Iraq: Turkey Companies Need Cash to Increase Oil

UNCLAS SECTION 01 OF 02 ANKARA 006870

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EFIN IZ
SUBJECT: Iraq: Turkey Companies Need Cash to Increase Oil

SENSITIVE BUT UNCLASSIFIED.

Coordinated with ConGen Istanbul.


1. (SBU) Summary. Turkish companies supplying refined
petroleum products to Iraq's State Oil Marketing Company
(SOMO) say they have the physical capacity to boost
shipments to Iraq dramatically, but are not able to do so
unless SOMO regularizes overdue payments. They
appreciate the help of the U.S. Government, but suggest
that more -- for example, creation of a special financing
facility that could include a USG guarantee -- be done so
that the companies can continue to finance the purchase
and transport of product to Iraq. Short of creating such
a facility, the U.S. might help improve weak
communication between the companies and SOMO, such as by
organizing a meeting inside or outside of Iraq. End
Summary.

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READY TO INCREASE SUPPLY, BUT NEED FINANCING
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2. (SBU) Representatives of approximately 10 of the
Turkish companies supplying oil to SOMO told Economic
Counselor and Istanbul Pol/Econ Chief November 18 that
they were physically able to increase their supply of
refined oil products to Iraq by 50%. Both their trucking
fleets and Turkish port capacity were sufficient to
support such an increase, they claimed. However, they
would be unable to maintain their current level -- much
less increase the flow -- if SOMO does not regularize its
payments to the supplier companies.


3. (SBU) The companies said that as of November 18, the
total amount receivable from SOMO was $708 million. Of
this, $438 million was more than 45 days overdue. The
companies deeply appreciated the efforts of Embassies
Baghdad and Ankara in obtaining the recent $400 million
payment, but said that, as small companies with shallow
pockets, they could not continue supplying SOMO under
such conditions. With banks unwilling to take the risk
of non-payment by SOMO, the companies need the financial
reflows from SOMO payments in order to purchase new
supplies on the international market. Without the
cycling of cash, they simply cannot continue working.

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UNCOMMUNICATIVE, HIGH-HANDED SOMO AGGRAVATES SITUATION
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4. (SBU) The company reps complained bitterly about the
difficulty they have in communicating with SOMO. SOMO
officials, they said, respond neither to written letters
nor to requests for meetings in Iraq. When there is a
meeting, the discussion never moves beyond pleasantries
to the details of contracts and payments. Furthermore,
SOMO acts in a high-handed manner, unilaterally canceling
contracts, deducting amounts from payments due for
unclear reasons, and using threat of non-payment to
extract concessions from the companies. The companies
gave SOMO the benefit of the doubt, noting that was not
traditionally an importing company. They also understood
that the overall Iraqi budgetary situation is extremely
tight. But, they observed that SOMO, with the help of
its contractor Sabro, was able to track every load of
product entering Iraq -- why wasn't it able to keep track
of its accounting, they asked rhetorically.

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A SPECIAL FINANCING FACILITY
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5. (SBU) As they have before, the companies suggested
that the United States assist in the creation of a
special financial facility or fund that could insure the
companies against the risk of non-payment by SOMO. This
would give banks confidence to provide finance. They
said the companies would be prepared to make
contributions into such a fund based on the amount of
product they ship. The companies also felt that a USG
guarantee would be necessary. In addition, the companies
seek to have SOMO pay interest on late payments, which
they say is not currently the case.

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COMMENT: POSSIBLE U.S.-ORGANIZED CONFAB?
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6. (SBU) The company reps said they would not be in
their business if they were not risk-takers, but that
they could not go on without the cash they need to
operate. International oil markets are tough and
unforgiving, they said. The companies have a genuine
self interest in supplying more product and seem ready to
do so. (The capacity of the border crossing is another
subject, see septel.) The proposal for a special
financing facility may or may not be realistic, but it
seems that without some kind of creative financial
remedy, the companies will not be able to continue
meeting Iraq's critical oil needs. Short of such a
facility, one thing we might be able to help address is
improving lines of communication between the companies
and SOMO. The companies suggested, for example, that
they would welcome a meeting with SOMO, arranged with
U.S. help to ensure that the issues are actually dealt
with, either inside or outside of Iraq.
MCELDOWNEY