Identifier
Created
Classification
Origin
08BRUSSELS952
2008-06-24 07:45:00
CONFIDENTIAL
USEU Brussels
Cable title:  

EU WORKING ON A GAS TRANSIT DEAL WITH TURKEY

Tags:  ECON ENRG EPET EU 
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C O N F I D E N T I A L SECTION 01 OF 03 BRUSSELS 000952 

SIPDIS

E.O. 12958: DECL: 06/24/2018
TAGS: ECON ENRG EPET EU
SUBJECT: EU WORKING ON A GAS TRANSIT DEAL WITH TURKEY

Classified By: EST CHIEF THOMAS SMITHAM FOR REASONS 1.4 (b) AND (d)

C O N F I D E N T I A L SECTION 01 OF 03 BRUSSELS 000952

SIPDIS

E.O. 12958: DECL: 06/24/2018
TAGS: ECON ENRG EPET EU
SUBJECT: EU WORKING ON A GAS TRANSIT DEAL WITH TURKEY

Classified By: EST CHIEF THOMAS SMITHAM FOR REASONS 1.4 (b) AND (d)


1. (C) Summary. After working level discussions with Turkey
last week, the EU Commission is optimistic they may be
nearing an agreement with Turkey on gas transit. Turkey
appears willing to drop its hold-up tactics, allow direct
contracting between gas consumers and gas suppliers, will
require no lift-off clauses, and is willing to establish a
cost-based transit regime. In return, the EU is willing to
sponsor major investment in Turkmenistan to create a large
volume flow through Turkey. EU Nabucco Coordinator Jozias
Van Aartsen and the Commission have moved away from the idea
of pushing one pipeline (Nabucco) over all others and are
instead focused on opening up the Southern Corridor to
whichever pipeline or pipelines can succeed. July 18 will be
a key date for this process. Turkish Energy Minister Guler,
EU Energy Commissioner Piebalgs, and Van Aartsen will be
meeting and Commission officials are hopeful they will be
able to come to a political agreement on transit. End Summary.


2. (C) On June 19, 2008 EST Officer met with Brendan Devlin
and Kitti Nyitrai, assistants to EU Nabucco Coordinator
Jozias Van Aartsen, to discuss the possibility of the EU and
Turkey reaching a gas transit agreement. Devlin and Nyitrai
are optimistic that they may have the genesis of a deal with
Turkey on transit after recent discussions. In a nutshell,
Devlin said that Turkey appears willing to drop it hold-up
tactics, allow direct contracting between gas consumers and
gas suppliers, will require no lift-off clauses, and is
willing to establish a cost based transmission regime. In
return, the EU is willing to sponsor major investment in
Turkmenistan to create a large volume flow through Turkey.
Devlin views Azerbaijan as unaffected and able to do as it
wishes. Iranian gas supplies are not on the table for
discussion.


3. (C) On June 16 EU Commission officials from the Transport
and Energy Directorate (DG-TREN),Energy Charter Treaty
officials, and Turkish energy officials from BOTAS and the
Turkish Ministry of Foreign Affairs (MFA) held a
seven-hour-long, working-level meeting to discuss the gas

transit question. Present from EU side were Brendan Devlin,
Christopher Ross (DG-TREN, Policy Officer for Central Asia,
China, and the Caucuses) and Ulrike Hauer (Trade, Economy,
and Agriculture Counselor, Delegation of the European
Commission to Turkey). Present from the Turkish side were
Mr. Goskel (The Turkish Nabucco Coordinator),Mr. Dauzyol
(CEO of BOTAS),Mr. Aydin (the BOTAS commercial gas manager),
and Ms. Evren from the Turkish MFA. Present from the Energy
Charter Treaty Secretariat were Ralf Dickel (Director for
Trade, Transit, and Relations with Non-signatories) and Gonuz
Gurbal (Senior Expert).

