IRAQ AND THE TURKISH GAS MARKET

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
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