RUSSIA,S GROWING INTEREST IN TURKISH ENERGY

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001378

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: 07/31/2018
TAGS: ENRG EPET TU IZ
SUBJECT: RUSSIA,S GROWING INTEREST IN TURKISH ENERGY

Classified By: Economic Counselor Dale Eppler for reasons 1.4 (B) and (
D)


1. (C) Summary. According to the local press and
commentators, the July 18 visit of Gazprom Deputy CEO
Alexander Medvedev signified warming relations between Turkey
and Russia on energy issues. The jury is still out on
whether Medvedev's proposals for further access to Turkey's
market or his nods to Turkey's pet projects like the
Samsun-Ceyhan oil pipeline will amount to anything. However,
Turkey is dependent on Russia for over 60% of its gas and 40%
of its oil supply, so there is good reason for Turkey to seek
continued cooperation. Russia is also frustrated by Turkey's
state-controlled gas market which has impeded market access
for new players including one partially owned by Gazprom.
End summary.

Are Relations Warming?
--------------


2. (U) In a statement to the press, Gazprom number two
Alexander Medvedev expressed Russian interest in joining two
ambitious but stalled Turkish pipeline projects: the
Samsun-Ceyhan oil pipeline (never mind that Gazprom is a gas
company doesn't work in the oil business) and Mediterranean
Stream (multi-layered oil, gas, electricity, water, fiber
optic pipeline to Israel). After the press conference,
former Ministry of Energy Undersecretary Yurdakul Yigitguden
said Russia and Turkey had entered a new, warmer period in
their relations. Yigitguden also cited Turkish Foreign
Minister Babacan's February 20 visit to Moscow where he
proposed that Russia join Nabucco as further evidence.

Medvedev Proposals to Strengthen Russia's Market Share
-------------- --------------


3. (C) According to Ministry of Energy International
Relations Department Head Cigdem Hatunoglu, Medvedev made
other proposals to Energy Minister Guler including:

--capacity expansion of Blue Stream;

--renewal of the 6 bcm West Line gas contract, which expires
in 2011;

--Gazprom's purchase of the gas distribution networks of
large Turkish cities;

-- buying a 1 bcm gas storage facility under construction at
Tuz Golu.

Of these projects, arguably the most important for Turkey is
the renewal of the West Line contact. It is not clear
whether Gazprom's strategy might include linking renewal of
the contract with access to additional facets of Turkey's gas
market. Hatunoglu said nothing was agreed during the visit.


4. (C) In a separate conversation, Faruk Demir, an informal
advisor to Minister Guler, told us that Russia was also was
interested in doing a gas swap between Iran and Turkey.
Under this scenario, Turkey would agree to sell the Iranian
gas contracted to Turkey (currently 6 bcm, plateau level 10
bcm) to Russia and in return, Russia would provide gas to
Turkey in the same quantities. The advantage for Turkey is
that if Iran cuts supplies in the winter, as it has for the
last several winters, Russia would not interrupt Turkey's
supply. (Comment: It is not clear how such a deal benefits
Gazprom; perhaps there is a price arbitrage between Iran and
Europe. End comment.) Demir didn't think Guler was
considering the swap proposal seriously. He also said Russia
is interested in buying the license for South Pars block that
currently belongs to Turkey.

Medvedev Complains about Turkey's Gas Market
--------------


5. (C) According to BOTAS CEO Saltuk Duzyol, the primary
reason for Medvedev's visit was protecting Gazprom assets in
Turkey. Gazprom owns 40% of Bosporus Gas (BG),a company that
participated in the first and only gas contract release held

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by BOTAS. In 2005, BG bought the right to import 750 million
cubic meters of gas and sell into the Turkish market.
However, thus far, it hasn't succeeded in selling one
molecule of gas and its price is not competitive in the
Turkish market. In general, Russian gas is some of the
highest priced in Turkey. The Ministry of Energy claims that
the gas price in Turkey is an average derived from prices of
various importers. However, the GOT also regulates the end
user price and, since BOTAS is a state-owned company, some
analysts believe BOTAS sells gas at a loss or subsidizes
prices. Because of that, BG can't compete. Duzyol said
Medvedev urged Energy Minister Guler to liberalize Turkey's
gas market.

Turkey Needs Russian Resources
--------------


6. (U) Turkey depends on Russia for more than 60% of its
natural gas supply. Turkey also increased its oil purchases
from Russia by 30% from 2006 to 2007, making Russia the top
crude oil exporter to Turkey as of 2007. That year, Russia
provided Turkey almost 40% of its total oil supply. Russian
commercial interest in Turkey appears to be strong. On July
28, Turkey's Regulatory Authority announced its approval of
LukOil's acquisition of Akpet, a fuel distributor. Lukoil's
acquisition included almost 700 gas filling stations (roughly
5% of Turkey's downstream market) and five LNG storage tanks.



7. (C) Comment: At this point, comments about Russian-Turkey
energy relationship warming appear to be more hype than
substance. However, Turkey's reliance on Russia for oil and
gas, combined with Russian interest in expanding its market
share could lead to increased Russian presence in Turkey's
energy sector.

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

WILSON