TURKEY AND MAKING PROGRESS ON THE SOUTHERN GAS

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004728

SIPDIS

SIPDIS

DEPT ALSO FOR EUR MATT BRYZA

E.O. 12958: DECL: 08/13/2016
TAGS: ENRG EPET PREL TU AZ GR RU
SUBJECT: TURKEY AND MAKING PROGRESS ON THE SOUTHERN GAS
CORRIDOR

REF: A. BAKU 1193


B. ATHENS 2078

C. ANKARA 4241

Classified By: ECONOMIC COUNSELOR THOMAS GOLDBERGER FOR REASONS 1.4 (B
AND D)


1. (C) SUMMARY: In August 8 meetings in Ankara with State
Department (S/P) energy advisor Steve Hellman on southern
energy corridor issues, Turkish officials made clear that
they were not insisting on a role for Turkey as market
&consolidator8 that would buy natural gas produced in
Azerbaijan for resale to end-users in southern Europe via the
Turkey-Greece Interconnector (TGI) gas pipeline. Turkish
officials are open to a more traditional fee for transit
arrangement, providing that Turkey receives what it believes
is a fair deal, which would in turn require commercial
negotiations with all the parties to the arrangement. They
would also be prepared to accept USTDA assistance in
identifying suitable models, such as the U.S. Henry Hub, for
developing Turkey,s potential as a gas distribution hub. At
the same time, BOTAS officials claim that the Turkey link to
the South Caucasus Pipeline terminating in Erzurum will be
completed befre the end of the year, and that TGI
construction is similarly on track. Russian pressure on
Turkey to accept Russian gas to fill the TGI also continues,
with a Gazprom team expected in Turkey August 15. It is
therefore important that we continue to work behind the
scenes to bring together TGI partners to agree in the short
term on a symbolic agreement to transit Azeri gas to Greece.
End Summary.

--------------
The Message ) Establish Transit Deal
--------------


2. (C) Hellman emphasized the shared U.S. and Turkish goal
of facilitating southern egress of Caspian gas to Turkey and
on to Europe. This would increase competition and security
of supply by diversifying sources of supply and lessening
reliance on Russia,s Gazprom as single dominant supplier.
He called for Turkey to send a clear signal that it is &open
for business8 by quickly facilitating a symbolic direct
contract between Greece and Azerbaijan for provision of gas
through the Turkey-Greece Interconnector (TGI) based on a
transparent transit arrangement with and fees to Turkey per
international norms. He said this would counter perceptions
that Turkey aimed to act like Gazprom, buying and re-selling
as a &consolidator.8 Hellman stressed that this would
immediately show Turkey,s willingness to serve as a key
transit network with a clear transit regime. Moreover, he
suggested that the U.S. &Henry Hub8 could serve as a model
for a transit system in Turkey and offered the assistance of
USTDA in familiarizing Turkish officials with the Henry Hub.

--------------
We Support the Corridor, But...
--------------


3. (C) Energy Ministry (MENR) U/S Sami Demirbilek agreed in
principle, but said Turkey needed to better understand the
plans and intent of Azerbaijan, Greece, Italy, and the
consortium before it could clearly identify its transit
regime. In order for Turkey not to be taken advantage of,
Demirbilek thought there needed to be some sort of overall
and simultaneous commercial agreement among all parties. He
rejected as false the &rumor8 that Turkey intends to be a
consolidator or monopolist. He attributed the rumor to: 1)
Azerbaijan showing some hesitation on following through with
providing gas at agreed prices (facing Russian threats on
supply and pricing),and 2) confusion with Turkey,s separate
efforts to slow down a deal between Austria,s OMV and Iran
on gas for Nabucco by inserting Turkey into the deal.
Demirbilek said Turkey would do its best to make a deal with
Azerbaijan and the others, and Hellman offered to facilitate
a meeting of the key partners to reach agreement for TGI.
Demirbilek also said he would be happy to learn more about
the Henry Hub.

--------------
Nabucco Challenges ) OMV and Iran

ANKARA 00004728 002 OF 003


--------------


4. (C) Demirbilek was highly critical of Austrian OMV,s
&greedy8 and ill-advised efforts to strike a direct deal
with Iran using the Nabucco pipeline, but without talking to
Turkey about transit. He cited Turkey,s own problems with
Iran, which put in question Iran,s reliability as a
supplier. In response to the direct talks between OMV and
Iran, he said Turkey had insisted on creation of a joint
stock company with Turkish participation that would negotiate
with Nabucco suppliers. Demirbilek lamented that Turkey,s
reasonable concerns about Nabucco and OMV have created the
false impression that Turkey aims to act like a monopolist in
the case of TGI.

