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