TURKEY'S RECENT ENERGY DIPLOMACY WITH IRAN,

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 002135 SIPDIS SIPDIS USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK EEB FOR A/S SULLIVAN EUR FOR DAS BRYZA SCA FOR MANN DOE FOR HEGBURG USTDA FOR DAN STEIN E.O. 12958: DECL: 08/17/2017 TAGS: AJ ENRG EPET IR IZ KZ RS TU SUBJECT: TURKEY'S RECENT ENERGY DIPLOMACY WITH IRAN, AZERBAIJAN, IRAQ AND RUSSIA REF: A. ANKARA 1809 ¶B. ANKARA 1945 Classified By: Charge Nancy McEldowney for reasons 1.4 (b) and (d) ¶1. (U) Summary: GOT officials say that Turkey intends to continue its energy cooperation with Iran, Iraq, Azerbaijan, and Turkmenistan as potential future sources of gas to meet Turkey,s growing domestic needs and supply European markets. We have on several occasions firmly reiterated U.S. policy opposition to investment in Iran. GOT officials claim to understand our concerns, but point to Turkey,s energy needs and inability to rely on any single source for energy security as its consumption grows. Turkey is too reliant on Russia, they argue, Azerbaijan has a "hidden agenda," Iraq is unstable and Turkmen gas is still "theoretical." Underlying this "all fronts" strategy is a notable lack of confidence in Azerbaijan, as to both its willingness and ability to meet Turkey,s energy needs. Turkish officials also note active European investment in Iran, arguing that weakens our message that Turkey should not invest there. End summary. ¶2. (C) We used recent meetings with Energy Ministry Deputy U/S Bekir Aksoy, Energy Ministry Deputy General Director Nilgun Acikalin, Ministry of Foreign Affairs (MFA) Deputy Director for Energy, Water, Environment Vural Altay and Turkish Petroleum Corporation (TPAO) Acting Chairman Mehmet Uysal to discuss Turkey's recent energy talks with Iran, Azerbaijan, and Iraq and possible upcoming negotiations with Russia and Turkmenistan. GOT officials in both ministries were unified in their explanations for the recent spurt in Turkish energy diplomacy. They all noted increasing domestic demand and the need to give the EU a non-Russian route for gas to Europe. To meet this demand, Turkey must increase its gas imports. Turkey already is over-reliant on Russia and needs to diversify its sources of supply, and Turkey will therefore look at all available sources to meet its needs. Cooperation with Iran, they stated, is part of this larger diversification strategy. Gas contract disputes with Azerbaijan, rumors of limited Azeri supply and the upcoming expiration of a major Russian gas contract have heightened Turkish uncertainty about future gas supplies. -------------- Iran Deal - Not Easy -------------- ¶3. (C) Energy Deputy U/S Aksoy described the recent Iran-Turkey gas MOU (refs A and B) as consisting of three paragraphs which included language about mutual understanding and "democratic values." He stressed that commercial dealings with Iran will not be easy and predicted a long, difficult and expensive process before any new gas would flow into Turkey. MFA Deputy Director Altay expressed a similar view, downplaying the importance of the MOU and hinting that the devil in the details could cause the agreement to collapse. In particular, Aksoy cited a long list of yet-to-be-decided issues including upstream development, sales and distribution, price, and export volumes to Europe. In addition to significant regulatory and legislative changes, Aksoy said that two to three billion dollars over several years would need to be invested to realize the project. A technical level delegation from BOTAS (state-owned pipeline company) and TPAO traveled to Iran this week. The press reported that Energy Minister Guler could travel to Iran within days to finalize the deal. However, Aksoy said an agreement will take much longer and will probably not be completed by the end of August, the date set in the July MOU for completion of the deal. ¶4. (C) TPAO Acting President Uysal confirmed Turkey,s intention to develop three gas blocks in Iran,s South Pars field. He noted that the Iran sits on the second largest gas reserves in the world and that Turkey has been trying to get a deal with Iran for many years. He claimed that the Russian announcement of the South Stream pipeline in June was a "wake ANKARA 00002135 002 OF 003 up call" for Turkey and Iran, and led Iran to contact Turkey to renew talks about developing South Pars. When we stated that such investment could trigger U.S. sanctions, Uysal noted that many European companies are working in Iran and "Turkey is ready to receive the same treatment from the U.S. that those firms have received." We heard from a World Bank colleague that Iran will "pay" TPAO though a barter-type mechanism (also called "buy back"),in which TPAO will be allowed to keep up to 40-50 percent of the gas it extracts for either domestic consumption or resale. Former Energy Ministry official Yurdakul Yigitguden said such a barter-type arrangement would be consistent with terms Iran has offered in the past. Uysal declined to give any details about TPAO,s agreement with the Iranians. -------------- Iran Deal - Part of a Larger GOT Strategy -------------- ¶5. (C) Energy Deputy General Director Aciklan and Aksoy mentioned the importance of Turkey's role in transiting Turkmen gas to Europe. Aksoy said the MOU with Iran reserved space on Iranian pipelines for Turkmen gas. Turkey views this agreement as a step towards improving both Turkish and EU energy security by diversifying gas supply away from Russia. Turkey currently depends on Russia for 56 percent of its total