Transit Agreement Possible
--------------

4. (C) The Turkish side agreed they would consider splitting
commercial (purchase) issues out from transportation if the
volumes of gas to be transported were increased. In that
scenario, transportation would be subject to cost based
transmission fees and direct contracts (producer to consumer)
would be allowed. The EU side insisted on no commercial
exclusivity and Turkey agreed. Increasing the volumes could
be accomplished through book building -- a mechanism to
consolidate gas orders and match up supplies by bringing
together information from the consumers about how much gas
they will need and sharing that information with the
producers so they would know how much gas they should invest
to produce. If book building does go ahead it will be
subject to DG-Competition buy-in. If book building goes
ahead outside the Nabucco context, then a special purpose
vehicle is needed, according to Devlin.


5. (C) As a preliminary idea, a "Caspian Development
Corporation (CDC)" )- a notional title used for convenience
)- was discussed, which would operate the book building.
CDC could be a purchase joint venture or a stand-alone
entity, basically a clearing and settlement mechanism. At
this point it is not clear which option will be pursued.
This transit deal would make BOTAS happy because it
guarantees a future role for them. It would also make the
Commission happy because that role will not give Botas or
Turkey a monopoly on transit. July 18 will be a key date for
the process. Turkish Energy Minister Guler, EU Energy
Commissioner Piebalgs, and Van Aartsen will be meeting and

BRUSSELS 00000952 002 OF 003


will hopefully be able to come to a political agreement on
transit.

Intergovernmental Agreement
--------------

6. (C) Turkey will consider possible extension of an
Inter-Governmental Agreement (IGA) to Georgia and Azerbaijan.
Turkey will consider a kick-off Ministerial to mandate
negotiators. Turkey understood the need to respect EC
competence issues and the EC understood that a mechanism will
be needed to give Turkey a level of comfort on investment
issues. If Georgia and Azerbaijan are brought in, then the
IGA will have to be as simple as possible and agreements will
have to be broken down in to components. The EC understood
that the IGA was a way for Turkey to circumvent domestic
legal procedures allowing development of Nabucco and/or the
Southern Corridor.

Increasing Caspian Volumes
--------------

7. (C) Devlin indicated that the EU concept of gas supplies
for the Southern Corridor is that first gas will come from
Azerbaijan, but the real key for gas supply is Turkmenistan.
As an example, Devlin said that development of
Turkmenistan,s Iolotansk field could provide 90 bcm for 30
years. The onshore field was offered to the German's in 2006
and is still, presumably, not committed to the Russians or
other buyers. Devlin foresees the way forward as getting the
transit arrangement worked out with Turkey and then going to
Turkmenistan and telling them they'll take the gas from
Iolotansk. The EU would also give bigpolitical and
financial guarantees to Turkmenstan. In discussions, the
Turkish side made t clear that in opening gas flow from the
Caspian region they will have to "piggy-back" on the EU.

Van Aartsen Now Pushing "Southern Corridor" Concept
-------------- --------------

8. (C) According to Devlin, Van Aartsen and the Commission
have moved away from the idea of pushing one pipeline
(Nabucco) over all others and are instead focused on opening
up the Southern Corridor to whichever pipeline or pipelines
can succeed. Devlin believes the EU will need a variety of
pipelines going forward. Nabucco is a 30 bcm project, but
the DG-TREN estimates the EU will need 50 to 100 bcm by 2020.
Their 2025 target is 120 bcm. This change in focus may not
be politically popular with countries like Poland for whom
Nabucco has become a talisman or for countries like Austria
and Germany who have commercial interests involved. Devlin
does not believe German RWE and Austrian OMV want to increase
gas volumes for Europe. They want to insure gas supplies,
but not so much that it removes their pricing power in their
individual markets. The operative issue for the EU going
forward is volume building.


9. (C) Once the political agreement with Turkey is reached,
the EU would like to bring together an
EU-Turkey-Georgia-Azerbaijan Summit to nail down a commitment
on the route for the Southern Corridor, declaring that it
will go from Azerbaijan through Georgia, Turkey, and on to
Europe and that a Black Sea option will not be pursued. Once
the transit agreement has been reached, the route is
declared, and a CDC mechanism exists to consolidate demand,
the EU will go to Turkmenistan to propose a deal. This will
include providing EU guarantees to take the gas with the EU
assuming the volume risk and the price risk.


