ENERGY COORDINATOR MANN URGES TURKEY TO NEGOTIATE

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 000449 SIPDIS SIPDIS EEB FOR A/S SULLIVAN EUR FOR DAS BRYZA EEB FOR MANN DOE FOR HEGBURG E.O. 12958: DECL: 03/07/2018 TAGS: ENRG EPET TU SUBJECT: ENERGY COORDINATOR MANN URGES TURKEY TO NEGOTIATE WITH AZERBAIJAN ON TRANSIT TARIFFS REF: A. ANKARA 00358 ¶B. ANKARA 00316 Classified By: Economic Counselor Dale Eppler for reasons 1.4 (B) and ( D) ¶1. (C) Summary. On February 25-26, Coordinator for Eurasian Energy Diplomacy Steve Mann met with GOT officials to discuss gas and oil issues. Energy Minister Guler stressed that security of supply is Turkey's most urgent priority. He suggested Turkey and the U.S. work together to develop Iraqi oil and gas and to bring Turkmen gas westward. Mann urged Guler to move forward on gas transit negotiations with Azerbaijan. GOT officials told Mann Turkey is keen to develop an "energy hub", a commercial gas trading center. Throughout the discussions it became clear that the GOT uses the term &energy hub8 in a precise commercial fashion, not a metaphysical one. Officials also disclosed BOTAS/GOT inability/unwillingness to conclude new sales and purchase agreements and looked to the energy hub concept as a way around the problems. End Summary. ¶2. (SBU) On February 25-26, Coordinator for Eurasian Energy Diplomacy Mann discussed energy issues with Energy Minister Guler, newly appointed GOT Ambassador to Turkmenistan Husseyin Bicakli, BOTAS Board Member and Nabucco Coordinator Osman Goksel, Energy Advisor to the President Volkan Ediger, and Member of Parliament Taner Yildiz. In addition, Ambassador hosted a lunch for Mann which included MFA Deputy Undersecretary for Bilateral Political Affairs-Africa, Asia and Pacific Unal Cevikoz, Energy Acting Undersecretary Selahattin Cimen and Chief Foreign Policy Advisor to the President Gurcan Turkoglu. Gas supply (Not Transit) is Turkey's Priority -------------- ¶3. (C) Energy Minister Guler told Mann finding new gas supplies for Turkey's growing demand is the most urgent issue Turkey faces. In the short term, Guler lamented additional gas volumes were not available from Azerbaijan, Iran, Iraq or Egpyt, leaving Turkey with the option of buying more Russian gas or spot market LNG. He firmly stated gas transit without Turkish offtake is not the solution and discussion on this topic is not welcome. He said the U.S. and Turkey should work together to expedite gas development in Iraq, especially in NorthernIraq with an export route through Turkey and in the Caspian to facilitate Turkmen gas moving westward. Guler warmly welcomed Mann's proposal to Turkmen President Berdimuhammedov for USTDA to conduct a feasibility study for linking Block 1 offshore gas infrastructure with Azeri offshore infrastructure. With such a connection, Mann said there was a possibility of early gas (2-6 bcm) in the near term. ¶4. (C) Mann said he understood Turkey's need for gas at a price that didn't disadvantage Turkey compared to European prices. (Comment: Turkish leadership may fear criminal proceedings for agreeing to a price higher than Europe's. Former BOTAS Chairman Bilgic has been indicted for bringing three Russian contracts under one agreement at an overall higher price. Bilgic maintains his action was necessary at the time to get relief from "take or pay" clauses. End comment.) Mann added that Turkey's lack of progress on transit tariffs with Azerbaijan is slowing progress on Nabucco and that in turn is giving rise to competitors, like White Stream. Mann said the transit tariff negotiation called for a maximum of creativity and urged Guler to begin the negotiations without delay. Mann said he was confident both sides could resolve their differences. Turkey's Hub concept regains momentum -------------- ¶5. (C) Guler told Mann that the December 2006 Nabucco Ministerial statement recognized Turkey as an "energy hub." Guler said the hub or commercial gas trading center would be established at Ahibos (outside of Ankara) where gas ANKARA 00000449 002 OF 003 pipelines from Russia, Iran, Azerbaijan connect. He expressed frustration with EU Nabucco Coordinator van Aartsen who Guler said rejected Turkey's hub proposal during his visit (ref A),contradicting the Ministerial statement. (Note: We understand Turkey and the EU held further discussions on the hub concept in Vienna on February 28. We are seeking a read-out. End note.) ¶6. (C) In a separate meeting, BOTAS Board Member and Nabucco Coordinator Osman Goksel told us the hub concept moves Turkey toward EU liberalized gas market goals. He explained the hub as a commercial gas trading center and likened it to Henry Hub in Louisiana. He said the major advantages would be 1) a gas price set by bidders in a market place, rather than by suppliers and 2) open market entry - anyone could establish a company for trading. He acknowledged that only a certain percentage of gas (perhaps 30%) could be freely traded on a spot market and that the rest of the market would continue to rely on long-term