US embassy cable - 02ANKARA8863

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008863 
 
SIPDIS 
 
 
STATE FOR E, EB/CBED, EB/ESC, EUR/SE, NEA/NGA 
STATE PASS NSC FOR QUANRUD AND BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
USDOE FOR PUMPHREY/ROSSI 
 
 
E.O. 12958: DECL: 08/08/2012 
TAGS: ENRG, ECON, EPET, ETTC, AJ, GG, KZ, TU, IZ, Iraq 
SUBJECT: IRAQ AND THE TURKISH GAS MARKET 
 
REF: A) ANKARA 8018 B) ANKARA 5216 C) ANKARA 3837 D) 
     2001 ANKARA 4960 
 
 
Classified by DCM Robert Deutsch, Reason 1.5 (b,d) 
 
 
1. (C) Summary and comment:  The GOT denies recent press 
reports that suggest new developments on the Turkey-Iraq gas 
project.  Although the MFA previously told us a 1997 
Turkey-Iraq protocol on natural gas was null and void, BOTAS 
claims the protocol still exists, and was discussed as 
recently as July 2002.  The MFA maintains that a change in 
Iraq would not affect the gas picture in Turkey; however, 
BOTAS General Manager Bildaci believes that, if Iraqi gas 
becomes available any time soon, it could affect Shah Deniz. 
As the Shah Deniz gas project continues to be delayed, and 
the prospect of an Iraq post-sanctions appears more 
conceivable to the Turks, it is likely that Iraqi gas is 
playing into the GOT's -- and BP's -- calculations.  We 
believe that ultimately Turkey's commitment to the East-West 
Energy Corridor and to its Caspian neighbors will prevail, 
and it will hold up its end of the bargain on Shah Deniz. 
However, we would be more convinced that a change in Iraq 
would not affect Shah Deniz if the project were sanctioned 
and construction underway -- yet another reason to continue 
our push with all parties to move to sanction as soon as 
possible.  End summary and comment. 
 
 
GOT Denies Progress on Iraq Gas Deal, Speculates on Future 
--------------------------------------------- ------------- 
 
 
2. (C) There have been several press reports over the last 
few weeks quoting a "top Iraqi oil official" as saying that 
Iraq is seeking to become the "main gas exporter" to Turkey. 
MFA Deputy Director General for Energy Hakki Akil, BOTAS 
General Manager Bildaci, and TPAO officials have all 
confirmed to us that there have been no recent discussions or 
developments on the Turkey-Iraq gas project.  (Note:  Turkey 
and Iraq signed in May 1997 a protocol for the export of 
natural gas to Turkey.  See paras 8-9 for a history of the 
project).  Views differ, however, as to potential progress on 
this deal in an Iraq post-sanctions. 
 
 
3. (C) MFA Deputy DG Akil told us that change in Iraq would 
not affect the gas picture in Turkey; in particular, he said, 
it would not affect the government's commitment to the Shah 
Deniz gas pipeline.  Akil claimed that the GOT had never 
envisioned Iraqi gas for the Turkish market; therefore, even 
if it suddenly became available at a good price, it would not 
be competing with Shah Deniz gas. 
4. (C) BOTAS General Manager Bildaci (strictly protect) 
provided a different view.  Bildaci noted that Iraqi gas from 
an Iraq post-sanctions would be significantly cheaper than 
any gas Turkey is currently importing; therefore, if that gas 
became available in the very near future, it certainly had 
the potential to affect projects like Shah Deniz.  A TPAO 
official told us that, while there had been no recent 
progress on talks with Iraq, they were "keeping the channels 
of communication open." 
 
 
5. (C) A BP executive told econoff that Iraq is not figuring 
into BP's planning on Shah Deniz at this point because BP 
believed that Turkey 1) had no space for Iraqi gas; and 2) 
was committed to Shah Deniz.  A February 2002 internal BP 
report on gas in Turkey states that "by the time Saddam 
Hussein goes, Turkey could be fully supplied by other gas 
importers . . . the about-turn on policy will come when 
Saddam Hussein goes and the UN embargo is lifted; there will 
be enormous pressure on Turkey to increase trade with Iraq by 
re-opening the Kirkuk-Ceyhan oil pipeline and very quickly 
putting gas back on the agenda, although there will be more 
words than action."  (Note:  the Kirkuk-Ceyhan pipeline is 
open and being used to transport oil under the oil-for-food 
program). 
 
