US embassy cable - 05ISTANBUL1127

UNCLAS SECTION 01 OF 02 ISTANBUL 001127 
 
SIPDIS 
 
SENSITIVE 
 
USDOE FOR CHARLES WASHINGTON 
 
E.O. 12958: N/A 
TAGS: BEXP, ENRG, EINV, ECON, TU, Istanbul 
SUBJECT: U.S. OIL COMPANY BLAZES TRAIL IN BLACK SEA NATURAL 
GAS 
 
 
 This message is sensitive but unclassified and was 
coordinated with Embassy Ankara.  Not for internet 
distribution.  Contains company proprietary information 
 
1. (SBU) Summary: In a project that company executives 
confidently predict will soon be a banner success for U.S. 
investment in Turkey, Torreador Energy Corporation (the 
former Madison Oil Company) is moving forward to full 
development of a natural gas field off of Akcakoca on 
Turkey's western Black Sea Coast-- the first economically 
viable such deposit in the Black Sea.  The company has 
already drilled one well, and is in the process of drilling a 
second.  If all proceeds according to plan, the company 
expects the field should enter production in September 2006, 
initially producing 75 MCFPP.  The company expects that it 
will recoup its 30-40 million USD investment in 12 months, 
and ultimately earn a 10-12 fold return.  With its other 
Black Sea licenses, including the coastal section west from 
Istanbul to the Bulgarian border, Torreador appears poised to 
play a significant role in development of Turkey's Black Sea 
energy resources.  End Summary. 
 
2. (SBU) Istanbul P/E Chief joined company officials and 
visiting investors for a site visit to the Akcakoca operation 
on June 27-28.  After first visiting the Atilla Dogan 
Metalworking Company in Izmit on the Sea of Marmara, where 
the company's platforms are being assembled, the group 
proceeded to Akcakoca itself, where drilling began at the 
beginning of May.  The company first drilled a delineation 
well at its Akkaya-1 site, five miles offshore in the South 
Akcakoca subbasin, confirming the presence of gas at depths 
ranging from 853 to 1136 meters.  Currently, the company is 
in the process of drilling two offsets to its Ayazli-1 
discovery well, where gas was initially discovered last 
summer.  Torreador is working with its partner, the Turkish 
National Petroleum Company (TPAO), to acquire shore property 
where it can construct a production facility, and is 
investigating options for installation of pipeline from the 
wells to the shore.  It will also construct a pipeline from 
the onshore plant to a nearby BOTAS pipeline, to tie into the 
national distribution grid.  The company predicts that first 
gas from its planned eight shallow wells will come onshore in 
September 2006, with gas from three deeper wells following 
three months later.  Torreador credits the excellence of its 
Turkish partners, including Dogan, with enabling it to 
envision bringing a field into operation in just over two 
years (calculating from the initial success of its July 2004 
test well) in an area without previous energy development. 
 
3. (SBU) All told, company officials, including Turkey 
General Manager Roy Barker and President Tom Graves, have 
previously estimated the field at 350 billion cubic feet of 
natural gas, and currently assign a value of up to $2 billion 
USD at current gas prices.  Given their 36.75 percent share 
(TPAO has 51 percent, and the Canadian firm Stratic has 12.25 
percent), they calculate their income over the life of the 
field at 750 million USD, or 450 million USD after taxes and 
royalties.  Company officials will meet with their Turkish 
and Canadian partners in Ankara on June 30 to get the 
go-ahead for full development of the field.  Initial 
production when the shallow wells come on line in September 
2006 will be 75 MCFPP per year, and will be ramped up 
therafter as additional wells come on line. 
 
4. (SBU) Given Turkey's growing energy demand and the high 
price of fuel oil, Torreador sees little difficulty in 
selling its product into the national grid.  Though it 
initially toyed with the idea of selling directly to 
customers such as the nearby Erdemir Steel Works (which has 
provided much of the steel for the company's installations), 
company officials are now leaning towards selling directly 
into the Botas network, since they anticipate their 
production will be well in excess of what Erdemir would 
consume.  Questioned about whether Turkey's excessive 
take-or-pay contracts might not impose price constraints on 
what they can recoup from their gas, Torreador officials 
expressed confidence that Turkey's gas price will hold.  They 
note that the country will soon put out a tender for volume 
release of take-or-pay gas, which will allow buyers to put 
their own markup on the gas.  This, they argue, will work for 
Madison/Torreador, since they generally try to keep their 
price just (4-5 percent) below the government price. 
5. (SBU) Comment: Torreador's hard work and persistence to 
date show what it takes for a U.S. company to be successful 
in Turkey's challenging investment climate.  Over the years 
the company has had to deal with problems ranging from the 
difficulty of repatriating its profits to high royalties 
charged by the government (Turkey's new petroleum law is 
expected to address both problems).  Torreador's experience 
also shows the potential for much greater investment if 
Turkey can improve its regulatory and legal system.  While 
Akcakoca seems to be on track to be a success story, 
Torreador continues to face regulatory challenges including 
TPAO's claim on an adjacent lot that Torreador believes is 
rightfully its to develop.  Despite this conflict, the 
company is cooperating with TPAO in Akcakoca, which has 
helped smooth regulatory hurdles and eased the process of 
onshore development.  Not least, Torreador has benefited from 
the skill and entrepreneurship of local suppliers, which has 
enabled it to move quickly from utilizing rigs with nearly 
100 percent U.S. content to more economically building them 
on site in the Sea of Marmara and shipping them through the 
Bosphorus to Akcakoca.  End Comment. 
 
ARNETT