TURKEY TAKES BTC TO COURT

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001983

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: 11/14/2018
TAGS: ENRG EPET TU
SUBJECT: TURKEY TAKES BTC TO COURT

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


1. (C) Summary. On November 7, recently-promoted BP Turkey
President Djan Suphi told us that negotiations with
Azerbaijan on Shah Deniz Phase II pricing are deadlocked, but
he feels Azerbaijan is softening its position and that could
lead to a compromise. Suphi argued that SOCAR does not want
arbitration. BP is working with state-owned pipeline company
BOTAS to assess the gas network upgrades it needs to transit
increased Azeri volumes. Suphi also mentioned that BIL, the
operator of BTC, plans to take the BTC Company to
arbitration, seeking USG 350 million in damages. BIL
maintains that high oil prices have left them losing money on
the pipeline's operation. Suphi said the credibility of
BOTAS is at stake and contract terms should be upheld, even
if BIL is losing money. End summary.


2. (C) Suphi said Shah Deniz phase I price talks are frozen.
In the last meeting about 10 days ago, the GOT presented its
rationale to the Shah Deniz consortium for a revised Shah
Deniz phase II (SD II) price of USD 180 per 1000 cubic meter
of gas. (Note: The current gas price, which is much below
the market, is USD 120.) The GOT explained its calculation
as the Baumgarten gas price (approx. USD 400) minus the
transportation cost from Baumgarten to Turkey, i.e. netback
(approx. USD 220) equals USD 180. Suphi said this price
would not work, but declined to give a more acceptable price
range. Despite the lack of
progress to date, he thinks Azerbaijan may be softening its
negotiating position. There is a growing
recognition within SOCAR of the time value of money.
Arbitration may not be in SOCAR's interest because it is be a
long, drawn out process, during which time BOTAS would
accumulate a huge debt, plus interest to SOCAR. In the end
SOCAR may win but will be unable to collect its large debt
from economically insolvent BOTAS.


3. (C) BP Turkey is also working with BOTAS, the state-owned
pipeline monopoly, regarding the technical aspects of
transporting more Azeri gas to Turkey. BP and BOTAS are
working to identify the spare capacity in the gas transit
network, and pinpoint what capacity might be needed under
various production scenarios (i.e. 8 bcm, 12 bcm, 16 bcm
etc.) SD II production will be determined by the economics
not the field's productive capability, said Suphi. In
addition, BP and BOTAS are working out a contracting schedule
of what improvements need to be completed when, so that the
pipeline will be ready to take new SD II volumes.


4. (C) On a separate issue, Suphi told us that the Turkish
operator of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, BOTAS
International Limited (BIL),has decided to take the BTC
company to arbitration, seeking USD 350 million (Note: BP is
the operator of the BTC pipeline and owns 30% of BTC Co. End
note). BIL, a wholly-owned subsidiary of BOTAS, runs the
daily operation of BTC pipeline in Turkey. Suphi said no
less than the credibility of BOTAS is at stake in this suit.
Suphi accused BOTAS of not living up to its commitments on
physical security, operational standards, host-country
agreement and financial commitments. BIL argues that the
original BTC contract is unfair given the dramatic increase
in oil prices since the original contract was signed in the
1990s. The transit tariff rate for 1 barrel of oil is only
USD 35 cents, compared to a USD 1 dollar fee imposed by the
oil pipeline from Iraq to Ceyhan. Additionally, BIL has had
to bear the brunt of rising gas prices to supply natural gas
to pump stations along the BTC route.


5. (C) The dispute with BIL may also affect BTC operations
in Turkey. BP will finish its BTC pipeline upgrades to
increase capacity flow to 1.2 million barrels/day by the end
of the year. However, BIL maintains it has no obligation to
ship more than the quantity provided for in the original
contract, 1 million b/d.


6. (C) In a separate conversation, GOT Nabucco Coordinator
and former BTC Turkey General Manager Osman Goksel said this
issue has reached a breaking point. For more than a year,
BIL has complained to BP that they are losing money on BTC

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operations. Despite record high-oil prices (and profits),BP
has refused to re-negotiate the terms of the contract.


7. (C) Comment: Going to arbitration could harm Turkey's
credibility as a reliable transit country at the exact same
time it seeks to develop even more ambitious projects, like
Nabucco. BOTAS first alerted us to this issue in January and
it appears nothing has changed since then. Both sides
probably have legitimate claims (BP: Turkey should honor its
contract obligations; BIL: We can,t expand when we are in
the red) but the lack of will to work toward a solution
reflects poorly on both sides.

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

WILSON