TURKEY ENERGY: BTC, GAS, AND LIBERALIZATION

UNCLAS SECTION 01 OF 02 ANKARA 000566 SIPDIS SENSITIVE USDOE FOR CHUCK WASHINGTON USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ENRG EPET TU SUBJECT: TURKEY ENERGY: BTC, GAS, AND LIBERALIZATION REF: A. ANKARA 492 ¶B. ANKARA 323 ¶C. ANKARA 131 AND PREVIOUS ¶1. (SBU) SUMMARY: According to the Energy UnderSecretary, Turkey continues to make progress on liberalizing its electricity and gas sectors, but there are still details to be filled in on the underlying legislation and action plan for privatization. He said Russia is welcome to compete for privatization opportunities, but noted that Gazprom's Bosphorus Gas lost a bid for the tender for the Izmir gas distribution. BTC is on track for second half 2005 oil flow, but GOT will seek cost-sharing from BP on cost over-runs, claiming shared responsibility. The GOT continues to drag its feet on issuing conditional licenses for potential Bosphorus oil bypass projects, claiming that projects must first show their viability by having demonstrated oil shipper support. The GOT believes "Voluntary Principles" can be useful mechanism for engaging stake-holders. End Summary. ¶2. (SBU) ELECTRICITY LIBERALIZATION: GOT Ministry of Energy (MENR) Undersecretary Sami Demirbilek covered the full range of energy issues in a January 28 meeting with EconCounselor and Energy Officer. Demirbilek was pleased that American company AES was serious about considering investment in Turkey's electricity distribution sector (Ref A). He said he had strongly encouraged AES not to wait until tender documents were issued, but to make comments now on potential privatization methodology to the GOT offices, including the Treasury - responsible for setting the sale's parameters. Demirbilek emphasized that the privatization methodology should assure supply security and best service, while conforming to a structure compatible with EU and international standards to attract the most qualified foreign investors. He implied that the full asset sale methodology supported by MENR was the preferable sale method. ¶3. (SBU) ELECTRICITY INVESTMENT: On the need for greater electricity investment to keep up with strong demand growth (demand projected to exceed supply by 2010-12),Demirbilek noted that the new Electricity Market Law and Electricity Strategy Paper called for the private sector to cover growing demand over the medium and long term. However, he said these documents were not specific on what the government should do if the private sector does not undertake needed investments. In other words, said Demirbilek, there may be a need for specific incentive and/or tendering process provisions with associated identification of detailed time-frames and organizational roles. He asserted that the privatization of the electricity distribution system would create a market-oriented customer base for the subsequently privatized generation sector. ¶4. (SBU) BUILD-OPERATE-TRANSFER (BOT) POWER PLANTS: Demirbilek gave assurances that the GOT would not violate its contracts with the controversial BOT projects dating from the late 1990's (two of which have U.S. involvement; SEPTEL). He said he expected that the GOT and the BOT sponsors would be able to achieve through negotiation a mutually beneficial outcome that included a reduction in prices paid and guaranteed by the government. Demirbilek said there was now recognition by investors that Turkey's economic stability and growth were sustainable and there was less perception of country risk. Therefore, he said he expected that the parties would reach a compromise without creating any concerns on the part of international investors (i.e., GOT would honor the contracts). ¶5. (SBU) BTC: The Undersecretary stated that Baku-Tbilisi-Ceyhan (BTC) pipeline would be ready to ship its first oil near the beginning of second half 2005, consistent with BTC statements (Ref C). He confirmed that general contractor BOTAS (the Turkish pipeline company) had taken over the subcontract for construction of Lot A adjacent to Georgia. Although emphasizing that it would not hold up construction completion, he said that GOT would contest BP's position that the GOT must cover all the cost overages for construction in Turkey. Demirbilek felt that BP was responsible for selecting and working with the subcontractors which created the eventual construction delays. He said that if necessary the dispute would be taken to international arbitration to resolve, but he repeated that this would not interfere with or delay completion of BTC. ¶6. (SBU) BOSPHORUS BYPASS AND VOLUNTARY PRINCIPLES: Demirbilek stated that oil shippers and the market must decide on any potential Bosphorus oil bypass, based on commercial benefits (Ref B). He said that the GOT did not feel pressure and could wait for a market-based solution to emerge. The official emphasized that the GOT was not in the position of picking routes or projects. He said that there had not been any decisions during recent high level Turkish-Russian discussions. In response to our question on status of conditional permits, Demirbilek said too many people were waiting for a "flag-ship" certificate; he said that the GOT was loathe to designate a project in this way; rather, the "flagship" would be the project that obtained support from an oil shipper (without needing a certificate). He said that Russian and American shippers needed to get together to promote a potential bypass as a way to mitigate the recognized risks of congestion in the Bosphorus Straits. Demirbilek said that the MFA's proposed "Voluntary Principles for Tanker Traffic in the Turkish Straits" concept could be a useful way of engaging all stake-holders in grappling with the issue. ¶7. (SBU) NATURAL GAS DISTRIBUTION AND RUSSIA: Demirbilek stated that Bosphorus Gaz, a Turkish partnership with Russia's Gazprom, was unsuccessful in its bid for the gas distribution tender for the Turkish port city of Izmir. He said that the Russians had expressed interest in investing in Turkey's gas market; the GOT said Russian companies were welcome to compete. Noting that Turkish firm Kolin Insaat submitted the lowest bid (out of 11 bids),Demirbilek wondered aloud whether the winning firm would be able to perform (Note: we understand that the pre-qualification evaluation of bidders may not have been adequate. End Note.) Russia currently delivers over 60 % of Turkey's natural gas, with a growing portion coming via the Blue Stream pipeline. Russia has shown some flexibility in reportedly not invoking pay provisions for take-or-pay contracts, given still excessive supply of gas for the Turkish market. ¶8. (SBU) COMMENT: The GOT official's remarks on BOT's were much more accommodating and less threatening than some past GOT comments. It appears that the GOT is engaged in strategic thinking on how to cope with the existing BOT contracts without harming the investment environment. The GOT remains passive and unsure how to move forward on facilitating a Bosphorus bypass solution. EDELMAN