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. -------------- Fuel Products to SOMO and the Iraqi Market -------------- ¶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. -------------- Fuel Oil Swapped North for Electricity South -------------- ¶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. -------------- Trucks through Syria and Iran -------------- ANKARA 00004406 002 OF 003 ¶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.) -------------- Rampant illegal fuel trade in Turkey -------------- ¶10. (C) The GOT has grown increasingly frustrated by illegal ANKARA 00004406 003 OF 003 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. -------------- SOMO and LPG Moving, But Reduced Numbers -------------- ¶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. -------------- Comment: -------------- ¶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. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ MCELDOWNEY