TURKEY ENERGY SECTOR - MAKE NO SMALL PLANS

UNCLAS SECTION 01 OF 03 ANKARA 005455 SIPDIS USDOE FOR CHARLES WASHINGTON USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK EXIM FOR P ROSS AND M KOSTIC OPIC FOR R CORR AND C CHIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG BEXP EINV EXIM OPIC TU SUBJECT: TURKEY ENERGY SECTOR - MAKE NO SMALL PLANS REF: (A) ANKARA 5332, (B) ANKARA 5000, (C) ANKARA 4379 ANKARA 00005455 001.2 OF 003 Sensitive but Unclassified. ¶1. (SBU) Summary: On the heels of completion of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, Energy Minister Hilmi Guler announced ambitious plans for $130 billion in new energy projects in Turkey, calling on the private sector to take up these new opportunities. Turkey is committed to developing Ceyhan as a "new Rotterdam" energy hub, replete with an oil refinery, LNG terminal, and multiple pipeline terminuses (ref b). The biggest component of the wished-for energy, $105 billion out of $130 billion, is for the electricity sector: the newly launched electricity distribution privatization, new electricity generation capacity to address an imminent shortfall in supply, and launching an ambitious nuclear power program. The World Bank is financing an underground natural gas storage facility that will be key to Turkey's plans to transit Central Asian gas to Europe and upgrading of a huge coal-fired power plant (Afsin-Elbistan) in Central Turkey. Virginia-based AES is very interested in the electricity distribution privatization, but U.S. firms are not visible in the other projects. End Summary. -------------- --- ELECTRICITY DISTRIBUTION TENDER FINALLY LAUNCHED -------------- --- ¶2. (SBU) On August 30, the GOT announced the tender for the long-awaited electricity distribution privatization. The three areas tendered were: Baskent (Central-North Anatolia, including Ankara, Kirikkale, Zonguldak, Bartin, Karabuk, Cankiri and Kastamonu); Ayedas (Anatolian side of Istanbul); and Sakarya (Thrace region, including Sakarya, Bolu, Duzce and Kocaeli). This group tendered is the first of four batches of tenders the GOT is planning to conduct for a total of 20 distribution regions. Interested companies are expected to make their prequalification applications in October. The bidding deadline for the tenders is December 15. Under the privatization's "Transfer of Operating Rights (TOR)" mechanism, TEDAS, the existing state-owned distribution company, will retain legal ownership of the physical assets of the distribution networks, but will transfer operating rights and responsibilities to the private investors. ¶3. (SBU) Alexandria, Virginia-based AES told us they remain very interested in the regional electricity privatization and would aggressively pursue all of the three regions in the first tender batch, despite their concerns over some of the terms of the tender. AES's main concern has been the lack of a clause that would allow international arbitration for dispute-resolution. In this regard, they are particularly concerned about the rights TEDAS will retain to terminate the TOR contracts, and how disputes with TEDAS will be equitably resolved. ¶4. (SBU) Privatization Agency (PA) President Metin Kilci told the press that financial adequacy would be the main criterion in evaluating the prequalification applications. This is likely intended to give local companies a chance, given their lack of electricity distribution experience. Although the GOT did not set foreign partnership limits for this specific tender, there is an ambiguous 50 percent limit for total foreign investor share in electricity distribution. Over the longer term, the GOT also aims to privatize Turkey's state electricity production company (EUAS), excluding large hydroelectric facilities. -------------- -------------- COAL PLANTS - TENDER FOR NEW AND REHABILITATION OF OLD -------------- -------------- ¶5. (SBU) On August 23, Energy Minister Hilmi Guler announced the start of the tender process for Afsin-Elbistan, what he termed the "biggest energy project in the history of the Turkish Republic." Guler said a "Turkish style investment model" would be implemented in this project, under which the GOT would lease lignite mines in the area to private investors. Instead of paying cash to the Government, tender winners would renovate the lignite and build