--------------
BOTAS Ready to Play ) Claims on Time on SCP
--------------


5. (C) In an earlier meeting, BOTAS Acting DG Saltuk Duzyol
told Hellman that BOTAS supported a fee for transit
arrangement, but deferred to the MENR for a political
decision. Duzyol and his assistant Sakir Arikan were adamant
that BOTAS would complete the Erzurum link to the South
Caucasus Pipeline (SCP) by October-November, just within the
contractual window. Arikan strongly criticized SCP
Consortium David Woodward,s public claim that BOTAS was
facing a &considerable delay.8 Noting that the project had
been started late, but was being completed at a cost of
one-fifth of what BP would spend, Arikan said that a 2-3
month delay was entirely reasonable for a project of this
scale.


6. (C) The BOTAS officials said that the TGI had overcome
some delays in both Turkey and Greece and they expected to
complete the last hurdle of the Meric River crossing and
achieve TGI completion by March 2007. The BOTAS officials
said that there was plenty of additional capacity in the
BOTAS grid to transit the 11 BCM contemplated for the full
capacity TGI when ultimately linked to Italy. Sarikan noted
that with investment in looping and compressors, BOTAS had
significant additional capacity, but claimed that the number
is commercially sensitive because of the current Nabucco
negotiations. Duzyol was enthusiastic about the approximate
5 BCM of Egyptian gas which he said would begin flowing to
Turkey in 2008.

--------------
Statoil Bearish ) but Ready to Help
--------------


7. (C) In a separate meeting, Statoil Turkey Manager Per
Myrvang told us that he had been prepared to approach Turkey
on behalf of the SCP-Shah Deniz consortium, but had held off
because of all the noise and uncertainty about Turkey,s
intent on a transit arrangement. He said that the Azeris
were under extreme pressure from the Russians, who were
threatening to reduce in kind any amounts sold (cheaply per
the contract) to Turkey with much higher priced (o/a $200)
gas. Mryvang said that Energy Minister Hilmi Guler was the
sole decision maker on gas issues and thought that there were
still people around him pushing for the scheme of hub as
consolidator. (Corroborating this, one of Guler,s senior
advisors separately presented Energy Officer with a detailed
scheme for an Ankara &Ahiboz8 hub with &Ahiboz up8 and
&Ahiboz down8 pricing.) Mryvang observed that Turkey was
no longer over-contracted for gas, so Turkey, Azerbaijan, and
Georgia would have to work out whose gas initially goes on
the Greece. Mryvang said that Statoil was prepared to play a
commercially facilitative role for the EU where it had a lot
of contacts and experience in marketing gas. He thought that
the EU competition rules proscribing joint marketing of gas
could be overcome, maybe by SOCAR doing the marketing.

--------------
Russian Blue Stream and LNG
--------------


8. (C) Seeking to creatively help Turkey meld its positive
east-west vision with Russian ambitions to expand Blue Stream
as part of a north-south corridor, perhaps linked to Israel,

ANKARA 00004728 003 OF 003


Hellman asked Turkish officials about potential to use the
existing BOTAS grid and the unused Izmir gas processing
facility, investing in it as a brown-field conversion to an
LNG exporting facility. Both BOTAS and MENR were reserved
about this idea, and skeptical that the Russians would be
interested. They were interested in the notion of LNG export
to the U.S., but reverted to the standard dream of Ceyhan as
the energy hub of choice, noting the potential for Iraqi gas
to be processed there.

--------------
Comment and Next Steps ) Russian Pressure
--------------


9. (C) Embassy will work Hellman,s themes with MFA
(unavailable during the Hellman visit) and MENR, particularly
to gauge the support of Minister Guler. If it is clear that
Minister Guler is supportive, the USG should seek to
facilitate a negotiated agreement between Turkey, Azerbaijan,
and perhaps Greece. Embassy will work with TDA to explore
support to Turkey on a Henry Hub type approach; i.e.
implementing a &hub8 in a good way (transparent transit
regime in accordance with international norms, vice a Gazprom
approach). Henry Hub is a physical pipeline node and a
pricing point, but it clearly embodies a transparent,
facilitative transit approach.


10. (C) Turkish press reports that Gazprom comes to Turkey
on August 15. There may be danger of a &grand bargain8
trading Russian support for the Turkish Samsun-Ceyhan oil
pipeline in exchange for more Gazprom gas in Turkish
pipelines, potentially transiting onwards. At the same time,
Turkish officials are loathe to give up too much or fear
leaving too much on the table in establishing Turkey,s
energy hub and transit approach. Therefore, it will be
important that we continue to work behind the scenes to bring
all the parties together, most likely starting with an
Azeri-Turkish meeting to dispel misunderstandings and reach
agreement on a transit regime.

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

WILSON