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