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

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USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
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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.

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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

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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.

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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."

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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.

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MOU with Iraq
--------------

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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.

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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.

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