TURKEY AND IRAQ'S ILLICIT AND LICIT FUEL TRADE

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004406

SIPDIS

SIPDIS

USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK

E.O. 12958: DECL: 07/26/2016
TAGS: EFIN EPET KCOR TU IZ
SUBJECT: TURKEY AND IRAQ'S ILLICIT AND LICIT FUEL TRADE

REF: A. STATE 105085

B. ANKARA 3716

C. ADANA 155

D. O5 ANKARA 6952

Classified By: ACTING ECONOMIC COUNSELOR ANDY SNOW FOR REASON 1.5 (D)

This cable has been coordinated with Consulate Adana.


1. (C) Summary: Illegal fuel product trade in Turkey is
significant and an issue of great concern to the Turkish
Government, but we are not aware of any evidence that fuel
smuggling in Turkey has any link with the insurgency in Iraq.
Despite the challenges of the single bottleneck Habur Gate
and difficulties in gaining timely payment from and doing
business with the Iraqi State Oil Marketing Company (SOMO),
Turkish suppliers have provided significant fuel product to
Iraq, albeit currently reduced because of a customs
crack-down on smuggling. End Summary.

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Fuel Products to SOMO and the Iraqi Market
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2. (SBU) Given shortfalls in refining capacity in Iraq,
Turkey has supplied significant amounts of refined fuel
product to SOMO via Habur Gate. In 2005 as many as 500-800
tankers per day delivered product to SOMO. Over thirty
Turkish suppliers have participated in this business; major
suppliers are state-owned Turkish Petroleum International Co.
(TPIC),Ocean Energy, Delta Petroleum, Aygaz, Etsun, and
Kizil Group. Over time both the Turkish suppliers and the
Government of Turkey (GOT) became increasingly frustrated and
bitter about slow payment by SOMO. Total arrears breached $1
billion on a number of occasions in 2005-6. Temporary
stoppages of shipments were resolved by partial payments by
SOMO.


3. (SBU) A long stoppage in 2005-6 was finally resolved by
belated implementation of a February 15, 2006 agreement which
provided for a schedule for paying down arrears and
acceptable letters of credit securing any future shipments.
Turkish suppliers complained that SOMO delayed in providing
acceptable letters of credit, again fell behind on payments,
and failed to meet or introduced new conditions not
contemplated in the contracts or under the agreement.
Shipments finally restarted in April, but remained below
one-half of previous daily shipments, because of reduced
contract volume.


4. (SBU) The single Habur Gate has acted as a significant
bottleneck, operating at capacity and exacerbated by
construction projects still underway. Turkish suppliers have
told us they could increase volumes significantly, if there
were more border gate capacity and if they were assured
payment.

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Fuel Oil Swapped North for Electricity South
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5. (SBU) Iraqi Customs officials, SOMO-North representatives
at Habur Gate and assorted U.S., Turkish and Iraqi border
officials confirm the flow since approximately March 2006 of
100-150 daily shipments north of fuel oil from Bayji refinery
to provision the Kartet (Karadeniz) electric power generation
plant in Silopi, 15 KM from the Iraqi-Turkish border (ref B).
This is an endorsed swap arrangement known to both Turkish
officials and regulators, as well as both Iraqi and KRG
officials. Both a Turkish MFA official and an Iraqi Customs
official active in routine border coordination said that some
of this oil also has been transported through Turkey to the
Mersin and Iskenderun international fuel terminals for sale
as fuel oil on the international spot market. These fuel oil
trucks return to Iraq empty, adding to congestion at Habur
Gate.

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Trucks through Syria and Iran
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6. (SBU) The Turkish MFA contact at Habur also says that in
the last 4 months Turkish truckers have been avoiding the
long northbound wait to re-enter Turkey from Iraq at Habur
border gate by transiting both Syria and, to a lesser degree,
Iran. The Syria traffic re-enters Turkey at the Kilis gate
and the Iran traffic re-enters at the Agri province gate near
Dogubeyazit. It is possible that these fuel transporters
could be transporting petrol products on this return leg
given the incentive presented by the yawning gap between
Turkish fuel product prices and those in Iraq. It was the
opinion of Turkish officials that prior to the late
Spring/early Summer 2005 commencement of renovation on the
Habur gate the backflow of Turkish trucks through Syria was
minimal. They anticipate that once the gate renovation
project is complete in August 2006 the northbound flow will
return almost exclusively through the Habur gate.


7. (C) Adana contacts in Gaziantep several timesthis year
have reported a steady flow of fuel oil in varying volume,
ranging from a doze to several dozen trucks daily, from Iraq
through Syria to the Turkish-Syrian border gate at Kilis to
unofficial, &backyard8 style refineries in Gaziantep. Some
reports from Gaziantep suggest that Turkish trucks returning
from Iraq through Syria also may be using the Hatay gate at
Reyhanli to return to Gaziantep. They describe the use of
these low grade refineries to produce asphalt for the
informal market in Turkey.


