TURKEY TO RESUME FUEL SHIPMENTS TO IRAQI SOMO

UNCLAS SECTION 01 OF 02 ANKARA 005777

SIPDIS

SIPDIS
SENSITIVE

EB FOR A/S SULLIVAN
USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK

E.O. 12958: N/A
TAGS: ENRG ECON IZ TU
SUBJECT: TURKEY TO RESUME FUEL SHIPMENTS TO IRAQI SOMO

SENSITIVE BUT UNCLASSIFIED.


1. (SBU) Summary. Turkish and Iraqi State Oil Marketing
Organization (SOMO) officials agreed on a new payment plan for
approximately $950 million in arrears owed by SOMO to Turkish fuel
product suppliers. This agreement should allow fuel shipments from
Turkey, including for building kerosene stocks, to resume as soon as
SOMO can negotiate new contracts with the Turkish companies.
Turkish officials say they were impressed by the commitment of their
Iraqi counterparts to the new payment plan, but the first test will
be an $80 million payment due October 20. End Summary.


2. (SBU) Foreign Trade Undersecretariat (FTU) Director General
Sevket Ilgac confirmed that he and a delegation led by Iraqi SOMO DG
Falah al-Amari agreed September 27 on a "minutes of meeting"
containing a payment plan for arrears due by SOMO to Turkish
suppliers of fuel products to SOMO. The agreed minutes, a copy of
which Ilgac provided (emailed to Baghdad/ECON) notes "with
satisfaction" payments that have been received on the $650 million
in arrears under the so-called "Category A" in the previous
agreement. The main operative points of the new agreement provide a
new repayment plan for approximately $297 million in "Category B"
arrears, which had been disputed by SOMO.

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New Payment Plan for Category B
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3. (SBU) The September 27 agreement subdivides category B into
three new categories, the first and largest of which is $200 million
for fuel deliveries made in January and February 2006 that were
endorsed by SOMO ("covered by credit notes"). SOMO acknowledged its
obligations in this category and promised to pay the $200 million in
5 installments of $40 million each. The first two installments are
due together on October 20, the second two are due together on
November 20 and the final installment is due on December 20. The
second subcategory covers approximately $80 million due for
deliveries made in 2003-05. These were also endorsed by SOMO, but
were not included in the first payment agreement dated February 15,

2006. SOMO agreed to examine these claims and to propose a payment
plan before November 1. The third, and according to Ilgac, most
problematic category, is about $17 million for deliveries that were
not endorsed by SOMO, but where the suppliers are able to show
evidence that SOMO took delivery. SOMO promised to come to an
agreement with FTU and the involved on this category before November

30.

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New Shipments Can Start Immediately
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4. (SBU) Ilgac said that he had great personal confidence in
al-Amari and that he was optimistic that SOMO would keep its word on
this plan. Al-Amari assured him that the Iraqi Finance Minister had
approved and allocated $200 million to cover the first sub-category.
Ilgac said FTU is ready immediately to approve new delivery
contracts negotiated by SOMO with Turkish supplier companies. He
said SOMO and suppliers were currently discussing prices and
volumes. New contracts could be settled and products in route to
Iraq, he thought, before the end of the week (October 6).


5. (SBU) Ilgac also said that FTU had agreed that SOMO could deal
with a smaller subset of the 33 companies to which SOMO is indebted
between now and the end of the year (when payments should be
complete). He confirmed that after that SOMO would be free to deal
with any Turkish supplier company. He understood that there was a
particular need for kerosene in Iraq and said that SOMO was
discussing this with the state-owned Turkish International Petroleum
Company (TPIC). He understood, however, that TPIC might not be able
to provide all of SOMO's needs for unspecified technical reasons.


6. (SBU) The new agreement also covers improved arrangements for
payment of Turkish imports of Iraqi heavy fuel oil, as well as for
cooperation against fuel smuggling. Ilgac noted that the latter was
of prime interest to both sides.

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Comment
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7. (SBU) Ilgac said that he was impressed by al-Amari's command of
the situation and apparent personal commitment to settling the
outstanding issues. This must indeed be impressive to be sufficient
to overcome SOMO's track record in honoring its debts to Turkish
companies (this is the fourth such agreement covering substantially
the same arrears). Receipt of the October 20 installments will be
an important test of Ilgac's faith and of Turkey's continued
flexibility. Ilgac also noted hopefully that many of the logistical
problems at the Habur border crossing that have stymied earlier
deliveries should be fixed following the completion of construction
of a new facility.


8. (SBU) Ilgac stressed repeatedly that the basic problem in the
past was lack of communication by SOMO. In the past, when SOMO was
unable to meet its obligations, it simply didn't pay and didn't make
an effort to contact the Turkish side. He said that if SOMO had any
difficulties under the new agreement, it should immediately consult
with FTU on potential solutions. Turkey's overriding interest, he
stressed repeatedly, was in having a good trade relationship with
Iraq.
MCELDOWNEY