TURKEY-AZERBAIJAN GAS TALKS HELD UP BY RESALE

C O N F I D E N T I A L ANKARA 002039 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: 11/24/2018 TAGS: ENRG EPET AJ TU SUBJECT: TURKEY-AZERBAIJAN GAS TALKS HELD UP BY RESALE RIGHTS REF: ANKARA 1914 Classified By: Acting Economic Counselor Rebecca Neff for reasons 1.4 ( B) and (D) ¶1. (C) On November 20, BOTAS International Relations Department Head Emre Unger described to us the state of play on Turkey-Azerbaijan gas negotiations. He said the two sides are nearing agreement on how much Azerbaijan Shah Deniz Phase II (SD II) gas would be available for purchase by Turkey. A compromise agreement set to be signed in Baku on November 14 fell through at the 11th hour, he said, when SOCAR rejected the GOT's demand for resale rights for this gas. Unger would not say if this was a new GOT demand. On Shah Deniz Phase I price negotiations, Unger said BOTAS is offering a "good price," but he declined to give a dollar figure. ¶2. (C) The November 14 talks left BOTAS with the impression that Azerbaijan prefers the Turkey-Greece-Italy (TGI) pipeline to Nabucco, Unger said. To support this claim, he said SOCAR has asked BOTAS to analyze the pipeline upgrades and improvements required to transit an additional 7 bcm through Turkey to Europe. Unger claimed that the pipeline economics of transiting 7 bcm are favorable only for TGI. To move this amount of gas, Turkey will not build a new, dedicated pipeline, instead it will use the existing Turkish gas grid. Pipeline infrastructure from Bursa to the Greek border has sufficient spare capacity and the line from the Georgian border to Erzurum may also be sufficient. However connecting Erzurum to Bursa will require "serious infrastructure expenditures." Given that BOTAS is operating in the red (reftel) and the difficulty of getting credit in the global marketplace, we asked how BOTAS would find the money and whether it would seek investment partners. Unger dismissed concerns about BOTAS' financial health and said the money would be found without partners. ¶3. (C) Comment: Given the GOT's long-standing demand for 8 bcm of SD II gas and its concerns about near-term energy shortages, its difficult to understand why BOTAS would demand gas re-sale rights from Azerbaijan. Perhaps the dynamics of domestic gas price increases (price has risen 73% this year) combined with the effects of the global economic downturn on Turkey (electricity demand was -2% in October and -4.5% in the first half of November) are pushing the GOT to request contract flexibility in case energy demand goes south. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey SILLIMAN