TURKEY: IRAQ ARREARS CAUSE DESPERATE ACTION BY

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001355

SIPDIS

EEB FOR A/S SULLIVAN
SPECIAL ENVOY FOR EURASIAN ENERGY GRAY
EEB FOR ENERGY COORDINATOR MANN
EUR FOR DAS BRYZA

E.O. 12958: DECL: 07/29/2018
TAGS: ENRG EPET TU IZ
SUBJECT: TURKEY: IRAQ ARREARS CAUSE DESPERATE ACTION BY
BOTAS

REF: ANKARA 889

Classified By: Ambassador Ross Wilson for reasons 1.4 (B) and (D)


1. (C) Summary. Ignoring pleas from high-level GOT
officials, BOTAS (state-owned oil and gas pipeline company)
temporarily suspended, then resumed, operation of the
Kirkuk-Yumurtalik pipeline, a major export route for Iraqi
oil on July 22. BOTAS claims the inability to collect on
large Iraqi debts, which they calculate to be USD 1 billion,
forced their hand. The same day BOTAS shut the line, Iraq
paid USD 50 million to BOTAS. MFA Iraq Coordinator Murat
Ozcelik characterized Botas, action as contrary to broader
Turkish strategic goals in Iraq and said he would continue to
work with BOTAS to prevent a reoccurrence of this situation.
Ozcelik stressed that Iraq must pay its debts and asked for
U.S. assistance in getting Iraqi compliance on this issue.
End Summary.

Background
--------------


2. (SBU) Early morning July 22, Reuters reported and the MFA
confirmed, the Kirkuk-Yumurtalik pipeline halted operations
to load tankers with oil. According to the press, a Turkish
court ordered the closure of the pipeline and seizure of oil
assets as payment for Iraq debts to Turkish companies. It is
not clear who filed the case or what companies were involved.
Later in the afternoon of July 22, the pipeline was
restarted and BOTAS announced it had received USD 50 million
from the government of Iraq for debts owned. The MFA
confirmed that BOTAS indeed received these funds.

GOI Arrears Push BOTAS to Desperation
--------------


3. (C) According to BOTAS CEO Saltuk Duzyol, the current
dispute related to an Agreement, signed in July 2007 during
the visit of President Talabani to Ankara, in which Iraq's
State Oil Marketing Organization (SOMO) agreed to pay BOTAS
USD 187 million to cover debts incurred between 2003-2006.
SOMO had already paid BOTAS USD 87 million: USD 100 million
was outstanding when BOTAS stopped operation of the pipeline.
SOMO then paid BOTAS an additional USD 50 million. Duzyol
said SOMO has not paid for any 2007 or 2008 services. In a
quick back-of-the-envelope calculation, Duzyol estimated
SOMO's bill for transit fees per year at USD 170 million,
bringing the 2007-2008 arrears to date to approximately USD
255 million.


4. (C) In addition, Duzyol alleged that Iraq could owe BOTAS
as much as USD 1 billion for arrears that date back to 1989,
the year the pipeline opened. Duzyol said the original
agreement between Turkey and Iraq provided that Iraq would
guarantee a minimum throughput of oil (and related transit
fees) defined as half the capacity of the pipeline,
approximately 700,000 barrels a day (b/d). Duzyol said in 18
years, the pipeline has never reached the minimum throughput
level, nevertheless Turkey expects to be paid the
corresponding transit fees. He added that the pipeline was
currently operating at 1/10 of its capacity, approximately
140,000 b/d.

Iraq Must Pay But Blackmail Is Not Acceptable
--------------


5. (C) Iraq's Ambassador to Turkey Sabah Omran told us large
debts, both private and public, have been an irritant in the
Turkey-Iraq relationship for many years. He said an Iraqi
delegation a year and half ago had agreed with GOT officials
to pay debts amounting to USD 969 million. Omran speculated
that the BOTAS agreement for USD 187 million could have been
part of that deal. Omran agreed that BOTAS should be paid
but condemned BOTAS' action as "blackmail." He expressed
hope that another meeting to reschedule Iraq debts could be
held soon. In a separate meeting, MFA Iraq Department Head
Aydin Selcen told us that Turkey is considering writing off
Saddam-era public debt for the sake of goodwill and expansion
of trade and investment ties (reftel).

ANKARA 00001355 002 OF 002



The GOT Mounts a Campaign Against BOTAS action
--------------


6. (C) GOT officials understand that BOTAS' action
undermines broader strategic policy goals of increasing TU-IZ
bilateral political and economic ties, including in the
energy sector, where Turkish Petroleum (TPAO) has repeatedly
expressed interest investing in Iraq. During his July 10
trip to Iraq, PM Erdogan set a target of USD 25 billion in
bilateral trade volume for next year, a five-fold increase
from last year. MFA Iraq Coordinator Murat Ozcelik told
Ambassador he personally weighed in against closure of the
pipeline. In addition, the MFA and the Ministry of Energy
sent letters to Duzyol arguing against BOTAS, planned
actions, and Omran claimed that Foreign Trade DG Sevget Ilgac
also engaged BOTAS with the same line of reasoning and
assured him that Turkish courts have been instructed to
follow UNSC Resolution 1790 which prevents the seizure of
Iraqi petroleum against legal claims until the end of 2008.


Debts Must be Paid
--------------


7. (C) At the same time, Ozcelik and others argue that, Iraq
must pay its debts. BOTAS is not Iraq's only creditor.
Turks say that there are many Turkish companies that are owed
money and who will continue to go to court to seize Iraqi
assets as a method of payment, and, the most prominent one
available in Turkey is oil. While it may be understandable
that debt incurred prior to 2003 during the Saddam era may or
may not be repaid in full and is subject to Paris Club
rescheduling, it is not acceptable to ignore post-2003 debts.
Selcen told us Iraq cannot expect a free ride, especially
when oil prices are at record highs and the GOI is entering
into multi-million dollar commitments to buy Boeing aircraft
and other products. Ozcelik requested U.S. Government
assistance in convincing the GOI to take Turkish creditors
seriously and take steps to resolve the issue.


8. (C) Comment: With or without a court order, the pipeline
shutoff was a ham-handed ploy by BOTAS to get SOMO to pay
some of its arrears, but one that hurts Turkey's long-term
interests. We will continue to work with like-minded GOT
officials to discourage similar actions in the future.
Payment by SOMO of at least its post-2003 arrears to Turkey
would greatly aid our effort.

Visit Ankara's Classified Web Site at
http://www.intelink.sgov.gov/wiki/Portal:Turk ey

WILSON