8. (C) We only have sketchy, second-hand information on
those arranging transportation of fuel oil from Iraq to
Turkey, often through Syria. There are Kurdish tribal
leaders in Mardin city and Mardin Province, supplemented by
smaller tribal leaders in nearby Sanliurfa and Sirnak
provinceS, who control most of the transportation of refined
product for SOMO and Coalition end users in Iraq. It is
clear thaQtribal leaders and their driver sub-contractors
have at times been diverting refined product from the
deliveries they are contracted to provide southbound to SOMO
and the Coalition ( a frequent Turkish Customs complaint
currently under Turkish parliamentary investigation). It
also appears that they manage to carry product - as
opportunities present themselves on an individual or
coordinated basis - when returning northbound from Iraq. The
evidence includes abundant visible large oil spill remnants,
hundreds of extra tanker hulls (which could be swapped out
between more highly refined and fuel oil loads to prevent
internal tank contamination),and hand pump units seen in
roadside depots in southeastern Turkey.


9. (C) Adana Conoffs also have witnessed in late 2005 a
GOT-sanctioned and Turkish Jandarma/Police traffic-managed
informal border crossing on the Iranian border in southeast
Van province southeast of Baskale. It is linked to a large
open-air, ad hoc refined fuel transfer yard and informal
market in southern Van province near Hosap castle. While the
refined product could be from neighboring Iran, it also could
be Iraqi in origin. It included both diesel and benzene
products of ready market quality, according to local Kurdish
vendors. The Baskale sub-governor said that the GOT is well
aware of the fuel trade and operates the informal border
crossing and resulting traffic because it is one of the few
hard currency sources for the otherwise impoverished border
region with Iran and Iraq. He saw operating in this way as
the least damaging of poor choices and better than leaving
the trade exclusively in the hands of fuel smugglers, whom he
otherwise seemed to think would operate the crossing without
any oversight. He also said that providing the populace such
an alternative economic platform might reduce PKK influence
in the area through slightly increased standards of local
development. (Comment: The local border official likely was
being candid, perhaps since he knew that Conoffs had observed
this operation from the road. He may be unlikely to express
the rationale for the operation in the same frank manner to
higher echelon Turkish officials since fuel smuggling has
attracted parliamentary attention. End Comment.)

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Rampant illegal fuel trade in Turkey
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10. (C) The GOT has grown increasingly frustrated by illegal

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fuel product trade in the Turkish market, because of lost tax
and/or customs revenues. The differential between Turkey,s
high priced market ) Turkey has one of the highest pump
prices for gasoline in the world at about $7.50 per gallon )
and Iraq,s subsidized lower prices ) even with a
shortage-induced black market ) is significant and
compelling for truckers. A representative of the DEIK
(Foreign Economic Relations Board),which represents Turkish
suppliers and lobbies for business in Iraq, told EmbOff that
individual truckers routinely sold 10 % of their load
illegally into the Turkish market. These truckers replace
weight/volume in their load by &watering down8 the fuel or
placing rocks in the tank. GOT officials have at times
accused trucks contracted for shipping sustainment for
coalition forces as also contributing to &slippage8 into
the illicit market.

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SOMO and LPG Moving, But Reduced Numbers
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11. (C) The GOT has undertaken a number of measures to
combat illicit fuel trade. It instituted a &fuel marker8
system and increased testing and enforcement and it has
carried out a number of operations against customs officials
in an attempt to quash corruption and smuggling. A
significant operation on June 28 (Ref C) resulted in the
arrest of 30 officials at the gate and effectively stopped
tanker flow for over two weeks, including sustainment. The
GOT introduced onerous procedures, apparently particularly
focused on LPG/propane, effectively shutting down LPG for a
longer period and exacerbating shortages in Iraq. Many
drivers ) most presumably guilty of malfeasance - sat in
line hoping the rigorous procedures would abate. Over the
last week SOMO southbound flows have resumed, albeit at a
much reduced rate of 80-120 tankers per day, of which 15-30
are LPG.

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Comment:
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12. (C) In response to the Department,s concern that
neighboring country illicit fuel trade may be abetting the
insurgency in Iraq (Ref A),we are not aware of any evidence
that rampant smuggling in Turkey has any direct or funding
relationship with the insurgency. Turkey is increasingly
frustrated with the domestic problem of the illicit fuel
trade, fed by the large price differentials across the border
with Iraq. Periodic crack-downs on customs operations have
exacerbated the bottleneck at Habur Gate. While there are
certain short and medium term fixes that can increase the
capacity of this single existing border facility between
Turkey and Iraq, these improvements will be far from
sufficient to meet the critical needs in Iraq, including
those of Coalition forces (Ref D). We understand that Turkey
and Iraq have reached a preliminary agreement on the opening
of additional border crossings. It remains to be seen how
quickly this progresses. End Comment.


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