TURKISH ELECTRICITY TO NORTHERN IRAQ: CONTRACT

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000172

SIPDIS

ANKARA PASS TO ADANA
SIPDIS

E.O. 12958: DECL: 01/29/2018
TAGS: ENRG ECON EINV EPET IZ TU
SUBJECT: TURKISH ELECTRICITY TO NORTHERN IRAQ: CONTRACT
AMENDMENT NEEDED TO TURN LIGHTS BACK ON

REF: A. ANKARA 15

B. 07 ANKARA 2870

C. 07 ISTANBUL 981

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Classified By: Economic Counselor Dale Eppler for reasons 1.4 b and d.


1. (C) Turkish MFA Deputy Coordinator for Iraq Murat Ozcelik
presented us with a two paragraph contract amendment on
January 29 that he said was a "simple solution" to getting
Turkish electricity supplies flowing again into Northern
Iraq. The amendment needs to be signed by Kartet, the
private Turkish company that owns and operates the Silopi
power plant, and SOMO, the Iraqi oil company that provides
fuel to the plant. The amendment would "legitimize" the oil
import permit issued by the Turkish Ministry of Foreign Trade
by putting the permit in the same name as the Kartet
subsidiary that imports the oil. Kartet officials say they
have no objections to the amendment, but were not sure if
SOMO would agree to it as drafted, indicating that there are
"differences" between SOMO and the Ministry of Electricity
related to this contract. A copy of the proposed amendment
was delivered via email to Embassy Baghdad on January 29.
MFA said that they will start the process of issuing the
import permit (estimated two or three days) as soon as they
have the amendment signed by both parties. Kartet officials
say that electricity would begin flowing again approximately
four days after they receive the import permit, assuming
sufficient quantities of fuel oil are delivered.


2. (SBU) Background: The Kartet plant in Turkey provides
electricity to northern Iraq using Iraqi heavy fuel oil. To
operate, the plant needs (1) an oil export permit from SOMO,
(2) an oil import permit from the Turkish Ministry of Foreign
Trade, and (3) a letter of credit from the Trade Bank of
Iraq. In 2007, negotiations over the permits extended into
February, but Kartet had enough fuel oil stockpiled to keep
the plant operating at low levels. This year, the plant's
fuel stockpiles were very low at the end of the year, and the
plant shut down on January 2. The Iraqi government also was
over 20 million dollars in arrears to Kartet at the end of
the year, and MFA ordered Foreign Trade not to issue the
import permit until the arrears were cleared. On January 17,
Kartet officials met with Ozcelik and told him that they had
received the oil export permit and letter of credit, and that
the arrears issue had been dealt with (they planned to deduct
the arrears from the new letter of credit). Ozcelik wrote to
Foreign Trade on January 19, saying MFA lifted its hold on
the oil import permit. On January 22, Foreign Trade raised
the issue of the importing subsidiary being different from
the parent company receiving the permit. Ozcelik asked
Foreign Trade for proposals on how to resolve the issue.
Ozcelik and Foreign Trade officials met on January 28 and
agreed on the contract amendment as the best way forward.


3. (C) We asked why the subsidiary issue had only arisen now,
while Kartet had been doing business via the subsidiary for
three years without problem. Ozcelik said that the Kartet
business arrangement is "exceptional," as the company imports
fuel oil at far below market prices, and exports electricity
at far below market prices. Foreign Trade officials are
worried that unless the paperwork surrounding the deal is
impeccable, they will be subject to corruption charges. In
2005, a year after Kartet signed its contract with the Iraqi
government, Kartet set up a subsidiary to import the fuel
oil. The subidiary's name does not appear in Kartet's
contract, nor on the import permit provided for under the
contract, and Foreign Trade wants the name of the importer on
the invoice to be the same as the permit holder to avoid
legal challenges from other companies that want licenses for
other, below-market-price deals. Ultimately, Ozcelik said,
the GOT would like to see the Kartet-Iraqi trade conducted at
market rates to avoid legal problems. In the short term,
however, the political imperative is to get the power back on
as quickly as possible.

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4. (SBU) Kartet officials confirmed to us January 30 that the
subsidiary name issue will not affect the validity of the
letter of credit already issued by the Trade Bank of Iraq.
The letter of credit covers the sale of electricity to Iraq,
and Kartet sells electricity in its own name.


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

MCELDOWNEY