gas supply. Aksoy said he thought Europeans would welcome Turkmen gas even if transited through Iran. ¶6. (C) In all meetings, we forcefully stated U.S. policy objections to increased Turkish-Iranian cooperation and Turkish investment in Iran,s energy sector. Our interlocutors acknowledged U.S. policy on Iran, but said Turkey is not in a position to ignore Iran,s energy resources. Turkey's domestic gas consumption is projected to increase from 35 to 60 billion cubic meters by 2012-15. Aksoy said Turkey did not know how to meet this demand given unresolved issues with Azerbaijan and uncertainty about contract renewal with Russia. Turkey already receives gas from Iran, a neighboring country, and can,t afford to ignore Iranian offers to meet their supply needs. Aksoy and Acikalin stressed that Turkey's priorities for new gas supply had not changed. The GOT would prefer gas from Azerbaijan, then Iraq, then Turkmenistan and lastly Iran. The strongest message came from the MFA,s Altay, who said the GOT "expects the U.S. to understand Turkey's need to diversify gas supply routes." -------------- Azerbaijan Contracts Not Signed -------------- ¶7. (C) Despite the visit of Azeri Energy Minister Nakit Aliyev to Ankara last week, no deal was reached in the dispute over a commencement date for contracted volumes from Azerbaijan to Turkey (ref B). However, gas is flowing at an approximate rate of eight million cubic meters per day. Aksoy estimated that gas will begin to flow to Greece in September. Altay said that the TGI inauguration ceremony was planned for mid-September but no specific date had been chosen. The GOT would like to have high-level USG representation at this ceremony. ¶8. (C) Disagreement over the terms of gas sale also continues. Azerbaijan has not accepted Turkey's formulation of 15% of transited volumes priced on net-back calculations from the Turk-Azeri border. According to Altay, Aliyev has passed the buck to the Shah Deniz consortium partners, telling the GOT that it should negotiate directly with consortium partners to make a deal on price. Altay said a Turkish delegation would go to Baku soon to restart negotiations. -------------- MOU with Iraq -------------- ANKARA 00002135 003 OF 003 ¶9. (C) The MOU signed last week between Turkey and Iraq on energy issues provided for an exchange of technical experts in oil, gas and electricity sectors and broadly called for increased cooperation in these areas. Regarding the oil sector, the Ministry of Foreign Affairs and the Energy Ministry had slightly different views on timing. The MFA said that cooperation could go forward right away while the Energy Ministry said it would await the passage of a new oil law in Iraq. On gas, they agreed to cooperate on a new gas pipeline to be built along the existing Kerkuk-Ceyhan oil pipeline. On electricity, they will cooperate to build new generation capacity and transmission lines on both sides of the Turk-Iraq border. The financing and other details about these projects are still to be determined. ¶10. (C) Compared to Iran, Aksoy noted that considerably less investment and less time would be needed to bring Iraqi gas to Turkey. He estimated that such a project could be completed in five years, with the appropriate legislation in place and an improved security environment. -------------- Future Negotiations with Russia? -------------- ¶11. (C) Turkey's gas contract with Russia for the West Line (through Bulgaria),which supplies 40% of Turkey's gas demand, expires in 2011. All interlocutors denied press reports that a Russian delegation would soon visit Ankara to renegotiate this contract. MFA maintained that relations with Russia were good and that reduction in Russian supplies would be a Turkish decision based on energy security concerns and the need to diversify suppliers. In contrast, the Energy Ministry hinted that the West Line contract may not be renewed and that Turkish-Russian competition for Caspian gas and, in particular, Turkmen gas, is straining relations. Aksoy expressed frustration in dealing with Moscow's heavy-handed tactics. He mentioned an offer by Russia to give Turkey more favorable terms for Russian gas in exchange for Turkey cancelling deals with Azerbaijan, Turkmenistan, and Iraq. ¶12. Comment: Turkish officials uniformly expressed a lack of confidence in all suppliers, and said that the GOT strategy is to get all the gas they can from all possible sources, first meeting Turkish domestic needs and then supplying Europe. With the Russian announcement of the South Stream pipeline bypassing Turkey, the Turks appear to be discounting future gas deals with Moscow. Also, there is a tangible feeling of mistrust toward the Azeris. Several contacts have mentioned an undefined "other agenda" being pursued by the Azeris, while others expressed doubts about how much gas Azerbaijan can really deliver because of Azeri consumption and lack of deliverable supply. The GOT appears to count Shah Deniz gas as a "maybe" in future demand-supply calculations. These two factors might explain the GOT's strategy of running in all directions and look at any neighboring country, including Iran, as a potential source of gas supply. The Turks also point to European investments in Iran as a reason why Turkey needs to move now to secure gas supplies for its domestic markets. In addition, all GOT officials were well-briefed on U.S. sanctions and appear to have concluded that they won,t apply to Turkish investment in Iran. End comment. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ MCELDOWNEY