AMBASSADOR MANN, TURKISH OFFICIALS DISCUSS NEXT

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 007878

SIPDIS


E.O. 12958: DECL: 12/22/2013
TAGS: ECIN ENRG EPET IZ PREL TU
SUBJECT: AMBASSADOR MANN, TURKISH OFFICIALS DISCUSS NEXT
STEPS ON CASPIAN ENERGY AND THE EAST-WEST ENERGY CORRIDOR


Classified by Economic Counselor Scot Marciel for reasons 1.5
(b) and (d).



1. (C) Summary: Ambassador Steven Mann, State Department
Special Representative for Caspian Energy Diplomacy, visited
Ankara, December 16-18 to discuss Caspian issues with senior
Turkish officials, who confirmed Turkey's commitment to the
East-West Energy Corridor and expressed confidence that BTC
would be completed, despite managerial problems in Turkey.
Turkish officials were optimistic in their appraisal of
Turkey's development as an energy hub -- the core of the
East-West Energy Corridor. Turkey and Greece will soon
announce agreement on the long-awaited natural gas
interconnector, opening the door for eventual natural gas
exports via Turkey to Europe. Turkey completed successful
negotiations with Russia to reduce price and take or pay
commitments for Blue Stream and is looking ahead to similar
success with Iran. Ambassador Mann emphasized that the
aggressive policies of Gazprom and Transneft and of Iran made
U.S.-Turkish coordination essential on Caspian energy. Mann
said his top priorities in the coming months would be the
Aktau-BTC connection and promoting pipeline options from
Turkey to Europe; both sides agreed to work closely together
in pursuit of these priorities. Turkish officials also
expressed interest in the prospect of importing Iraqi natural
gas to Turkey and onward to Europe, and TPAO conveyed to Mann
its interests in Iraq oil as well as gas, and requested to
begin a dialogue with CPA Baghdad. End Summary.


Energy Ministry



2. (C) BTC: Ambassador Mann met December 16 with Energy and
Natural Resources Minister Hilmi Guler, who opened by saying
that Turkey was not concerned that recent political
instability in Georgia and Azerbaijan would threaten
completion of the BTC pipeline. The government was aware of
BP's concerns about construction delays in Turkey. He
recognized how important it was to stay on schedule and
pledged that BOTAS would finish the job on time. Ambassador
Mann said that the USG continues to strongly support Turkey
as an energy hub to Europe. However, Turkey's performance on
BTC has broad implications for Turkey and the whole East-West
Energy Corridor. Support for future projects, such as Shah
Deniz, will be influenced by Turkey's record on BTC
construction. We need to ensure that Turkey is the most
attractive option. Drawing on BTC Co.'s latest readout, he
stressed that his concerns were not with the government's
commitment but the performance of BOTAS. Guler complained
that BTC conditions on environment and safety make it very
tough to complete the work on time. Mann replied that BOTAS
knew the conditions when it agreed to the contract.



3. (U) Greece Interconnector: Guler announced that just
minutes before the meeting, Turkey and Greece reached
agreement on the natural gas interconnector and that the
signing would take place the week of December 22. Mann
warmly welcomed this and proposed a USG announcement
welcoming the agreement once it had been firmly emplaced.



4. (C) Turkmenistan: Guler said that Turkey remains very
interested in Turkmen gas, because the price is the most
attractive in the region. Right now, he pointed out, Turkey
gets gas from Turkmenistan, but it comes via Russia at a much
higher price. Ambassador Mann noted that we could have built
a trans-Caspian Pipeline, but for Niyazov, whose fears of
Russia were at the heart of the pipeline's failures. A
Niyazov regime makes it impossible to expect progress with
Turkmenistan on Caspian energy. Guler responded that Turkey
has some good cards to play with Niyazov and would like to
work together with the U.S. on this option. Mann expressed
skepticism and stated that, while US support in principle for
a Trans-Caspian line remains unchanged, he would not waste
his time on trying to craft a new deal with the Turkmen
leader.



5. (C) Kazakhstan: Turkey is very positive about
Kazakhstan, Guler remarked, especially Turkish exploration
there, and is hopeful that Kazakhstan will be in the BTC
coalition. Ambassador Mann agreed, pointing out that it
makes economic sense for Kazakhstan, but we need to overcome
the problem of the Kazakh and Azeri regimes seeking to lock
up a monopoly on transport across the Caspian. Mann pledged
to work together with Turkey to push this issue forward.



6. (U) Iraq: Guler said that Turkey is interested in Iraq
gas exports via Turkey. Mann noted that his recent
involvement in Iraq was centered on the UN Oil for Food
program, but offered an observation that Iraqi gas was years
in the future as an issue. Guler pressed for information on
Kirkuk-Yumirtaluk and noted that Turkey has made several
offers (with no response) to assist with pipeline security
issues in northern Iraq. Ambassador Mann pledged to convey
the Minister's request for formal consultations to CPA.



