SOUTHERN CORRIDOR: MOVING ON TRANSIT AGREEMENT

C O N F I D E N T I A L ANKARA 001121

SIPDIS

SIPDIS

EEB FOR A/S SULLIVAN
EUR FOR DAS BRYZA
DOE FOR DAS HEGBURG
USTDA FOR DAN STEIN

E.O. 12958: DECL: 05/11/2017
TAGS: ENRG BEXP GR AJ TU
SUBJECT: SOUTHERN CORRIDOR: MOVING ON TRANSIT AGREEMENT

REF: ATHENS 838

Classified By: Ambassador Ross Wilson. Reasons 1.4 (b) and (d).


1. (C) Summary. In a May 9 meeting, Energy Minister Hilmi
Guler agreed with Ambassador that setting a legal framework
for transiting Shah Deniz production is the next step in
developing Caspian gas exports to Europe via the soon to be
completed Turkey-Greece Interconnector (TGI) and the Nabucco
pipeline. Guler said he and his Greek counterpart have made
progress, but he is perplexed that Azeri officials have not
replied to his offers to meet. He described a Turkish model
for transit arrangements that include assurances of Turkish
access to gas at a price determined on a "netback" basis
(i.e., the European consumer price less shipping costs).
Guler also wants to keep working on develop supplies in
addition to Azerbaijan, including Iraq and trans-Caspian, and
asked for US and EU help. He said Russian pressure was
unabated, and argued that absence of explicit US support for
the Samsun-Ceyhan oil bypass pipeline was playing into
Russia's strategy to dominate both oil and gas supplies.
Guler seems to have given up earlier ideas of Turkey buying
and reselling gas, and to be ready to work with the Azeris
and others on the technical issues despite the political
uncertainties in Turkey. Moving quickly remains necessary to
avoid another crisis this winter. End summary.


2. (C) Ambassador pressed Guler to take a leadership role
in engaging with Azerbaijan on a gas transit agreement. He
noted that production problems for Shah Deniz I gas seem to
have been resolved and urged Turkey to begin accepting Azeri
gas volumes and begin transshipment to Greece this summer.
He added that we looked forward to a Turkey-Greece "first
gas" ceremony in July. Guler replied that there had been
some forward movement: Greek Development Minister Sioufas
(ref) and he had agreed to meet trilaterally with Italy soon
(date not yet set) and the physical Turkey-Greece
interconnection should be ready by late July. Meanwhile,
however, Azeri officials have not responded to his offers to
meet and the status of the first year supply contract with
Azerbaijan is still unresolved. He found this highly
perplexing given Turkey's close relations with Azerbaijan.


3. (C) Appealing to Turkey's regional leadership role,
Ambassador emphasized that the essential next step for both
TGI and Nabucco is developing a gas transit agreement and
legal framework that would give investors the confidence they
need to develop Shah Deniz II. The Minister agreed, stating
three guiding principles for Turkish policy:

1) Turkish security of supply is the priority. Thus, Turkey
should have access to gas that is transiting its territory in
order to meet its growing demand. Guler said any agreement
should give Turkey the option to take up to an agreed amount
of gas; he thought that about 20% would be reasonable.


2) Ensuring a reasonable price for Turkish consumers is
important. This price should be determined under a
"net-back" formula so that the price paid in Turkey is lower
than the price paid by European customers by an amount at
least equal to transportation costs.

3) Turkey views energy policy as a strategic tool to enhance
its international standing.

Guler added that he had found the April USTDA-sponsored visit
to the United States -- which his Undersecretary, Sami
Demirbilek, joined -- very useful. He hoped that US
officials had also found it useful in gaining a better
understanding of Turkey's policy as described above.


4. (C) Guler faulted European countries for not taking
Turkey's interests into account: "They always talk about
Europe's needs, but we have needs too." He estimated
Turkey's future gas demand at 30-40 bcm per year. Ambassador
urged him to have a deeper dialogue with European energy
officials on this subject, including at a June 5 EU-sponsored
energy conference in Istanbul that will be attended by Energy
Commissioner Piebalgs. Guler said he planned to do so, but
noted that the lack of a common EU energy policy meant that
every EU member has its own policies and interests. The
United States could also help get the message across to
European governments.

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Iraq Gas
--------------


5. (C) Guler put in his regular plug for developing
trans-Caspian and Iraqi gas, saying that in his personal
opinion it was not clear that Azerbaijan had sufficient gas
to meet Turkish and European needs, or the ability to supply
those needs in a timely way. Developing other sources would
give confidence to consumers as a "back-up" to Shah Deniz II.
Ambassador noted that we were waiting for a response from
Turkey on our proposed next steps coming out of the March 9
Turkey-Iraq-US gas meeting in Istanbul. The Iraq Neighbors
working group on energy that Iraq has asked Turkey to chair
was another opportunity. If the US is part of this Neighbors
working group, perhaps there could be a Turkey-Iraq-US
trilateral on the margins. Guler said it was also important
for the EU to play an active role with Iraq.


6. (C) Ambassador strongly cautioned against turning to
Iranian gas. Iran is a very risky supplier and will only
become more so. We are strongly opposed as a matter of law
and policy to investment in Iran's energy sector, including
export pipelines. Guler said discussions with Iran were
continuing, but alluded to the difficulties, including the
ongoing arbitration case. He claimed, however, that U.S.
companies were working in Iran's energy sector. We denied
this, with the Ambassador noting that the risks in turning to
Iran will only grow. Both he and Guler noted US-Turkey
cooperation on the Iran nuclear issue.

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Russian Pressure
--------------


7. (C) Guler also picked up his longstanding theme of
pressure from Russia: he resists, but cannot do so forever.
Referring to the recent groundbreaking for the Samsun-Ceyhan
oil pipeline, Guler asked for more explicit US support for
the Bosphorus bypass line. "Even-handed" US support for
multiple oil bypass pipelines was playing into the hands of
Russia, giving it room to increase its supply dominance. As
goes oil, so will go gas, Guler said, warning, "There could
be many new Blue Streams." This is part of a bigger Russian
strategy, which the US's -- understandable -- reluctance to
choose among allies is unintentionally furthering.

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Turkey Civilian Nuclear Projects
--------------


8. (C) Guler noted that Turkey's parliament had this week
passed and sent to President Sezer a bill providing a
framework for developing domestic nuclear generation
capacity. This would, he said be driven by the private
sector. The government will license the most attractive
proposals and provide electricity purchase guarantees, but
will not operate through a complex tendering process -- thus
minimizing opportunities for corruption, Guler said. He said
that US companies would be most welcome to participate.
Ambassador said that it would be important that the GOT put
out sufficient information to US and international companies.
Guler noted that there were similar large investment
opportunities in the coal sector.

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Comment
--------------


9. (C) Time is slipping as we approach summer without much
progress on a Shah Deniz transit arrangement. The Turks and
Greeks seem to be ready to move forward following Sioufas'
Ankara visit. The next step is to bring the Azeris into the
picture, perhaps with EU help. Turkey's current political
uncertainties will make it more difficult to get focus at a
top political level, but Guler seems ready and willing to
work on the technical issues. Perhaps with the help of the
USTDA visit, the issue of the type of transit agreement
Turkey wants seems to have been resolved in a positive way.
Guler emphasized that he is not "horse trading," but wants to
come up with an agreement that all sides would be comfortable
with, including the private sector that needs to finance the
project.

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

WILSON