TURKEY PLANS TO AMEND NATURAL GAS MARKET LAW TO FREE GAS

UNCLAS SECTION 01 OF 02 ANKARA 002011 SENSITIVE SIPDIS EEB FOR SPECIAL ENVOY FOR EURASIAN ENERGY GRAY EEB FOR ENERGY COORDINATOR MANN EUR FOR DAS BRYZA E.O. 12958:N/A TAGS: ECON ENRG TU SUBJECT: TURKEY PLANS TO AMEND NATURAL GAS MARKET LAW TO FREE GAS IMPORTS REF: Ankara 1710 ANKARA 00002011 001.2 OF 002 ¶1. (SBU) Summary: The GOT is expediting long-awaited legislative amendments to liberalize the natural gas market in Turkey. Iran's gas cut-off the past few winters, and increasing pressure from companies wanting to enter the market pushed the Energy Ministry to prepare a Gas Sector Strategy Paper that proposes amending the 2001 Natural Gas Law by lifting state pipeline company BOTAS' monopoly in gas imports and opening the way to its unbundling. The amendments are expected to be sent to the Parliament by the end of this year. If passed, they will make Turkey a more attractive market for gas sales and give a boost to regional gas projects like Nabucco and transit of Iraqi gas. But the GOT may have trouble selling the advantages of liberalization to a skeptical Parliament, a public already angered by utility price increases, and a defiant BOTAS. End Summary. ¶2. (SBU) Ministry of Energy and Natural Resources (MENR) Supply Security Branch Director Ozturk Selvitop said the Ministry is working on a Gas Sector Strategy Paper, which he hoped would be finalized by the end of 2008. Selvitop said the 2001 Natural Gas Market Law must be amended to facilitate market liberalization. BOTAS still dominates the market, and only one of the four private companies who won the right to take over 4 bcm of BOTAS's contracts (approximately 10% of the total gas market) in 2005 has been able to get an import and trading license. Selvitop said the Strategy Paper will propose amendments to the natural gas law to: 1)lift the ban on BOTAS signing new purchase contracts; 2) remove all restrictions on gas imports by the private sector (Note: the Law now bars companies from signing purchase contracts with supplier countries who Qready have contracts with BOTAS. End note.); and 3) unbundle BOTAS, in a way that the company keeps its monopoly position in transmission, but becomes a market player in gas import and trading. Selvitop noted these amendments could face opposition in Parliament. ¶3. (SBU) Private sector companies may be behind MENR's initiative to amend the law. Kazim Turker, CEO of large construction company Turkerler Group, told us his company's project to build a new gas pipeline to import Iraqi gas has won the approval of high-level GOT officials including the PM, and is awaiting legislative changes before a gas import/export license can be granted (reftel). This project cannot go forward without amendments to the Natural Gas law. ¶4. (SBU) E.ON Ruhrgas Turkey General Manager Cenk Pala, a former Department Head at BOTAS, said the 2011 expiration of Russian-BOTAS West-Line 1 contract for 5-6 BCM of natural gas could be an opportunity for private companies to make a deal with Russia and bring gas to the Turkish market. Pala said E.ON is looking to contract its own supply for an 800MW gas-fired power plant his company plans to build in Denizli. Given the gas shortages in Turkey the last few winters and BOTAS' financial problems, Pala claimed BOTAS does not have much choice but to accept more players' in the gas market. The critical article in the Natural Gas Market Law is the one preventing private companies from importing gas from source countries with which BOTAS has existing contracts. "This practically removes all the options for private companies," said Pala. Several companies, including his own, are waiting for these amendments before signing contracts with source countries and securing gas for their energy generation projects. ¶5. (SBU) In public comments at the STEAM Energy Conference on November 13-14, MENR Undersecretary Selahattin Cimen and Energy Market Regulatory Authority (EMRA) President Hasan Koktas both supported amending the Natural Gas Market Law and reiterated their commitment to take the necessary steps to form a well-functioning gas market. Shell Gas Turkey GM Nusret Comert, who also gave a presentation at the conference, said the sector wants to see a reduction in BOTAS' market share. Comert added that the sector welcomed the GOT's recent decision to implement a cost-based pricing strategy, which he thought was an encouraging step for the companies. He urged the GOT to unbundle BOTAS, and make the company a fair player in a competitive market. (Note: We understand Shell is losing USD 9 million/year selling gas in Turkey. End note.) Commenting on the proposed amendments, OMV Gas Turkey GM Oktay Sen said BOTAS' pricing policies are a serious impediment to the functioning of a free market. Sen noted that even after several gas price increases this year, BOTAS' profit margin in the price formula is zero. "There is no margin left for the private sector to operate," said Sen, and commented that the upcoming amendments were necessary but might not be sufficient to give the market a ANKARA 00002011 002.2 OF 002 jumpstart. ¶6. (SBU) AKP MP Soner Aksoy, Head of the Energy Committee, supports liberalizing gas imports as a way to increase gas supply to Turkey. However, others in Parliament seem less sure about the positive effects of gas market liberalization. In a separate meeting, Ozgur Guven, Advisor to the U.S.-Turkey Parliamentary Friendship Caucus told us many MPs don't understand how opening the market will result in more gas to Turkey since the regional pipelines that supply Turkey will not change. We responded that liberalization could have many positive effects, such a competition for gas prices and services as well as increasing private sector interest in projects currently under consideration like Nabucco, Turkey-Greece-Italy and a northern gas route from Iraq that would bring more gas to Turkey. ¶7. (SBU) Comment: The GOT's attempt to liberalize its gas market is a late, but positive step. Given Turkey's increasing energy demand and BOTAS's financial difficulties, the GOT has little choice but to open the market more, supported by the push by private sector companies to enter the gas market. A more liberal gas market can only help Turkey to meet its supply security concerns and help it realize important regional projects like Nabucco and a northern gas route from Iraq. But the GOT may have trouble selling the advantages of liberalization to a skeptical Parliament, a public already angered by utility price increases, and a defiant BOTAS. End comment. SILLIMAN