7. (U) Guler noted that Turkey has exported power to Iraq
and wants to do more. For example, Turkey could dedicate the
production of certain coal-fired plants in Turkey for Iraq.
Another alternative would be to send some mobile generator
stations to Iraq. The big advantage was that these
generators use fuel oil, which is in surplus in Iraq. He
added that Turkey is ready to send fresh water by rail to
Iraq.



8. (C) Iran: Turkey is in discussions with Iran about
reducing the price its pays for imported gas and reducing the
take or pay volume, just as it did with Russia. Guler
remarked that Iran has been very active in seeking contracts
in Europe. Referring to the prospect of gas pipelines from
Turkey to Europe, Guler said we could use their expectations
to our advantage in the negotiations. Mann responded that
Iran remains a sharp issue for the U.S. and pointed out that
it is not just policy but a matter of U.S. law. He said that
it was good to seek a price reduction, and the USG understood
that the GOT would use Iran's Europe ambitions to its
tactical advantage in the negotiations, but it was important
to go no further. He warned Guler not to make a commitment
to transship Iran's gas because that would raise ILSA issues
and call into question US support for the Turkey-Greece
interconnector.



9. (U) BTC: In a meeting December 17th, Energy Under
Secretary Demirbilek affirmed that BTC and the Shah Deniz

SIPDIS
pipeline were top priorities for Turkey. He said that delays
in BTC construction were one of many energy problems the AK
government inherited. The Ministry has been in talks with
the subcontractors to BOTAS and all but one has signed
recovery plans to bring the construction back on schedule.
Demirbilek said he has stressed to the subcontractors that
they get all logistical preparations taken care of so that
they can resume operations in March, after the winter season
ends, with no restraints.



10. (SBU) Greece: Demirbilek said that relations with
Greece have been improving in general, and BOTAS, in
particular, was encouraged after successfully negotiating a
price reduction with Russia. Price had been the sticking
point, but Greece agreed to pay the average cost of Turkey's
gas imports plus a USD 10-15 transit fee. The final price
will not be known until the Shah Deniz gas begins to arrive
in Turkey. Greece also was considering a Turkish proposal to
increase the size of the pipeline from 36 to 42 inches.



11. (C) Mann said his emphasis in 2004 would be on Aktau-BTC
and the Balkans, specifically the three options for gas
transit from Turkey to Europe (via Greece to Italy, via
Greece to Macedonia and Albania, and via Bulgaria and Romania
to Central Europe). He noted that the Baumgarten option was
not viable until Turkey's contract for Russian gas via the
west pipeline expired in 2012. Demirbilek argued that Turkey
would extend the pipeline and continue to import gas from
Russia; otherwise, Russia would use the pipeline to compete
with Turkey and deliver Russian gas to Greece and Italy.
Mann countered that Turkey could reverse the flow and use the
pipeline for deliveries to Hungary.



12. (U) Domestic Gas Market: Another problem that the AK
government inherited, according to Demirbilek, was the
restructuring of the domestic energy market. He said that
the current plan will not work and he plans to work hard over
the next six months to arrive at a solution, including
amendments to the gas and electricity laws. (Note: the laws
mandated liberalization but have gone largely unimplemented.)
Reform is especially important to prepare the market for the
influx of Shah Deniz gas, he said.


Foreign Ministry



13. (C) Russian Energy Policy: Ambassador Mann met December
17 with Deputy Under Secretary Kilic, who emphasized Turkey's
confidence that BTC is irreversible. Kilic said the
government is looking ahead to what he considers the more
important issue of natural gas. Mann emphasized that BTC was
still important because how well the project is accomplished
will affect confidence about other Caspian projects.
Ambassador Mann expressed his concern about increased Gazprom
and Transneft activism, including Niyazov's 25-year gas deal
with Russia, the corrupt and distasteful Georgian gas deal in
July, and Russian attempts to reverse Odessa-Brody. Kilic
responded supportively. He and Mann agreed that the most
promising immediate area for US-Turkish cooperation is in
making final an Aktau-BTC agreement, and they agreed to a
joint negotiating mission with the ABTC parties in the first
quarter of 2004. Kilic urged that we not leave
Turkmenistan out of our considerations. Mann responded along
skeptical lines, as in the Guler meeting.



14. (SBU) Greece: On natural gas, Kilic said that there has
been real progress. The Greece-Turkey Interconnector
agreement will be an important step. He noted that Greece
sees itself as a regional hub and has been promoting Caspian
gas within the EU, which is showing signs of growing
interest. He urged that we keep all three options for
pipelines to Europe open. Kilic urged that Turkey, Greece
and the U.S. jointly talk to consumer countries in the
Balkans and Europe; Mann agreed to consult with our embassies
in the region and consider this.



15. (C) Iran: Kilic said Turkey wants to make itself a
transit hub for Iran's massive gas reserves but recognized
that under current conditions not much can be done. He said
Turkey wants to keep its options open with Iran to keep
Teheran on the hook. He added that Greece and the EU see
Iran as an important supplier to Europe and Iran has been
very aggressive in seeking contracts in Europe. Mann
stressed that an agreement between Turkey and Iran to
transship Iranian gas would mean the U.S. could not support
the interconnector, and would open the door to ILSA problems.
As a fundamental point, we need Greece and Turkey to
reaffirm the priority of Caspian gas. Kilic asked Mann to
stress this with Greece and the EU.



16. (C) Kilic pointed out that Iraq gas could be an
alternative to Iran. He said Turkish firms have contracts
from many years back for Iraqi gas and he promised to give
more details in a non paper, which Mann said he would send to
Baghdad for comment. (Embassy will e-mail the text to CBED.)


BOTAS



17. (C) On December 18, Ambassador Mann met with Mehmet
Bilgic, DG of BOTAS, the state natural gas and pipeline
monopoly, and construction manager for the Turkey portion of
BTC. Bilgic remarked that Turkey has made real progress in
reducing energy costs to the population. The most positive
result of lower prices has been that consumption of natural
gas has increased and more consumers are switching from coal
to natural gas -- where it is available. This has helped to
reduce air pollution in Turkey's big cities. He said that
BOTAS successfully re-negotiated the Blue Stream deal with
Gazprom and to reduce the price and take or pay commitment.
He said that Iran would be next -- Turkey will seek similar
reductions and expects to complete a deal in January 2004.
Further down the road, BOTAS will try to reduce expensive LNG
contracts with Algeria and Nigeria.



18. (U) Iraq: BOTAS is looking to Iraq as a future, cheap
source of natural gas -- both for domestic consumption and to
meet rising demand in Europe. In a non-paper prepared for
Ambassador Mann, BOTAS and the MFA explained Turkey's
previous efforts in the late 1990s to develop natural gas
imports from Iraq and their hope that fields in northern Iraq
can be developed and pipelines built to begin shipping gas
into the Turkish grid by 2009. Bilgic explained that
development of the fields would depend on the private sector
but would not involve a large investment -- much of the gas
would be associated output from present oil fields -- and
BOTAS would lead the effort to construct the connecting
pipeline, which would run parallel to the Kirkuk-Ceyhan oil
pipeline.



19. (SBU) Turning to the Kirkuk oil pipeline, Bilgic said
that BOTAS had made repeated attempts to offer Turkish
assistance on repairing and securing the Kirkuk pipeline.
Ambassador Mann pledged to pass on the Turkish offer. Bilgic
said that it would be essential to include the local
population in the security measures. He noted that without
the pipeline, oil and products are transported by truck --
bringing lots of money to the locals. The pipeline locals --
on both sides of the border -- profit from the transport by
truck. Restoration of the pipeline will mean that most of
that money will go to central government.



20. (U) BTC: Bilgic offered a detailed explanation of the
problems behind BTC construction delays in Turkey and pledged
to fix the problems. He said the main problem is managerial.
First, the Turkish subcontractors were not ready for the
very stringent IBRD guidelines on resettlement and land
acquisition -- Turkish law is much easier. This caused a
delay at the start as securing the right of way was delayed.
In addition, BTC's health, safety and environmental standards
are higher than the contractors were accustomed to, and the
subcontractors have been passive in addressing these issues.
Bilgic added that BOTAS failed to understand its
responsibility as the prime contractor, which forced BTC to
step in to keep the project on track. Finally, BTC hiring
requirements meant that a number of expatriate managers were
hired, but they did not have a deep commitment to the
project. BOTAS will replace many of the expats with BOTAS
managers. He said BOTAS's attitude has changed: "we must
deliver, not complain." He added that agreements have been
reached with all but one of the subcontractors to get the
project back on schedule. Mann stressed the pressing need to
repair the deficits and get the project back on track.



21. (U) Greece: Turning to the deal with Greece on a
natural gas interconnector, Bilgic explained that a few
issues remain to be settled, but a senior Greek official will
come to Ankara December 23 to sign the final agreement. He
added that Turkey appreciates U.S. support for this effort.
To make this project a success, BOTAS must address the issue
of reliability, and storage is the key. Gazprom is the
competition and they have an outstanding track record of
reliability. BOTAS has gotten a green light from the IBRD to
help finance a 1.5 bcm storage facility that can be expanded
to 5 bcm.


TPAO



22. (SBU) TPAO head Osman Dinc pulled Mann aside during
lunch at DCM's and conveyed a strategy outline for TPAO
exploration and development in Iraq, centering on the
following issues:


-- concluding an agreement on the Gharraf oil field on the
basis of an existing PSA;
-- developing an Iraq-Turkey gas export project involving
fields north of Baghdad;
-- joining large field consortia, e.g. West Qurna and
Majnoon;
-- exploring in Blocks one and four in the western and
southern deserts.


Mann agreed to convey the information to CPA Baghdad along
with Dinc's request to come to Baghdad for detailed
discussions with Ministry of Oil and CPA. Copy of Dinc's
presentation will be scanned and sent to CPA Baghdad via
e-mail from EB/CBED.


Baghdad minimize considered.


Ambassador Mann cleared this cable.
EDELMAN