contracts. He said long-term contracts have been a problem for Turkey with gas over-contracting in the 1990s and gas shortage currently. He also lamented that Turkey has done poorly in gas price negotiations. He said Turkey pays more for Russian gas than Europeans whose transit price should be higher due to longer transit. Mann said the hub concept would require Turkey to build trust in its ability to oversee a transparent and fairly regulated marketplace. He added Turkey's recent gas cut off to Greece, as well as BOTAS, handling of the BTC cost overrun, did not advance Turkey's credibility. Caspian gas transit tariffs and 15% reserve option -------------- ¶7. (C) Goksel told Mann a transit tariff formula is straightforward and will be decided by the Nabucco consortium companies. The tariff will be cost-based and include a fixed rate of return for pipeline operators. He said the Nabucco partners were not far away from agreement on a formula. According to Goksel, the tariff rate methodology is not related to the 15% gas transit reserve formula (ref B). (Note: Turkey is seeking 15% of gas volumes that transit the country for domestic usage. End note) Moreover, the 15% reserve formula is not related to the hub concept, Energy Acting Under Secretary Cimen told Mann. Both concepts seek to secure more gas volumes for Turkey. In the reserve formulation, Turkey is seeking flexibility either by having an option to buy up to 15% (they are seeking a 20% option with Iran) or by reselling the gas at the hub. Cimen emphasized this proposal is nascent and Turkey may be willing to sign take-or-pay contracts or forego resale rights, if it was the only way to get gas. He said price is important and they are seeking a way to index their price to EU prices. Given Turkey's proximity to Azerbaijan, Turkey believes it should pay less than Europe. Presidential Energy Advisor Volkan Ediger told Mann the GOT does not have a unified policy on becoming a hub and there continues to be much discussion within the government on this issue. Kazakh Oil and Samsun-Ceyhan Oil Pipeline -------------- ¶8. (C) Mann told Guler that bringing oil to market continues to be a U.S. strategic priority. Mann said 1.5 million barrels a day from Kazakhstan will be looking for an outlet to market within the next few years. Mann expressed doubt Russia would approve the Caspian Pipeline Consortium (CPC) expansion, without which this new oil would be stranded and in search of new routes. Mann said twinning the Baku-Tbilisi-Ceyhan (BTC) pipeline could be a possibility as well as transport to Supsa and then through Samsun-Ceyhan. ¶9. (C) Guler said Samsum-Ceyhan would be ready to accept Kazakh oil. He added that the project is attracting interest from several countries such as Russia, Israel and India. Guler said oil from Ceyhan could be piped to Israel along with water, natural gas and electricity forming a set of "peace pipelines" to Israel and the Palestinians. India was also interested in buying oil from Ceyhan. ANKARA 00000449 003 OF 003 Turkmen President in Turkey, March 25-29 -------------- ¶10. (C) Guler told Mann Turkmen President Berdimuhammedov will visit Ankara, Istanbul and Antalya March 25-29, returning the courtesy of President Gul's December visit. Mann said this is the perfect opportunity for the U.S. and Turkey to synchronize messages to the Turkmen government. Mann said the US and Turkey should tell Berdimuhammedov that now is the time to normalize relations with the world. As part of that normalization process, Turkmenistan should open it's energy sector to world-class international oil companies who can bring wealth to Turkmenistan by developing new oil and gas fields. Mann said Chevron has a proposal pending before the government and Exxon is also considering a project. Mann noted that large firms may wish to partner with smaller firms and commended Guler for the excellent work Turkish Petroleum (TPAO) has done in the Caspian. Statoil's rationale for TAP -------------- ¶11. (SBU) Statoil Hydro Turkey General Manager Sverre Mala told us Trans-Adriadic Pipeline (TAP) is a winner because the TGI provisions for transit are too complicated (they don't want to deal with Turkey's 15% off-take formula) and they believe the business case for Nabucco is weak. (Note: The GOT has told us they will pursue the same 15% offtake formula for any pipeline transiting Turkey. End note.) Statoil said two factors drive its business decisions: 1) where is the best economic result and 2) where can it sell gas without a middleman. StatOil is negotiating with Shah Deniz consortium members to make at least 12bcm available for TAP. They foresee 2bcm for Azerbaijan/Georgia; 4-5 bcm for Turkey; and 5-6 bcm for Europe. Statoil stressed its business model is to "follow the gas to market" and complained that Turkey's netback pricing formula restricts their pricing flexibility and makes price re-negotiations with the customers very complicated. ¶12. (U) Coordinator Steve Mann cleared this message. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON