TURKS COMPLAIN SOMO STIFFING TURKISH OIL COMPANIES

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 003180

SIPDIS

CENTCOM/EUCOM FOR POLADS
BAGHDAD FOR KEVIN TAECKER
TREASURY FOR LARRY MCDONALD

E.O. 12958: DECL: 06/06/2015
TAGS: EFIN PREL EPET IZ TU
SUBJECT: TURKS COMPLAIN SOMO STIFFING TURKISH OIL COMPANIES
FOR $840 MILLION

Classified By: Economic Counselor Thomas Goldberger for reasons 1.4 b &
d.


1. (C) Summary: Turkey's Coordinator for Iraq
Reconstruction, Ambassador Koray Targay, says the Iraqi
Central Bank has stopped making payments to the 16 Turkish
energy companies providing refined products to SOMO because
of a lack of cash. The MFA fears that the over $800 million
in arrears threatens future supplies and poses a security
problem for Iraq. Turkey's largest fuel provider to Iraq
said the problem was that Kurdish-connected "intermediaries"
were demanding a fee. End Summary.


2. (SBU) Targay told Econ/C SOMO is far behind in payments
to the 16 Turkish energy companies providing refined products
for Iraq and is behind on payments for refined products from
Kuwait and Jordan. Targay said the debt owed by SOMO to the
Turkish companies reached $840 million and that Prime
Minister Erdogan raised the problem with Iraqi Prime Minister
Jafari during his recent visit to Turkey. Targay understood
that SOMO and the Oil Ministry had approved the payments but
the Central Bank told the Turkish embassy that it did not
have the cash. Targay emphasized that the arrears had
reached such a huge level that the financial viability of the
private companies was at risk. This could force the
companies to stop deliveries, which could contribute to
insecurity in Iraq. Indeed, Targay said officials at the
Habur Gate border crossing reported a decline in the number
of SOMO-bound trucks crossing into Iraq from 400 per day a
few weeks ago to 280-290 per day currently.


3. (SBU) On a secondary but related issue, Targay said the
annual legal agreement between SOMO and the Turkish companies
under which this trade is conducted expires at the end of
June. Targay said the Turkish suppliers met last week in
Istanbul and asked SOMO to send a representative to discuss
the payment problem and renew this "fundamental document,"
which is essential for the Turkish companies. But according
to Targay, SOMO responded that it was too busy to meet in
June, which Targay found incomprehensible given the
importance of the matter.

TPIC Says Intermediaries Behind Payment Problem
-------------- --


4. (SBU) We followed up with SOMO's largest supplier in
Turkey, Turkish Petroleum International Company (TPIC),the
trading arm of the national oil company TPAO. TPIC was
instrumental in meeting SOMO's needs in the early days of the
interim government, when SOMO took over from KBR the task of
importing refined products for Iraq. SOMO Vice President
Sadi Gungor told us that SOMO is behind on payments to TPIC
to the tune of $150 million -- $650 million to all the
Turkish firms. (Comment: The $840 million cited by Targay
probably included the total amount SOMO owes for fuel
delivered to Iraq, while Gungor was probably talking about
payments in arrears only.)


5. (C) Gungor explained that the arrears put the Turkish
companies in a difficult financial situation because they
have already paid for the fuel delivered to Iraq, which is
purchased on the international market. Gungor said that TPIC
will not stop making deliveries to Iraq, because "we are a
state company" and GOT officials have intervened to urge TPIC
to continue the deliveries. However, Gungor expected that
some of the private companies could not afford to continue
deliveries without receiving some payments. Gungor said the
real reason for the payment stoppage was the involvement of
"intermediaries," who were demanding a commission to
facilitate the payments. Gungor stressed that TPIC will not
agree to deal with the intermediaries, who he hinted were
connected to Kurdish figures in Iraq.

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


6. (C) The Turks are not asking us to solve this issue for
them. In fact, in the positive spirit following Jafari's
visit, the Turks are trying to find a constructive way to
deal with the issue and have been proactive both in their
meetings with Jafari and in Baghdad. Their preferred
approach is to move to a letter of credit system, but Targay
acknowledged that this would take time. Any way the U.S.
could be helpful, such as by encouraging SOMO to conclude a
new agreement (the Iraqis may not appreciate the stock the
Turks put in "legal" documents) or by helping the CBI find
the cash flow to draw down arrears, would seem to serve both
Turkish and U.S. interests in stability in Iraq. We are not
able to rank this among all the other Iraq priorities, but it
seems consequential from post's perspective.
MOORE