GOT and most observers estimate 
that there will be a shortage of electricity generation 
supply in Turkey.  End Comment. 
 
11.  (U) Baghdad minimize considered. EDELMAN