US embassy cable - 05ANKARA566

UNCLAS SECTION 01 OF 02 ANKARA 000566 
 
SIPDIS 
 
SENSITIVE 
 
USDOE FOR CHUCK WASHINGTON 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, TU 
SUBJECT: TURKEY ENERGY: BTC, GAS, AND LIBERALIZATION 
 
REF: A. ANKARA 492 
 
     B. ANKARA 323 
     C. ANKARA 131 AND PREVIOUS 
 
1.  (SBU) SUMMARY: According to the Energy UnderSecretary, 
Turkey continues to make progress on liberalizing its 
electricity and gas sectors, but there are still details to 
be filled in on the underlying legislation and action plan 
for privatization.  He said Russia is welcome to compete for 
privatization opportunities, but noted that Gazprom's 
Bosphorus Gas lost a bid for the tender for the Izmir gas 
distribution.  BTC is on track for second half 2005 oil flow, 
but GOT will seek cost-sharing from BP on cost over-runs, 
claiming shared responsibility.  The GOT continues to drag 
its feet on issuing conditional licenses for potential 
Bosphorus oil bypass projects, claiming that projects must 
first show their viability by having demonstrated oil shipper 
support.  The GOT believes "Voluntary Principles" can be 
useful mechanism for engaging stake-holders.  End Summary. 
 
2.  (SBU) ELECTRICITY LIBERALIZATION: GOT Ministry of Energy 
(MENR) Undersecretary Sami Demirbilek covered the full range 
of energy issues in a January 28 meeting with EconCounselor 
and Energy Officer.  Demirbilek was pleased that American 
company AES was serious about considering investment in 
Turkey's electricity distribution sector (Ref A).  He said he 
had strongly encouraged AES not to wait until tender 
documents were issued, but to make comments now on potential 
privatization methodology to the GOT offices, including the 
Treasury - responsible for setting the sale's parameters. 
Demirbilek emphasized that the privatization methodology 
should assure supply security and best service, while 
conforming to a structure compatible with EU and 
international standards to attract the most qualified foreign 
investors.  He implied that the full asset sale methodology 
supported by MENR was the preferable sale method. 
 
3.  (SBU) ELECTRICITY INVESTMENT: On the need for greater 
electricity investment to keep up with strong demand growth 
(demand projected to exceed supply by 2010-12), Demirbilek 
noted that the new Electricity Market Law and Electricity 
Strategy Paper called for the private sector to cover growing 
demand over the medium and long term.  However, he said these 
documents were not specific on what the government should do 
if the private sector does not undertake needed investments. 
In other words, said Demirbilek, there may be a need for 
specific incentive and/or tendering process provisions with 
associated identification of detailed time-frames and 
organizational roles.  He asserted that the privatization of 
the electricity distribution system would create a 
market-oriented customer base for the subsequently privatized 
generation sector. 
 
4.  (SBU) BUILD-OPERATE-TRANSFER (BOT) POWER PLANTS: 
Demirbilek gave assurances that the GOT would not violate its 
contracts with the controversial BOT projects dating from the 
late 1990's (two of which have U.S. involvement; SEPTEL).  He 
said he expected that the GOT and the BOT sponsors would be 
able to achieve through negotiation a mutually beneficial 
outcome that included a reduction in prices paid and 
guaranteed by the government.  Demirbilek said there was now 
recognition by investors that Turkey's economic stability and 
growth were sustainable and there was less perception of 
country risk.  Therefore, he said he expected that the 
parties would reach a compromise without creating any 
concerns on the part of international investors (i.e., GOT 
would honor the contracts). 
 
5.  (SBU) BTC: The Undersecretary stated that 
Baku-Tbilisi-Ceyhan (BTC) pipeline would be ready to ship its 
first oil near the beginning of second half 2005, consistent 
with BTC statements (Ref C).  He confirmed that general 
contractor BOTAS (the Turkish pipeline company) had taken 
over the subcontract for construction of Lot A adjacent to 
Georgia.  Although emphasizing that it would not hold up 
construction completion, he said that GOT would contest BP's 
position that the GOT must cover all the cost overages for 
construction in Turkey.  Demirbilek felt that BP was 
responsible for selecting and working with the subcontractors 
which created the eventual construction delays.  He said that 
if necessary the dispute would be taken to international 
arbitration to resolve, but he repeated that this would not 
interfere with or delay completion of BTC. 
 
6.  (SBU) BOSPHORUS BYPASS AND VOLUNTARY PRINCIPLES: 
Demirbilek stated that oil shippers and the market must 
decide on any potential Bosphorus oil bypass, based on 
commercial benefits (Ref B).  He said that the GOT did not 
feel pressure and could wait for a market-based solution to 
emerge.  The official emphasized that the GOT was not in the 
position of picking routes or projects.  He said that there 
had not been any decisions during recent high level 
Turkish-Russian discussions.  In response to our question on 
status of conditional permits, Demirbilek said too many 
people were waiting for a "flag-ship" certificate; he said 
that the GOT was loathe to designate a project in this way; 
rather, the "flagship" would be the project that obtained 
support from an oil shipper (without needing a certificate). 
He said that Russian and American shippers needed to get 
together to promote a potential bypass as a way to mitigate 
the recognized risks of congestion in the Bosphorus Straits. 
Demirbilek said that the MFA's proposed "Voluntary Principles 
for Tanker Traffic in the Turkish Straits" concept could be a 
useful way of engaging all stake-holders in grappling with 
the issue. 
 
7.  (SBU) NATURAL GAS DISTRIBUTION AND RUSSIA: Demirbilek 
stated that Bosphorus Gaz, a Turkish partnership with 
Russia's Gazprom, was unsuccessful in its bid for the gas 
distribution tender for the Turkish port city of Izmir.  He 
said that the Russians had expressed interest in investing in 
Turkey's gas market; the GOT said Russian companies were 
welcome to compete.  Noting that Turkish firm Kolin Insaat 
submitted the lowest bid (out of 11 bids), Demirbilek 
wondered aloud whether the winning firm would be able to 
perform (Note: we understand that the pre-qualification 
evaluation of bidders may not have been adequate.  End Note.) 
 Russia currently delivers over 60 % of Turkey's natural gas, 
with a growing portion coming via the Blue Stream pipeline. 
Russia has shown some flexibility in reportedly not invoking 
pay provisions for take-or-pay contracts, given still 
excessive supply of gas for the Turkish market. 
 
8.  (SBU) COMMENT: The GOT official's remarks on BOT's were 
much more accommodating and less threatening than some past 
GOT comments.  It appears that the GOT is engaged in 
strategic thinking on how to cope with the existing BOT 
contracts without harming the investment environment.  The 
GOT remains passive and unsure how to move forward on 
facilitating a Bosphorus bypass solution. 
 
EDELMAN