TURKEY: BP TIES UP LOOSE ENDS WITH GOT

UNCLAS SECTION 01 OF 03 ANKARA 001306

SIPDIS

SENSITIVE

NSC FOR BRYZA
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO
USDOE FOR CHUCK WASHINGTON

E.O. 12958: N/A
TAGS: ENRG EPET TU
SUBJECT: TURKEY: BP TIES UP LOOSE ENDS WITH GOT

REF: A. ANKARA 703


B. ANKARA 566

C. ANKARA 131

SENSITIVE BUT UNCLASSIFIED


1. (SBU) SUMMARY: BP has engaged in a recent flourish of
outreach to Turkey. With the BTC consortium having agreed to
cover cost over-runs in Turkey, BTC remains on track for
first oil at Ceyhan at the end of September. BP and the GOT
will then turn attention in Turkey to the Shah Deniz gas
pipeline. While the GOT is perceived as better managing
Turkish Straits traffic, there seems to be a growing industry
consensus on the need for a bypass. End Summary.

BP Will Cover Over-runs
--------------


2. (SBU) According to Turkey and Azerbaijan - based BP
officials, the BTC consortium has agreed to extend loans of
$160 million to BOTAS to cover cost overruns on BTC
construction in Turkey. The loans would be repaid from
future cash flow from the project and are intended to avoid a
sensitive call on the GOT Treasury guarantee to cover costs
over the fixed price construction contract. This apparently
resolves a brewing dispute with the GOT over responsibility
for the over-runs (Ref B),which had the potential to mar the
good feeling surrounding BTC opening later this year.

First Tanker Load at Ceyhan at End of September
-------------- --


3. (SBU) BP officials confirmed that BTC was on track for
first tanker loading at Ceyhan at the end of September. BP
Azerbaijan President, David Woodward, told the Ambassador
February 28 that BP had worked closely with BOTAS to work out
problems with construction subcontracts for troubled Lots A
and B (Ref C). Whereas BOTAS had taken over the subcontract
from Turkish firm TEPE in Lot A - adjacent to Georgia (TEPE
is still taken care of pumping stations),more recently
surfacing commercial problems in the Lot B sub-contract with
Turkish firm Alarko were being handled with closer
intervention by BOTAS. Woodward added that BOTAS' actually
taking over the additional contract might have gone beyond
BOTAS' capacity. The remaining Lot C and the Ceyhan port
facility are very close to completion. Woodward stated that
the Turkish pipeline would be ready to start filling at the
end of June.


4. (SBU) Turning to the upstream end, Woodward said that
Azerbaijan offshore production had commenced. Noting that
the Azerbaijan portion of BTC would be ready at the beginning
of May, he said that existing pipelines would be used in the
meantime for transport of product. Woodward lamented
extensive sub-contractor woes in Georgia, but observed that
they had worked through claims and the pipeline would be
ready at the Georgian border with Turkey around the end of
May.

Other Oil and Gas
--------------


5. (SBU) Woodward also noted positive discussions with
Kazakhstan on arranging egress of Kashagan crude oil via
Aktau to Baku, initially by tankers. He stated that BTC
capacity could almost be doubled by 2012, using drag reducing
agents and incremental pumping stations to accommodate
increased oil. Woodward also noted that construction had
started on the South Caucasus (Shah Deniz) natural gas
pipeline, which is planned to run parallel to BTC. He
anticipated that construction would be complete to the
Turkish border by the end of 2005, and ready for first gas
flow in 2006. The BP official stated that there would be
plenty of time for Turkey to complete its portion from the
border to connect to the Turkish grid at Erzurum, noting that
Turkey would be able to use BTC construction camps and
facilities.

Wildcat Drilling in the Black Sea
--------------


6. (SBU) On exploration in Turkey, BP officials said that BP
aimed to start exploratory drilling in the eastern Black Sea
in June using a rig leased from the American company Santa
Fe. They noted that there was favorable geology on both
sides of the maritime border between Georgia and Turkey where
BP had garnered drilling rights from both countries. While
Woodward commented that the two countries had not yet
mutually recognized their deep sea border, he expected that
this would be worked out and would not affect development.
He expected initial results from the drilling later in the
summer, noting that this well was a "wildcat" in that it was
new territory. Woodward admitted that success in exploration
here would provide increased impetus for a Bosphorus bypass.

Bosphorus Bypass
--------------


7. (SBU) Turkish MFA Energy and Water DDG Mithat Rende
confirmed recent positive discussions between TNK-BP and GOT
officials (Ref A) on Bosphorus bypass options. GOT and most
oil shippers perceive that Turkish Straits are at capacity -
2004 shipping is marginally higher than 2003 at 2.1 million
bpd (2.8 million bpd including refined and related products)
- and acknowledge the need for a bypass. Rende pointed out
that this was contrary to the views of some other Russian
companies, which have focused only on cheapest route.
Various oil companies and shippers have told EconOff that
after over a year of using new VTS (Vessel Tracking System)
technology, GOT has made great progress in safely and
efficiently managing traffic, but there was room for
additional improvement in straits management. Mithat Rende
expressed concern that the number of tankers had grown to
9,399 in 2004, reflecting more tankers less than 200 meters
long, and potentially posing greater risk. Rende was
positive on both BP and ChevronTexaco's serious pursuit of
Bosphorus bypass options. However, he emphasized that
companies needed to look at all options, including
trans-Thrace routes. Rende described GOT concerns about the
Burgos-Alexandropolos route under consideration by TNK-BP,
emphasizing environmental and large tanker access concerns.
Rende repeated the long-standing GOT position that a
Samsun-Ceyhan bypass would be the best option, but stated
that the project would have to stand on its own commercial
merit. He asserted that the market could eventually support
two different bypass projects: one each for Kazakhstan and
Russia sourced crude oil.

Energy Dialogue
--------------


8. (SBU) Mithat Rende expressed strong support for building
the U.S. Turkey Energy Dialogue, but emphasized the need for
both GOT MFA and U.S. State Department to be closely involved
- along with the Energy Ministries - under the umbrella of
the Economic Partnership Committee. Rende said he got a
positive read-out from Ambassador Akinci's recent visit to
Washington, including his meetings with Ambassador Mann and
DOE DAS Brodman. He said both sides expressed strong support
for Turkey as an energy hub. Rende said they shared U.S.
concern about Gazprom acquiring the natural gas network in
Georgia, as part of an overall concern about the risk of
monopolies in the region. He said he would be willing and
able to travel to Washington this year if it would help
facilitate the bilateral energy dialogue.

Comment
--------------


9. (SBU) BP officials (from Istanbul, Baku, and Moscow
TNK-BP) have been actively soliciting meetings with the
Embassy in the count-down to first oil at Ceyhan and to
promote the full range of BP activities in Turkey and the
region. Given the scale and complexity of the three-country
BTC construction project, everyone will be happy to declare
victory with oil flow at the outlet sometime in fourth
quarter 2005. In the meantime, the date for celebration in
Ceyhan is not yet fixed.
EDELMAN