U.S.-TURKEY ENERGY WORKING GROUP: TURKEY RECOMMITS

C O N F I D E N T I A L ANKARA 001699

SIPDIS

CORRECTED COPY, PARA 15 ADDED

E.O. 12958: DECL: 09/24/2018
TAGS: ENRG EPET IR IZ TU
SUBJECT: U.S.-TURKEY ENERGY WORKING GROUP: TURKEY RECOMMITS
TO TRANSIT GAS TO EUROPE BUT NO SOLUTION ON AZERI GAS

REF: ANKARA 1641

Classified By: DCM Doug Silliman for reasons 1.4 (B) and (D)


1. (C) Summary. Special Envoy for Eurasian Energy C. Boyden
Gray and Deputy Assistant Secretary Matt Bryza led the U.S.
delegation to the first U.S.-Turkey Energy Working Group. A
summary of Gray and Bryza,s points on Caspian energy is
below. Iraq energy issues reported septel.

-- Turkey must quickly resolve the impasse with Azerbaijan on
Shah Deniz phase II volumes, allowing at least 6 BCM to go to
Europe to convince Azerbaijan to develop the field. This
would give Turkey 4 BCM, short of its 8 BCM target, but much
better than no Azeri gas;

-- The U.S. can help meet Turkey's energy supply needs by
supporting projects that generate electricity with sources
other than gas, and support energy conservation;

-- Turkey and the U.S. should work together to encourage
Turkmenistan to allow entry of Western companies to develop
Turkmen oil and gas fields; and


2. (C) Summary continued. Turkish delegation leader and his
MFA and Energy Ministry team made the following points:

-- Turkey's first priority is additional gas for domestic use
but this is not inconsistent with Turkey's desire to be a
transit country for Europe;

-- Turkey requested U.S. support for its bid to open the EU
Energy Chapter as soon as possible; and

--To unlock Turkmen gas, Turkey supports the EU concept for a
private/public partnership, nominally called the Caspian
Development Company (CDC).


3. (SBU) The first meeting of the U.S.-Turkey Energy Working
Group took place in Ankara on September 15. The U.S.
delegation was led by Eurasian Energy C. Boyden Gray and
Deputy Assistant Secretary Matt Bryza. The Turkish side was
led by MFA Deputy Undersecretary for Economic Affairs Selim
Kuneralp and included MFA Deputy Director General for Energy,
Water and Environmental Affairs Vural Altay, MFA Special
Envoy for Iraq Murat Ozcelik Ministry of Energy Deputy
Undersecretary Yusuf Yazar Turkish Petroleum General Manager
Mehmet Uysal, BOTAS General Manager Saltuk Duzyol, Turkey's
Nabucco Coordinator Osman Goksel, and other officials.

Effects of the Georgia crisis on Southern Corridor
-------------- --------------


4. (C) MFA Deputy Undersecretary Kuneralp told Special Envoy
Gray that the Russian invasion of Georgia had caught EU
attention and highlighted the need for energy diversification
for Europe sooner rather than later. For example, Hungarian
Nabucco Coordinator Mihaily Bayer would visit Ankara later in
the week and offer to host a Nabucco Summit in January. At
the same time, Russia,s invasion has complicated the
investment picture by elevating the risks of the project. On
balance, Kuneralp said South Stream was more likely suffer
from Russian actions that Nabucco.


5. (C) Gray agreed that a "mental shift" had taken place in
Europe which could help opening the route for gas westward.
Similarly, the U.S. Administration was also now engaged in
this issue at very high levels. DAS Bryza added the Russians
did not attack the Baku-Tbilisi-Ceyhan (BTC) pipeline,
although they did bomb railways to Supsa.

Turkey's Security of Supply
--------------


6. (C) Kuneralp explained the reasons for Turkey's demand
for large volumes from Azerbaijan's Shah Deniz phase II (SD
II) gas development. Turkey's electricity demand is growing
by 6% a year, while gas demand is rising by 15%. Turkey is
still working to expand its gas distribution network; 59 out
of 71 provinces now have access to gas for residential and
industrial use. Turkey's current annual gas consumption is

38 billion cubic meters (bcm). BOTAS General Manager Duzyol
estimated that Turkey's demand will rise to 70 bcm by 2020.
To meet this demand, Turkey will need to maximize volume
intake from current contracts and also attract about 10 bcm
in new supplies. These calculations assume Turkey will
successfully renew existing contracts with Russia (for 6 bcm,
expiring in 2011) and Algeria (4 bcm expiring in 2014).
Without those contracts, the gap between supply and demand
grows to 20 bcm.


7. (C) Ministry of Energy Deputy Undersecretary Yazar said
Turkey has a strategy to reduce its dependence on natural
gas. USD 125 billion in investment is needed by 2020 in
order to raise the current installed electricity generation
capacity (40,000 MW) to Turkey's goal of 80,000 MW. (Note:
Most analysts believe the real installed capacity is about
27-28,000 MW because of obsolete machinery and
inefficiencies.) Turkey aims to generate 25% of electricity
with nuclear power by 2025. (Comment: This is unlikely.
Bids for Turkey's first 4,000 MW nuclear plant are due
September 24. Power is likely to come on-line around
2018-2020. End comment.) This tender represents 10% of
Turkey's current generation or 5% of planned generation for

2020. Yazar also said that Turkey will be developing more
generation from coal and renewable sources and has also
launched a campaign on energy efficiency and conservation.
In addition, Turkey would like to develop and transport
Iranian and Iraqi gas.

