Identifier
Created
Classification
Origin
06ANKARA1527
2006-03-23 11:24:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

TURKEY: PLAYING CHICKEN ON BTC AND CASPIAN GAS

Tags:  EPET ENRG EINV PREL TU GG AZ 
pdf how-to read a cable
VZCZCXRO9179
RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHAK #1527/01 0821124
ZNY CCCCC ZZH
R 231124Z MAR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4181
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBS/USEU BRUSSELS
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHAAA/NSC WASHDC
RHMFISS/HQ USEUCOM VAIHINGEN GE
C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001527 

SIPDIS

SIPDIS

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

REF: A. ANKARA 1010


B. ANKARA 65

C. 05 ANKARA 7312

D. ANKARA 7067

Classified By: DCM NANCY MCELDOWNEY FOR REASONS 1.4 (B,D)

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001527

SIPDIS

SIPDIS

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

REF: A. ANKARA 1010


B. ANKARA 65

C. 05 ANKARA 7312

D. ANKARA 7067

Classified By: DCM NANCY MCELDOWNEY FOR REASONS 1.4 (B,D)


1. (C) Summary: During Ambassador Steven 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
--------------


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. (BTC has already advanced $192
million to BOTAS.) 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.

--------------
Natural Gas From Azerbaijan and Beyond
--------------


4. (C) Townshend also reported that construction of 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, however, 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 lunch hosted by the MFA,
Turkish officials raised a number of energy questions,
including Georgia,s request for additional and earlier gas
from the SCP. Energy 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 regardless of source, the fact was becoming clear that
Georgia would have to pay a market rate for gas. 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 by A/S Fried in
separate meetings March 16 at the MFA with Under Secretary
Tuygan, Deputy Under Secretary Uzumcu and DDG Rende. Fried
described the current focus on energy issues involving both

ANKARA 00001527 002 OF 002


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 Wayne would give the definitive USG policy
statement at a March 17 NATO energy meeting. Fried 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, whether from Turkmenistan or Kazakhstan.
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 a
great deal. 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 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.

--------------
EMBASSY COMMENT
--------------


8. (C) It seems reasonable for BTC not to accept BOTAS,
position that all the delays and over-runs are due to "scope
changes" 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 since June 2005 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. The threat of investigation, subsequent
public disgrace, and years spent battling court cases -- even
if innocent -- is doing increasing damage in the Turkish
energy sector. Turkey has ambitious plans to act as a
regional energy hub, plans which the U.S. should continue to
support vigorously, but the investigative threat and constant
bureaucratic hurdles act as a real handicap to the attainment
of that vision. The handling of the BTC dispute is the
immediate case in point. The longer BTC, the flagship
Caspian energy project is delayed, the further both the U.S.
and Turkey will be from advancing our joint energy goals.


10. (U) Amb Mann has cleared this cable.

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

WILSON