TURKEY-GREECE GAS INTERCONNECT ADVANCES, BUT KEY

1. (C) Summary and comment: Turkey and Greece have reached
agreement on the text of an Intergovernmental Agreement for
the Turkey-Greece gas interconnect, which they hope to sign
by the end of November. BOTAS and DEPA have not, however,
been able to agree on the price at which DEPA would purchase
gas under a Gas Sales Purchase Agreement (SPA). The
underlying problem is that Turkey is currently paying
significantly more for its imported gas than is Greece. It
appears it will not be economically viable for Turkey to
export gas to Greece until Shah Deniz gas (by far the
cheapest Turkey will import) comes on line in 2006. BOTAS
General Manager Bildaci requested EB/CBED Ambassador Mann's
assistance in encouraging the Greeks to accept paying a
higher price for gas from Turkey in the short-term for the
long-term strategic benefits this deal would bring. Post
believes it would be useful for Ambassador Mann to raise this
issue with Greek officials during his visit to Athens later
this month (refcon). End summary and comment.




2. (C) BOTAS General Manager Bildaci called econoff in
November 4 to request USG assistance on the Turkey-Greece
interconnect. Bildaci said officials from the Greek
government and DEPA had visited Ankara October 30-November 1
to discuss the Intergovernmental Agreement (IGA) and Gas
Sales Purchase Agreement (SPA) for the interconnect. He
noted that the government-to-government IGA discussions were
successful, with the two sides reaching agreement on a final
text. MFA and Ministry of Energy officials later confirmed
to econoff that they had agreed with the Greek delegation on
an IGA text, which they hope to sign by the end of November.




3. (C) Bildaci noted, however, that the SPA negotiations had
ended in a stalemate over the price at which DEPA would
purchase gas from BOTAS. The two sides discussed only the
first one half billion cubic meter (bcm) that Greece would
purchase in 2005-2006, before Shah Deniz gas comes on line
and the contracted volumes ramp up. The root of the problem
appears to be the discrepancy between what BOTAS and DEPA are
paying for their imported gas -- since BOTAS is currently
paying more, it will be forced to sell to DEPA at a loss (or
DEPA will have to pay a higher price) until Shah Deniz comes
on line. According to Bildaci, 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


Note that the Russian gas figures reflect the discount
Bildaci successfully negotiated with Gazprom in July. The
figures for Iranian gas do not reflect the discount Bildaci
negotiated, since that price is only good through 2005
(Bildaci did not reveal what the discounted price was).




4. (C) Bildaci said that DEPA officials told him they are
currently paying USD 119 per thousand cubic meters for
Russian gas. Therefore, even if Bildaci sold gas to DEPA at
USD 123 per thousand cubic meters (the lowest price BOTAS is
currently paying), and charged no transit fees, DEPA would
still have to pay more than it is currently paying for its
imported gas. Under BOTAS and DEPA's current price
structures, exporting gas to Greece does not become
economically viable until Shah Deniz comes on line. Bildaci
told econoff he sees two options: 1) a DEPA-BOTAS
compromise, whereby both accept some minor losses for
strategic reasons; or 2) postponing the SPA negotiations (and
eventual delivery of gas to Greece) until June 2003, at which
point Shah Deniz will be far enough along to allow BOTAS to
negotiate based on Shah Deniz gas prices.


5. (C) Bildaci said he preferred the first option, which
would allow work on the Greece-Turkey interconnect to begin
immediately. (Note: BOTAS has already selected the French
firm Sofregaz to conduct the detailed engineering study for
the Turkish portion of the Shah Deniz pipeline). He said
thought he could offer DEPA the price of USD 123 per thousand
meters with no transit fees. Bildaci suggested that EB/CBED
Ambassador Mann could help significantly if he were to
encourage the Greeks to accept paying a higher price for a
small amount of gas for a few years (i.e. one half bcm until
2006/2007) in order to advance a strategic project that would
increase its diversity of supply.




6. (C) Bildaci noted wryly that, before he negotiated a
discount with Gazprom, BOTAS was paying USD 133 per thousand
cubic meters for Russia West 1 gas, and USD 145 per thousand
cubic meters for Russia West II gas, significantly more than
what DEPA was paying for the same gas. He commented that,
when he reported this situation to the new Minister of
Energy, there was sure to be -- and there should be --
another investigation, which he dubbed "White Energy Scandal
II." Bildaci said that, although he had had no role in
negotiating any of the high-priced Russian contracts, he
still feared the repercussions of this for BOTAS.




7. (C) Comment: Post believes it would be useful for
Ambassador Mann to raise this issue with Greek officials
during his visit to Athens later this month (refcon). One
complicating factor, of course, is BOTAS's Iran gas contract.
Although BOTAS likely will not be exporting Iranian gas to
Greece, it is the Iranian contract that allows Bildaci to
justify the USD 123 price he plans to offer DEPA. End
comment.
PEARSON