Azerbaijani gas
--------------


8. (C) Kuneralp said meeting Turkey's internal energy demand
is Turkey's first priority, followed closely by Turkey,s
strategic interest in becoming a transit state for Caspian
and Iraqi gas to Europe. There is no inconsistency in this
position; Turkey can do both but it must find adequate gas
supplies. Gray said he understood Turkey's energy security
needs but also cautioned that Turkey must both consume and
transit Azeri gas from Shah Deniz II to make a deal work.
Azerbaijan President Aliev has repeatedly told the U.S. (and
recently Vice President Cheney) that he wants to sell Azeri
gas to Europe for strategic reasons. Gray said without an
outlet to Europe, Azerbaijan will not develop the gas at all,
and Turkey will receive no additional supply. 4-5 BCM is not
as much as Turkey needs, but it is much better than no gas.
Turkey needs to look broadly at other sources to make up for
the remaining 3-4 BCM, including new coal plants, electricity
imports, LNG, renewables, and conservation. The U.S. is
prepared to help Turkey develop these additional sources.

Turkmen gas
--------------


9. (C) Gray said the U.S. and Turkey need to work together
with the EU and other allies to convey the same message to
Turkmen leadership: "you must open up to foreign investors to
bring new technologies and financing to the sector and to
increase output." Turkish Nabucco Coordinator Goksel said a
different approach is needed and suggested the creation of a
private/public partnership, nominally called the Caspian
Development Company (CDC) to bring technical skills,
financing, and political support to the development of
Turkmenistan's resources. Bryza expressed concern that CDC
could crowd out or disadvantage private Western investors.
Bryza said we should work together to draw up specific steps
we can take together on Turkmenistan. Kuneralp agreed and
the MFA will send us a draft.

Proposing alternatives - substitutes for natural gas
-------------- --------------


10. (C) Gray said we need to find new, inventive ways to
help solve over-subscribed demand for SD II volumes. The
U.S. wants to work with Turkey to reduce its gas usage by
investing in other forms of electricity generation, such as
coal-fired plants or renewables, and energy conservation.
Gray said that the U.S. could help provide favorable
financing terms through OPIC or Export-Import bank to make
new energy deals feasible. Kuneralp was interested and
suggested a more detailed discussion on the issue at a later

date.

Where is the EU?
--------------


11. (C) Whether discussing Azeri, Turkmen or other gas
sources, several GOT officials complained that the lack of a
unified EU energy policy and changes in EU staff are
complicating things for Turkey. Kuneralp said the EU Nabucco
Coordinator would soon leave his position and EU Commissioner
Piebalgs would take up the reigns beginning with a trip to
the region, including Ankara in October. Kuneralp told Gray
the EU wants Turkey to follow its rules and regulations for
gas transmission but they refuse to open the Energy Chapter
of the accession process, even though required benchmarks
have been met. Gray said we view Turkey's accession process
positively and that the U.S. will look for ways to encourage
the EU to open Turkey's Energy Chapter.


12. (C) Bryza said he understood the EU was considering
taking on some project risk for Nabucco through financing
mechanisms of the European Investment Bank (EIB) or EBRD.
Bryza said risk-sharing would improve investment climate for
Nabucco and that the EU should announce this type of support
right away.

Pipeline security
--------------


13. (C) Kuneralp said there is no evidence of sabotage in
the August 5 explosion and fire on the BTC line in Turkey but
the investigation is still ongoing. Kuneralp suggested BTC
investors may have an axe to grind since they want to take
over security of the line. MFA had a interagency meeting to
recommend steps to improve BTC security, including hard
covers for block valves. TPAO and Botas reps said that a
one-star Jandarma general has been given the responsibility
for pipeline security.

Other issues
--------------


14. (C) U.S. delegation also raised U.S. objections to and
legal sanctions against Turkish investment in Iran and the
Ambassador's request on behalf of GE to delay Turkey's bid
deadline for the upcoming nuclear tender. Kuneralp confirmed
what we have been hearing that a deal with Iran could take a
decade or more and that the current Iranian offer to develop
South Pars is not economical for TPAO.


15. (C) Bryza suggested the WG jointly develop three action
plans, one each on Azeri gas, Turkmenistan-Azerbaijan
inter-connection, and Iraqi gas (including a coordinated
effort by the U.S. and Turkish embassies in Baghdad to
convince the GOI to accelerate gas production and its
potential export to Turkey and Europe). Kuneralp agreed,
with Turkey holding the pen on initial drafts.


16. (U) This cable has been cleared by SE Gray and DAS Bryza.

Visit Ankara's Classified Web Site at

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WILSON