AMBASSADOR DISCUSSES PIPELINES, BOT PROJECTS WITH

1. (C) Summary. Energy Minister Guler reiterated to
Ambassador May 13 his personal commitment to completing BTC
construction on time in Turkey, and thanked Ambassador for
his reassurance that U.S. support for BTC had not decreased
with the change in Iraq. Ambassador requested GOT support
for the sanctions lift resolution, noting that passage of the
resolution would allow the oil from the Kirkuk-Yumurtalik
pipeline to be sold again. Ambassador asked for the
Minister's help in resolving the dispute with U.S. BOT power
plant investors Doga and Trakya, emphasizing the importance
of a quick resolution to the U.S., particularly to OPIC and
ExIm, which had roughly USD 500 million invested in these
projects. End Summary.


Baku-Tbilisi-Ceyhan (BTC) Pipeline


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2. (SBU) Ambassador began his May 13 meeting with Energy
Minister Guler by congratulating him on resolving the
outstanding management issues relating to construction of the
BTC pipeline in Turkey (ref C). Guler emphasized that he was
personally following the project, and would ensure that the
pipeline was completed on time. Ambassador also reiterated
continued U.S. support for BTC, noting that rumors that our
support had decreased with recent changes in Iraq and that
the U.S. was promoting a Kirkuk-Haifa pipeline were
unfounded. Guler said he was happy to hear this directly
from the Ambassador; he did not believe U.S. support had
changed, but now he could more authoritatively answer
reporters, questions on this issue.


Kirkuk-Yumurtalik and Sanctions


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3. (C) Turning to the status on the Kirkuk-Yumurtalik
pipeline, which the GOT has raised with us previously (ref
B), Ambassador noted that the northern oil fields and the
pipeline were in good shape. He said, the U.S. -- like
Turkey -- wanted to get the oil flowing again, but first U.N.
sanctions must be lifted. Ambassador requested GOT support
for the sanctions lift resolution, the passage of which would
allow oil from the Kirkuk-Yumurtalik pipeline to be sold
again. Guler said he would pass the request to the GOT
leadership, adding that quick resumption of the oil flow from
Iraq would be a "nice gesture" by the U.S. after our recent
bilateral problems.


BOT Projects


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4. (C) Ambassador raised the current dispute involving the
U.S. build-operate-transfer (BOT) power plant investors Doga
Energi (Edison Mission) and Trakya Elektrik (Enron) (ref A).
He stated that the U.S. companies felt they were being forced
to make unilateral changes to their contracts, adding that
this atmosphere was not conducive to successful negotiations.
Ambassador noted that the U.S. government agencies OPIC and
ExIm Bank had invested roughly USD 500 million in these two
projects, and thus the U.S. had a strong interest in seeing
the current dispute resolved as soon as possible. He pointed
out that the GOT knew from the earlier arrearages dispute
involving these same companies that OPIC would aggressively
defend its investment. The U.S. also had an interest in the
continued, long-term participation of U.S. companies in
Turkey's energy sector. Ambassador asked for the Minister's
help in resolving this issue during the May 14-16 visit of
OPIC, ExIm and the other export credit agencies.




5. (C) Minister Guler responded that, although he believed
there were "irregularities" in these BOT contracts, he was
not pursuing a prejudiced approach toward the companies and
he was surprised they felt this way. He said he believed the
irregularities were likely the fault of the Turkish partners,
not the foreign investors. Guler pointed out that Turkey
simply could not afford to purchase electricity at 11-12
cents per kilowatt hour from the BOTs when the world average
was closer to 4-5 cents per kilowatt hour. With electricity
prices 3 times the world average, there was no way Turkey
could attract foreign investment, nor could its firms'
products compete internationally.




6. (C) Guler said he believed that a contract was a contract,
which was why he had approached the companies to ask for a
"gesture" on their part, but the companies had refused. He
said he had not gone to the press as some politicians might
have; rather, he had asked the companies several times in
private meetings if they would be open to renegotiating the
contracts. Since the companies had refused to renegotiate,
he was now looking at the government's rights as a party to
the contracts. Guler said he believed there were four
possible outcomes: 1) the contracts continue to be
implemented as is; 2) the contracts are canceled; 3) the GOT
buys out the companies; and 4) the parties enter into
international arbitration. He said the Ministry of Energy
was reviewing all four options for each of the BOTs; they
would not be treated as a group. Guler told the Ambassador
he would try to assure the companies that he was pursing a
positive approach, that he was only considering solutions
allowed by the contracts, and that he would seek a resolution
agreeable to all parties.


Electricity Prices and IMF Commitments


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7. (C) Ambassador asked how the Minister planned to reconcile
his commitment to cut electricity prices with the GOT's
commitment to the IMF in the recent Letter of Intent to
increase electricity prices. The Minister responded that the
Ministry of Energy had recently implemented several important
cost-saving measures, including shutting down the expensive
mobile power plants and moving to more hydro power, and
stopping the Blue Stream gas flow for six months as allowed
for the in the GOT's contract with the Russians. The GOT had
also cancelled its contract to import electricity from
Bulgaria because the Bulgarians had not held up their end of
the bargain by giving priority to Turkish companies for
certain projects. These steps had resulted in a USD two
million per day savings to Turkey. Guler said the Ministry of
Energy (MENR) had argued to Treasury that these savings
compensated for not raising electricity prices in 2003.
Treasury technicians were now working with MENR technocrats
to confirm their calculations.
PEARSON