TURKEY: PLAYING CHICKEN ON BTC AND CASPIAN GAS

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001478

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USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
DOE FOR CHARLES WASHINGTON
EUR ALSO FOR MATT BRYZA AND STEVE MANN

E.O. 12958: DECL: 03/19/2016
TAGS: EPET ENRG EINV PREL TU GG AZ
SUBJECT: TURKEY: PLAYING CHICKEN ON BTC AND CASPIAN GAS


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Classified By: AMBASSADOR ROSS WILSON FOR REASONS 1.4 (B,D)


1. (C) Summary: During Ambassador Steve Mann's March 17
meetings in Ankara, Turkish government and BTC officials said
they are still aiming for loading the first oil tanker May 27
in Ceyhan, although the target date for an official ceremony
has slipped to July. The BTC consortium and BOTAS are at
loggerheads about sharing responsibility for funding
approximately $330 million in cost over-runs under the lump
sum-turnkey contract awarded to BOTAS for pipeline
construction in Turkey. Turkish and U.S. officials stressed
the importance of Azerbaijan and Georgia in developing
southern corridor east-west natural gas transit. There is
interest in exploring links to Kazakhstan and Turkmenistan.
End Summary.

Playing Chicken on BTC:
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2. (C) In a March 17 meeting in Ankara with Ambassadors
Wilson and Mann, BTC CEO Michael Townshend reaffirmed the
target of first tanker loading at Ceyhan May 27, with an
official ceremony the second week of July. Sharing his
concerns about BOTAS, capacity to complete the work and
lamenting the political reality that the GOT Treasury
guarantee was not actionable, Townshend stressed that the BTC
consortium could not accept full responsibility for delays
and cost over-runs. The BTC CEO shared what he described as
a final and generous offer to the Turkish Minister of Energy
to accept limited responsibility and fund a portion of cost
over-runs. Townshend felt this would expedite completion in
a win-win way and avoid a messy arbitration where the GOT
would win a less advantageous result. Out of about $330
million in disputed claims, BTC,s final offer calls for
BOTAS to cover $80 million. In addition, the BTC consortium
would provide other measures to assist cash flow at BOTAS and
its pipeline operating arm (BIL ) BOTAS International).


3. (C) Ambassador Wilson agreed that arbitration would not
be a productive path, noting the negative signals this would
create for building links to Kazakhstan for BTC and for
improving Turkey,s investment environment when Turkey aims
to seed $126 billion in energy investment, including moving
forward on ambitious plans for a new nuclear power program
and catalyzing Ceyhan as a regional energy hub.

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Natural Gas From Azerbaijan and Beyond
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4. (C) Townshend also reported that the follow-on South
Caucasus Pipeline for Shah Deniz natural gas is remarkably
proceeding on schedule for the end of 2006. He expects
delays in BOTAS achieving connection to the Turkish grid at
Erzurum. Townshend noted that BOTAS had asked BTC if it
could secure a natural gas compressor, critical for
completion of the connection ) and not at all easy to
procure on short notice.


5. (C) In a separate March 17 meeting, Mann and MFA
officials discussed Georgia,s request for additional and
earlier gas from the SCP. Enegry DDG Mithat Rende criticized
Georgia,s arbitrary increase in projected annual demand from
1.2 BCM to 3.5 BCM, based on inflated rosy projections for
domestic growth and a chemical fertilizer plant. He and Mann
agreed that the bottom line was that Georgia would have to
pay a market rate for gas ) whether from Turkey or from
Russia. Rende articulated Turkey,s oft-repeated position
that Shah Deniz gas offered Turkey diversification, re-export
rights, and advantageous pricing.


6. (C) These issues were also discussed in separate
meetings March 16 at the MFA with Deputy Under Secretary
Uzumcu and DDG Rende that also included A/S Fried. Fried
described the current focus on both Azerbaijan and Georgia as
"huge". Seldom, he said, had he seen the Europeans react
with such alacrity as they had after the Russian gas cut-off
to Ukraine. Suddenly they were serious about diversification
of energy supplies. He noted that EB A/S Tony Wayne would
give the definitive USG policy statement at a March 17 NATO
energy meeting. Fried and Mann had told President Aliyev
that, while the U.S. was offering no final endorsements, we
supported the notion of at least exploring Trans Caspian gas,

ANKARA 00001478 002.2 OF 002


whether from Turkmenistan or Kazakhastan. Such gas would run
through Azerbaijan and Georgia and, if there is an N-K
settlement, perhaps through Armenia as well. The Russians
are not happy, but were embarrassed at the reaction to the
gas cut-off. They still stand to earn plenty. What is
needed is competition, not the monopoly that Gazprom
currently enjoys. Nazarbayev may not be a democrat, for
example, but he can add up the difference between $10 (from
Gazprom) and $110 (from the free market) per BTU. Aliyev is
very aware of the issue. We hope, Fried said, that Shah
Deniz moves ahead.


7. (C) On BTC, Fried and Mann said the Azeris and others had
expressed serious concerns about apparent BOTAS-related
construction delays in Turkey. Tuygan, who seemed surprised,
explained that the oil had come as far as Erzurum and the
first tanker would be filled by late May. Turkey, too, was
interested in energy diversification, and wanted to serve as
a transit hub for oil and gas. Of course the Caspian region
was very important, but there were possibilities for Egyptian
gas as well. On Caspian gas, we ought to work together, and
everyone should have a chance to compete. MFA, Tuygan noted,
had just appointed Ambassador Mithat Balkan as its energy
coordinator. Fried agreed on the need for competition - a
Gazprom monopoly means a lack of investment. Without Gazprom
reform, fueled by competition, there will be insufficient
investment in the Siberians fields.

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EMBASSY COMMENT
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8. (C) It seems reasonable for BTC not to accept BOTAS,
position that all the delays and over-runs are due to &scope
changes8 by BTC and therefore not attributable to BOTAS,
mismanagement of the fixed price contract and choice of
inexperienced sub-contractors. However, the Consortium to
date has loaned money to BOTAS to expedite completion. There
is a danger that Turkey could play this face-off in a
ham-handed way and continue to force a game of chicken that
could lead to arbitration. But, BTC is a western company
coalition (which also includes state oil company TPAO). The
consequences of lost transit fees ($10 million per month) and
arbitration could be grave from a financial and investment
perspective.


9. (C) BTC's problems with BOTAS come in the context of
various reports that BOTAS' financial and management capacity
is under more and more strain. The company has no clear
leadership or support from senior government officials, and
has limped along for the past x years under a series of
ineffectual acting directors. The company is under threat
from a variety of allegations and investigations into
corruption and mismanagement in tendering and project
implementation. This contributes to an environment where
there is reluctance to sign a signature or make important
decisions at BOTAS, as well as at the Ministry, which is a
key impediment for BTC gaining a timely response to its
reasonable offer. Longer term, weak capacity at BOTAS is an
impediment to Turkey's grand plans for regional gas transit
to Europe.


10. (U) Steve Mann cleared this cable.

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON