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 �00A;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 ANKARA 00001983 002 OF 002 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