two new power plants (Afsin-Elbistan C and D). The GOT will transfer operating rights of the two plants to the private sector for 30 years, with a possible extension of up to 50 years. ¶6. (SBU) The project will require $5 billion in private sector ANKARA 00005455 002.2 OF 003 investment. Several foreign and domestic companies are reportedly interested in various phases of the project. According to our energy sector contacts, U.S. companies remain reluctant to invest in this kind of project in Turkey. ¶7. (SBU) Meanwhile, the World Bank has signed a $350 million loan to increase the efficiency of the existing Afsin-Elbistan A coal-fired plant. The loan required some waivers beause the environmental standards do not met the levels expected for a new plant. According to Guler, the entire new and rehabilitated Afsin-Elbistan complex will generate 30 billion KWH of electricity annually, about 18% of Turkey's total at the time of completion. -------------- QUEST TO ADD NUCLEAR TO THE ENERGY MIX -------------- ¶8. (SBU) After receiving private companies' proposals on nuclear power investment in May, the GOT established a commission with the participation of the Ministry of Energy and Natural Resources (MENR),Turkish Atomic Energy Agency (TAEK),the Energy Market Regulatory Authority (EMRA),and other related agencies. The commission evaluated proposals, and prepared a report in August to serve as a road map for developing nuclear power. Based on the report, the GOT drafted a "Law on Establishment and Operation of Nuclear Power Plants," which should be submitted to the Parliament in the new legislative session that begins in late September. The draft reportedly sets minimum state guarantees as the main criterion for the interested companies. ¶9. (SBU) Energy Minister Guler told the press the GOT wanted to see the private sector developing nuclear projects. Guler stated that rather than selecting the contractor through a tender process, the GOT would choose the company offering the minimum cost (including least state guarantee),maximum technology transfer, and greatest domestic input. In line with the draft legislation, MENR will be the lead agency in this project. -------------- CEYHAN AS NEW ROTTERDAM -------------- ¶10. (SBU) As described in ref B, Turkey is eager to build on its BTC and Kirkuk-Ceyhan terminus and oil storage, first by reinvigorating the near moribund Iraq oil pipeline, then by potentially adding natural gas egress and processing to this right of way. Turkey has licensed a prospective Samsun-Ceyhan oil pipeline and has urged Russia to support this route both for oil and natural gas pipelines to feed oil and gas processing at Ceyhan. Calik/Indian Oil and Petrol Ofisi/OMV have applied for refinery licenses for Ceyhan and Prime Minister Erdogan has encouraged Lukoil to shift its interest from Zonguldak to either Samsun or Ceyhan. -------------- NATURAL GAS STORAGE -------------- ¶11. (SBU) Natural gas storage is a key requirement for satisfying domestic seasonal requirements, tested each winter by cut-offs from Iran and concerns about Russia, and for establishing transit to Europe. Rehabilitation of a 1.2 BCM TPAO Thrace-Marmara gas storage is close to completion and a tender is underway for construction of a natural gas storage under the Salt Lake south of Ankara in an amount of 0.7 BCM - with potential to expand to 2-3 BCM under a World Bank loan for $300 million. -------------- COMMENT -------------- ¶12. (SBU) Despite the relatively new electricity and natural gas laws' focus on market liberalization and private investment, the Turkish Government has been frustrated by the dearth of private energy investment garnered to date. Over the years, Turkey's court system has struck down a number of privatizations and privatization models (BOT's, TOR's, etc.),increasing uncertainty for investors. While the government is expressing enthusiasm, commitment, and vision for partnering with private investors, it is not clear how successful it will be with its energy ambitions. Meanwhile, Turkey ANKARA 00005455 003.2 OF 003 has sought to bring greater market forces to grapple with a looming electricity shortfall (Ref C),but the government is still the main player and the energy regulator still struggles to stake out its role and maintain independence. End Comment. WILSON