TURKEY AS THE HUB IN THE EAST-WEST ENERGY CORRIDOR

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002721

SIPDIS


STATE ALSO FOR EUR/SE AND EB/CBED


E.O. 12958: DECL: 05/12/2014
TAGS: ECIN ENRG EPET ETRD SENV TU
SUBJECT: TURKEY AS THE HUB IN THE EAST-WEST ENERGY CORRIDOR
-- A PROGRESS REPORT

REF: A. ANKARA 1160

B. BAKU 760

C. ANKARA 1061


(U) Classified by Econ Counselor Scot Marciel for reasons 1.4
(b) and (d).



1. (SBU) Summary: Turkish officials say they continue to
strongly support the East-West Energy Corridor and are
positioning Turkey to become the transit hub for Caspian and
Middle East natural gas to Europe. Turkey is pushing two
pipeline projects to export gas to Europe and exploring
options for new supply sources. MFA DDG for Energy Hakki
Akil stressed that European companies were eager to buy gas
from Iran, and urged the U.S. to work with Turkey on
developing alternatives supply sources, such as Turkmenistan.
End Summary.


BTC
---

2. (SBU) In recent months, BOTAS has taken a number of steps
to get construction of the Turkish portion of the pipeline
back on schedule, and its efforts appear to be paying off.
MFA DDG for Energy Hakki Akil told us that the most
problematic stretch in the north will be back on schedule by
July. BTC CEO Michael Townshend told Ambassador Edelman May
7 that he is much more optimistic about BOTAS getting back on
schedule. He said a series of meeting among the BTC partners
was "an eye-opening experience for BOTAS," which has adopted
a better attitude about its responsibilities to complete the
project on time. BOTAS Managing Director Bilgic told us that
BOTAS had been acting like a client rather than a partner
(ref a). Townshend said pipelaying operations look to be
completed on schedule, but there remain some concerns about
completing the four pump stations along the Turkish route.
He also said that Turkey has not adequately trained the
jandarma (federal police),who will provide security for the
pipeline.


Natural Gas Pipelines
--------------

3. (SBU) Drawing on concerns voiced by Azeri Presidential
Energy Advisor Asadov (ref b),Econ Counselor asked Akil
about Turkey's support for pipeline projects to transport
Caspian gas to Europe. Akil responded that the government's
support remains strong as evidenced by Turkey's role in
promoting two gas pipelines to Europe -- the Turkey-Greece
Interconnector, which could include an extension to Italy,
and the Nabucco project to bring gas from Turkey through
southeast Europe to Austria. Akil pointed out that these
projects could provide Europe with important alternatives to
Russian gas, up to 30-35 bcm gas per year.



4. (U) Turkey and Greece signed a Sales and Purchase
Agreement in December 2003 calling for initial deliveries of
750 mcm beginning in 2006. But Turkey hopes to increase gas
throughput to 11 bcm and is supporting the efforts of Greek
national gas company DEPA and Italy's Edison Gas to build an
extension to Italy.



5. (U) The Nabucco Project would provide a second branch of
the East-West Energy Corridor to Europe. In 2002, BOTAS
agreed with OMV of Austria, MOL of Hungary, Transgaz of
Romania, and Bulgargaz of Bulgaria to explore building a gas
pipeline complex from Turkey to Baumgarten, Austria -- an
important natural gas hub into the main European lines. The
partners project that Europe will need between 25 and 30 bcm
from the pipeline when it is completed in 2009.



6. (SBU) Turkish officials tell us they want Turkey to be an
energy hub, providing a fourth supply route (after North Sea,
Russia and North Africa) for natural gas to Europe. However,
Demirbilek said Turkey is still pondering what kind of hub to
become. In the case of Greece, Turkey operates as a
wholesaler -- Greece will buy its natural gas from Turkey.
In the case of the Nabucco pipeline, the partners will
operate as transit countries. European gas companies will
contract directly with source countries like Azerbaijan and
Iran, and pay Turkey and the other partners a transit fee.



7. (C) Our GOT contacts identified some obstacles to
Turkey's goal to become an energy hub. Although Turkey
currently has an oversupply of natural gas, Akil said Turkey
will need to find additional sources of natural gas to fill
the combined demand of the Greece/Italy and Nabucco
pipelines, which he estimated at 30-35 bcm/year. Energy
experts expect Turkey's energy consumption to increase
significantly in the coming decade. Natural gas will grow
fastest as more cities connect to the gas grid, reducing the
widespread practice in Turkey of burning very dirty lignite.
Akil pointed out that most of the new supply from Shah-Deniz
will be used to satisfy this growing demand, leaving about
2-3 bcm available for export. He added that European gas
companies are very interested in the prospect of buying gas
from Iran, and suggested that Turkey will have a hard time
opposing that pressure unless it can offer better
alternatives. He said Turkey wants to explore feeding
Turkmen gas into the Shah Deniz pipeline, and urged the U.S.
to consider working with Turkey to promote this option.
Energy U/S Demirbilek said Turkey is looking at other
longer-term options, such as gas from Iraq, Syria, Qatar and
Egypt.



8. (SBU) Demirbilek cautioned that Turkey needed to "get its
domestic market in order" before it could enter into new
export obligations connected to these projects. He said
Turkey's Gas Market Law, which mandated the break-up of
BOTAS's monopoly over natural gas, was impractical because no
one could figure out how to unbundle state-to-state
take-or-pay agreements. The implication was that this
situation creates uncertainty about the future energy mix and
demand in Turkey and about who will have the authority to
enter into new supply contracts. Demirbilek wants BOTAS to
remain the principle importer and exporter of natural gas;
the Ministry has proposed appropriate amendments to the Gas
Market Law.


Bypasses
--------------

9. (SBU) Closely related to the pipelines issue is rising
oil tanker traffic bringing Russian and Caspian crude through
the Turkish Straits to world markets. Turkish officials
assert that traffic through the Straits is near its maximum
safe level and are exploring options to encourage diversion
of some of the oil through bypass pipelines. Last year, for
example, the MFA asked for U.S. support to stop the GOU from
agreeing to reverse the flow of the Odesa-Brody pipeline.
Several bypass options have been proposed, including two in
Turkey -- the first crossing Thrace west of Istanbul, and the
second running from the Black Sea port of Samsun to central
Turkey, where it will connect to an existing pipeline to the
port of Ceyhan. The Thrace option appears to be the first
out of the gate, but the Turkish government has held up a
license to allow the company to proceed.



10. (C) In parallel, the MFA has been exploring with oil
companies an agreement on Voluntary Principles, in which all
the shippers would agree to use existing bypass pipelines and
support construction of new bypasses to avoid further
increases in Straits traffic. Akil said several of the oil
companies have voiced support for the idea. However, Kjell
Landin of Chevron-Texaco told us that, while several western
oil companies have expressed support, in private they are
reluctant to sign. He pointed out that Akil has not received
support from the Russian shippers, which operate the most
dangerous vessels. He said the Russians will be happy to see
their western competitors bear the extra cost of using a
bypass pipeline, freeing up more space for the Russian
companies to use the less costly Straits. Landin added that
the western companies are also concerned that although the
Voluntary Principles would apply only to the special case of
the Bosphorus, there would be heavy pressure to assume these
standards for their operations world-wide, raising their
operating costs.
EDELMAN