ANOTHER INVESTMENT PROBLEM: THE CASE OF THE OIL

UNCLAS ANKARA 001861 SIPDIS SENSITIVE STATE FOR E, EB, AND EUR/SE NSC FOR BRYZA AND MCKIBBEN TREASURY FOR OASIA - MILLS AND LEICHTER USDOC FOR DAVID DE FALCO - ITA/MARKET ACCESS AND COMPLIANCE E.O. 12958: N/A TAGS: EINV EPET PREL TU SUBJECT: ANOTHER INVESTMENT PROBLEM: THE CASE OF THE OIL COMPANIES ¶1. (SBU) Lawyers representing U.S.-based Toreador Resources Corporation called on the Ambassador March 22 to seek the Mission's assistance in resolving a problem that is preventing Toreador from repatriating the proceeds of its $53 million capital investment in Turkey. They explained that the Turkish Petroleum Law of 1954 included a provision that guaranteed that foreign oil companies could repatriate their original investments based on the prevailing exchange rate when the investment was made. Under the law, when the Turkish lira loses value, the Turkish Treasury was to pay the difference. Although the lira was relatively stable for the first twenty years after the law, Turkish Treasury began making payments to cover the companies exchange rate losses when the lira started to depreciate in the early 1970s. Under this system, Toreador repatriated some $63 million in capital investments. ¶2. (SBU) In 1997, however, the Court of Accounts (Sanistay) effectively blocked further payments under the guarantee, arguing that Treasury had misinterpreted the 1954 law. Moreover, The Court held nine Treasury employees personally liable for the payments that already had been made. After one of its capital transfer applications was denied in 2001, based on this 1997 ruling, Toreador's Madison subsidiary, along with several other U.S. oil companies, sued the government and won a unanimous decision in the State Council (Danistay). Upon appeal, however, the higher Danistay reversed the ruling. A final administrative appeal is now pending. ¶3. (SBU) Toreador's lawyers say they recognize that the USG cannot intervene in this judicial process. However, they believe there is another way out. The Energy Ministry is now drafting new petroleum legislation, which the lawyers believe could include a provision reaffirming the 1954 law's exchange rate guarantee, even if only for investments already made. The lawyers said that, without the exchange rate protection, Toreador stands to lose $40 million. They estimated that the total amount at stake for all foreign oil companies was approximately $100 million. ¶4. (SBU) We discussed this issue March 24 with Treasury Director General for Foreign Investment Melek Us. She confirmed she was well aware of the case, as nine of her Treasury colleagues had been held personally liable for the payments made prior to 1997. Us said Minister Babacan also was aware of the case, and was determined to fix the problem to protect his employees. We responded that fixing the problem meant not only protecting the employees, but addressing company concerns. Failure to do so, we suggested, would make foreign investors even more wary of doing business here, and would run completely counter to the government's professed interest in improving the investment environment. Us agreed, and suggested we raise the matter with the Energy Ministry. ¶5. (SBU) Embassy requests guidance from State and Commerce on the suggestion of Toreador's lawyers to urge the GOT to include language in legislation reaffirming the exchange rate guarantee. EDELMAN