US embassy cable - 04ANKARA6797

UNCLAS SECTION 01 OF 02 ANKARA 006797 
 
SIPDIS 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, EPET, TU 
SUBJECT:  TURKEY: IMPORTANT, BUT TENTATIVE, STEP ON NATURAL 
GAS SECTOR LIBERALIZATION 
 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1. (SBU) Summary: In a possible step forward on long-delayed 
gas sector liberalization, the Turkish State Pipeline 
Company BOTAS announced a tender for six of its natural gas 
import contracts in November.  Although legal obstacles may 
eventually require that the tender be switched to gas 
volumes, rather than contracts, the companies now expressing 
interest seem to be positioning themselves for that next 
step.  In the context of President Putin's visit December 5- 
6, the press has reported widely on Russian interest in 
investment in natural gas distribution and transit in 
Turkey.  End Summary. 
 
Legal Framework 
--------------- 
 
2. (SBU) The 2001 Natural Gas Market Law requires BOTAS to 
gradually transfer its gas import responsibilities to the 
private sector through a program of tendering contracts 
between BOTAS and foreign suppliers, such as Russia's 
Gazprom and Iran's NIGC.  Under the arrangement, BOTAS was 
supposed to transfer 10% of its total contract amounts each 
year starting from 2002, targeting a market share of 20% by 
2009.  However, BOTAS has so far failed to transfer any 
contracts to the private sector, claiming it was impossible 
due to confidentiality and take-or-pay clauses in the 
agreements and the likely reluctance of suppliers to release 
sovereign guarantees.  In July 2004, the GOT submitted a new 
draft law to the Parliament that would have amended the 2001 
law in support of BOTAS' position, and also aimed at 
maintaining BOTAS' monopolistic structure.  The private 
sector harshly criticized the draft and succeeded in having 
the GOT withdraw it from the Parliament. 
 
3.  (SBU) In response to private sector urging and a recent 
EU Progress Report's recommendations, the GOT decided to go 
ahead with the contract transfer tender, even though a World 
Bank report on the gas sector supported a switch to a "gas 
volume release" model whereby entirely new lot contracts 
would be negotiated between foreign gas suppliers and 
private Turkish importers.  BOTAS tendered a total of 16 BCM 
of its gas imports from Nigeria, Algeria, Iran and Russia, 
corresponding to 64% of Turkey's 25 BCM natural gas 
consumption projection for 2005.  Even if the actual 
transfer of the contracts does not work out due to legal 
obstacles or lack of approval from suppliers, tender 
participants may expect their interest in contract transfer 
to position themselves for a likely switch to bidding on gas 
volume lots. 
 
BOTAS Perspective 
----------------- 
 
4. (SBU) In a meeting with Econoff and Econ Specialist on 
October 6, BOTAS Natural Gas Purchase Director Arif Akturk 
criticized the 2001 Natural Gas Market Law for setting 
unrealistic targets.  Akturk cited several problems related 
to the contract transfer model stipulated by the law. 
First, he said that since most of the contracts were based 
on inter-governmental agreements -- "non-disputable" by law 
-- suppliers would not be willing to give up their sovereign 
guarantees and re-negotiate their contracts with a new 
private entity.  Akturk stated that the take-or-pay 
liabilities in long-term contracts were another major 
problem for potential private sector buyers.  The BOTAS 
Director was more optimistic about switching to the 
alternative of "gas volume release", whereby BOTAS would 
keep its contracts with its suppliers and sign a separate 
contract with private companies. 
 
Private Sector Interest 
----------------------- 
 
5. (SBU) Press reports claimed several international and 
domestic energy companies, including BP, Shell, Statoil, 
Unit International, Koc Group, Sabanci Group and Bosphorus 
Gas, were interested in BOTAS' contract transfers.  Econoff 
and Econ Specialist met with Shell Turkey Director Nusret 
Comert on November 9 to discuss the gas tenders.  Comert 
confirmed his company's interest in BOTAS' gas release, but 
thought volume release would be a more realistic method than 
contract transfer.  Comert fully supported the GOT's stated 
goal of liberalizing its gas sector, but thought that 
reducing the state import share to 20% in a few years was an 
extremely ambitious target for any country.  Comert believed 
BOTAS was likely to fail in transferring its gas contracts 
with this tender, but noted the possible exception of 
Bosphorus Gas, in which Gazprom has a 40% ownership share. 
He observed this could offer it an advantage in the three 
export contracts with Gazprom tendered by BOTAS. (Note: 
BOTAS requires potential bidders having existing relations 
with any one of BOTAS' suppliers to receive the Competition 
Authority's approval to participate in the tender.  Sector 
representatives comment the Competition Authority would not 
have a problem approving Bosphorus Gas.  End Note) 
 
6. (SBU) In a separate meeting, BP Business Development 
Director Oktay Sen identified several uncertainties and 
potential legal problems with respect BOTAS' tender, so BP 
had not yet decided to participate in the tender.  Sen 
commented that an apparent BOTAS requirement for companies 
to bid for the contract transfer tender in order to be able 
to participate in potential subsequent volume release 
process was unusual and problematic.  Moreover, Sen said 
that in effect the current tender is explicitly for the 
"right to negotiate" with BOTAS' purchase contract partners 
(i.e., Russia) without knowing specific contract terms. 
 
The Russians are Coming 
----------------------- 
 
7.  (SBU) The tender announcement comes against the backdrop 
of the December 5-6 visit of President Putin.  Embassy 
contacts and the press have noted Russian interest in 
signing a MOU with BOTAS expressing Gazprom's intention to 
invest in Turkey's energy sector given its current gas 
sales, specifically in natural gas distribution, gas 
storage, gas transmission within and beyond Turkey, and a 
potential LNG terminal in Ceyhan.  BOTAS' Akturk said 
Gazprom's taking over a significant portion of BOTAS' gas 
imports from Russia, possibly through participation in 
multiple companies, could pose risk of undue influence in 
the market.  The World Bank report notes the possibility of 
unfair competition by Gazprom - the world's largest gas 
producer, which has developed a strategy for expanding 
downstream into European gas markets.  While Gazprom has 
shown flexibility in revising existing take-or-pay contracts 
with Turkey, Russia may view its economic interests to be 
compromised by the development of alternative gas transit 
projects across Turkey. 
 
8.  (SBU) Comment: The gas tender announcement constitutes a 
concrete step in the right direction.  Despite confusion and 
criticism with respect to BOTAS' two different gas release 
models, there seems to be considerable interest from 
companies.  As existing dominant gas supplier, Russia is a 
natural partner for opening up Turkey's gas market. 
Turkey's regulatory and competition bodies will have to 
remain vigilant to safeguard the transition to healthy 
competition and to avoid undue influence from the dominant 
supplier Gazprom.  End Comment. 
 
Edelman