U.S. OIL COMPANY BLAZES TRAIL IN BLACK SEA NATURAL

UNCLAS SECTION 01 OF 02 ISTANBUL 001127

SIPDIS

SENSITIVE

USDOE FOR CHARLES WASHINGTON

E.O. 12958: N/A
TAGS: BEXP ENRG EINV ECON TU
SUBJECT: U.S. OIL COMPANY BLAZES TRAIL IN BLACK SEA NATURAL
GAS


This message is sensitive but unclassified and was
coordinated with Embassy Ankara. Not for internet
distribution. Contains company proprietary information


1. (SBU) Summary: In a project that company executives
confidently predict will soon be a banner success for U.S.
investment in Turkey, Torreador Energy Corporation (the
former Madison Oil Company) is moving forward to full
development of a natural gas field off of Akcakoca on
Turkey's western Black Sea Coast-- the first economically
viable such deposit in the Black Sea. The company has
already drilled one well, and is in the process of drilling a
second. If all proceeds according to plan, the company
expects the field should enter production in September 2006,
initially producing 75 MCFPP. The company expects that it
will recoup its 30-40 million USD investment in 12 months,
and ultimately earn a 10-12 fold return. With its other
Black Sea licenses, including the coastal section west from
Istanbul to the Bulgarian border, Torreador appears poised to
play a significant role in development of Turkey's Black Sea
energy resources. End Summary.


2. (SBU) Istanbul P/E Chief joined company officials and
visiting investors for a site visit to the Akcakoca operation
on June 27-28. After first visiting the Atilla Dogan
Metalworking Company in Izmit on the Sea of Marmara, where
the company's platforms are being assembled, the group
proceeded to Akcakoca itself, where drilling began at the
beginning of May. The company first drilled a delineation
well at its Akkaya-1 site, five miles offshore in the South
Akcakoca subbasin, confirming the presence of gas at depths
ranging from 853 to 1136 meters. Currently, the company is
in the process of drilling two offsets to its Ayazli-1
discovery well, where gas was initially discovered last
summer. Torreador is working with its partner, the Turkish
National Petroleum Company (TPAO),to acquire shore property
where it can construct a production facility, and is
investigating options for installation of pipeline from the
wells to the shore. It will also construct a pipeline from
the onshore plant to a nearby BOTAS pipeline, to tie into the
national distribution grid. The company predicts that first
gas from its planned eight shallow wells will come onshore in
September 2006, with gas from three deeper wells following
three months later. Torreador credits the excellence of its
Turkish partners, including Dogan, with enabling it to
envision bringing a field into operation in just over two
years (calculating from the initial success of its July 2004
test well) in an area without previous energy development.


3. (SBU) All told, company officials, including Turkey
General Manager Roy Barker and President Tom Graves, have
previously estimated the field at 350 billion cubic feet of
natural gas, and currently assign a value of up to $2 billion
USD at current gas prices. Given their 36.75 percent share
(TPAO has 51 percent, and the Canadian firm Stratic has 12.25
percent),they calculate their income over the life of the
field at 750 million USD, or 450 million USD after taxes and
royalties. Company officials will meet with their Turkish
and Canadian partners in Ankara on June 30 to get the
go-ahead for full development of the field. Initial
production when the shallow wells come on line in September
2006 will be 75 MCFPP per year, and will be ramped up
therafter as additional wells come on line.


4. (SBU) Given Turkey's growing energy demand and the high
price of fuel oil, Torreador sees little difficulty in
selling its product into the national grid. Though it
initially toyed with the idea of selling directly to
customers such as the nearby Erdemir Steel Works (which has
provided much of the steel for the company's installations),
company officials are now leaning towards selling directly
into the Botas network, since they anticipate their
production will be well in excess of what Erdemir would
consume. Questioned about whether Turkey's excessive
take-or-pay contracts might not impose price constraints on
what they can recoup from their gas, Torreador officials
expressed confidence that Turkey's gas price will hold. They
note that the country will soon put out a tender for volume
release of take-or-pay gas, which will allow buyers to put
their own markup on the gas. This, they argue, will work for
Madison/Torreador, since they generally try to keep their
price just (4-5 percent) below the government price.

5. (SBU) Comment: Torreador's hard work and persistence to
date show what it takes for a U.S. company to be successful
in Turkey's challenging investment climate. Over the years
the company has had to deal with problems ranging from the
difficulty of repatriating its profits to high royalties
charged by the government (Turkey's new petroleum law is
expected to address both problems). Torreador's experience
also shows the potential for much greater investment if
Turkey can improve its regulatory and legal system. While
Akcakoca seems to be on track to be a success story,
Torreador continues to face regulatory challenges including
TPAO's claim on an adjacent lot that Torreador believes is
rightfully its to develop. Despite this conflict, the
company is cooperating with TPAO in Akcakoca, which has
helped smooth regulatory hurdles and eased the process of
onshore development. Not least, Torreador has benefited from
the skill and entrepreneurship of local suppliers, which has
enabled it to move quickly from utilizing rigs with nearly
100 percent U.S. content to more economically building them
on site in the Sea of Marmara and shipping them through the
Bosphorus to Akcakoca. End Comment.

ARNETT