 
Iraqi Gas, Shah Deniz and Turkey's Supply/Demand 
--------------------------------------------- --- 
6. (C) Industry analysts estimate that, given Turkey's 
existing gas contracts (including Shah Deniz), it will need 
to increase gas imports starting in 2012.  This estimate 
assumes medium demand/growth, exports to Greece of 2 bcm 
annually, and Turkey purchasing all contracted gas at the 
take-or-pay levels.  Under this scenario, the Turkish 
government (or private companies, in a liberalized market) 
would not be in a position to sign new gas contracts for six 
to eight years.  However, if inexpensive Iraqi gas became 
available before that, BOTAS could try to renegotiate some of 
its more expensive gas contracts, particularly with Russia, 
to lower prices or to create space for Iraqi gas.  As 
reported in ref A, BOTAS is currently paying, or will pay, 
the following amounts for its imported gas. 
 
 
Gas Contract      USD per thousand cubic meters 
--------------------------------------------- 
Russia West 1       130 
Russia West 2       134 
Blue Stream      132 
Iran                123 
Shah Deniz           95.5 
 
 
7. (C) Assuming that Shah Deniz has been sanctioned and has 
entered the construction phase, BOTAS would be less likely to 
try to renegotiate that contract.  As reported ref B, 
Turkey's powerful National Security Council has strongly 
endorsed the Shah Deniz pipeline.  Senior Ministry of Energy 
and MFA officials recognize that construction of Shah Deniz 
enhances Turkey's national security by diversifying its 
energy supply, solidifying its role in the East-West Energy 
Corridor, and helping to ensure the prosperity and stability 
of its Caspian neighbors.  Just as these officials did not 
try to renegotiate the Shah Deniz contract when Turkey's gas 
oversupply problem became apparent in early 2002 (ref c), 
they likely will look to other contracts first if cheap Iraqi 
gas becomes available.  The Shah Deniz project is governed by 
an Intergovernmental Agreement with an important ally, will 
provide Turkey's cheapest gas, and is considered by many to 
be critical to completion of the BTC oil pipeline.  If, 
however, Iraqi gas became available before Shah Deniz was 
sanctioned and construction underway, the equation could 
change. 
 
 
History of the Turkey-Iraq Natural Gas Project 
--------------------------------------------- - 
 
 
8. (C) BOTAS provided us the following history of the 
Turkey-Iraq Natural Gas Project: 
 
 
March '96:  Turkish Ministry of Energy (MENR) and Iraqi 
Ministry of Oil sign a Memorandum of Understanding for the 
natural gas export project. 
May '97:    Turkish and Iraqi Energy Ministers sign the 
"Agreement on Iraq Natural Gas Exports to Turkey."  BOTAS, 
the Turkish Petroleum Agency (TPAO), and Tekfen, a large 
Turkish holding company, sign the "Agreement for a Project of 
Mutual Interest," creating the consortium that would develop 
the gas pipeline project in Turkey. 
June '98:   Iraq-Turkey Joint Working Group agrees on a 
feasibility report. 
July '98:   Presentation made to foreign companies willing to 
participate in the project.  Gaz de France is later nominated 
to be the organizing company for other oil/gas companies' 
participation in midstream.  ENI-Agip is nominated to be the 
organizing company for other oil/gas companies' participation 
in upstream. 
June '01:   During the 13th Session of the Joint Economic 
Commission between Turkey and Iraq, both sides agree to hold 
discussions in order to reactivate the project by 
re-identifying new roles of the Turkish firms within the 
scope of the new gas market law. 
July '02:   During the 14th Session of the Joint Economic 
Commission between Turkey and Iraq, both sides agree to take 
the necessary steps for the realization of the "Iraqi Gas 
Export Project to Turkey and Europe" with an "integrated 
project approach," and "taking into consideration the future 
gas demand in Turkey." 
 
 
9. (C) Other sources claim that, according to the May 1997 
agreement, Turkey would purchase 10 bcm of gas per year from 
Iraq for a 20 year period.  MFA Deputy DG for Energy Akil 
told us in July 2001 (ref d) that, with the enactment of the 
new natural gas law in June 2001, BOTAS no longer had the 
authority to enter into new contractual arrangements for the 
import of gas.  Therefore, Akil said, the GOT had informed 
Iraq that the 1997 protocol was null and void with the 
passage of the new gas law. 
 
 
Comment 
------- 
 
 
10. (C) Although press reports regarding new developments on 
the Turkey-Iraq gas project appear to be false, progress on 
this deal becomes more likely with an Iraq post-sanctions. 
We believe that ultimately Turkey's commitment to the 
East-West Energy Corridor and to its Caspian neighbors will 
outweigh other considerations, and -- particularly once the 
project is sanctioned -- Turkey will hold up its end of the 
bargain on Shah Deniz.  However, we would be more convinced 
that a change in Iraq would not affect Shah Deniz if the 
project were sanctioned and construction underway -- yet 
another reason to continue our push with all parties to move 
to sanction as soon as possible. 
DEUTSCH