10. (C) According to Devlin, the biggest short-term threat to
the whole process is that Turkey is not taking this seriously
enough. There are those in the Commission who are in favor
of publicly pushing the Black Sea option as way to remind
Turkey that it is serious. The Commission is hearing from
Member States that they don't want to get pulled in to
Turkish political battles that could affect gas supply.
According to Devlin, Turkey is in danger of overplaying its
hand. Austria, Germany, Bulgaria, and France have all
expressed concerns about being vulnerable to Turkish threats
to cut off gas supplies if things don't go the Turkish way on
EU accession. In Devlin's view, the Commission is partly to
blame for Turkey's attitude. DG-Enlargement for many years
has been talking up Turkey's importance as an "energy
bridge." Unfortunately, in Devlin's opinion, Turkey has
bought into the hype.


11. (C) Devlin believes the Turkish decision on Gaz de France

BRUSSELS 00000952 003 OF 003


(GDF) was a very bad move because it showed that Turkey is
willing to play politics with its energy policy. This helped
feed fears by the French and others that Turkey will be
willing to use energy for political purposes in the future --
you give me what I want on accession or I'll make life
difficult for you with gas supplies. Turkey could have
accomplished the same thing in a quiet manner without out
getting people excited; doing it in a large public manner is,
according to Devlin, "just stupid."

Using South Stream as a Bargaining Chip
--------------

12. (C) Asked how Gazprom's South Stream pipeline project
fits into this equation, Devlin emphasized that South Stream
has no Commission status. It will not receive any Commission
status as a project of European interest, but at the same
time the Commission can't stop the Russians from working on
South Stream. Devlin views South Stream as a useful
negotiating tool with Turkey and is confident that the EU
would be able to delay South Stream if necessary to allow
other preferred pipeline solutions to go forward. According
to Devlin, the Commission has come up with a new doctrine:
any new pipeline projects must have EU regulatory approval.
The aim is to put discretionary tools at the hands of the
Commission to be able to hold up the Nord Stream and South
Stream pipeline projects if needed to get a Trans-Caspian
pipeline. The current feeling in the Commission is that they
will only allow Nord Stream and South Stream to go forward on
a regulatory basis if they get the Trans-Caspian pipeline.
Privately, the Commission is of the opinion that all the
agreements signed so far with EU members on South Stream are
illegal. At some point, the Commission plans to go forward
with legal action on these agreements. The Commission's
strategy is to make all routes seem viable until the Turks
make a deal. Until then, the Commission views South Stream
as their best negotiating tool, providing useful pressure on
Turkey.


13. (C) The Commission has told Moscow that it has no
objection to Gazprom injecting gas into Nabucco as long as
the injection takes place in Azerbaijan and not Turkey (Baku,
not Blue Stream for injection). The EU and Russia have come
to a gentleman's agreement not to openly bad mouth each
other's projects. Devlin is encouraged by recent public
statements by Russian President Medvedev that South Stream
and Nabucco are not competitors. Devlin pointed out that
South Stream is actually nothing more than Blue Stream II
redirected. Russia couldn't come to terms with Turkey to
expand Blue Stream so they redirected the people, money, and
equipment to South Stream as a way to bypass not only
Ukraine, but also Turkey. In Devlin's opinion, Turkey
overplayed its hand with Russia and is in danger of doing the
same with the EU.


14. (C) Comment: Devlin's boss Van Aartsen is viewed as an
independent negotiator who does not necessarily speak for the
Commission, however, the proposed transit deal has been
briefed all the way of the chain to EU Energy Commissioner
Andris Piebalgs and there appears to be general support for
it within DG-TREN. The first hurdle to wrapping up a transit
deal will be elevating this from the working level to the
Ministerial level without injecting politics into the
negotiation. Even if the EU and Turkey do reach an
agreement, the proposed structure is based on greatly
increased gas volumes flowing through the Southern Corridor.
Increasing these volumes will in turn depend on convincing
Turkmenistan to allow the investment and development needed
to bring new gas fields on line. Furthermore, the Commission
is playing a dangerous game in allowing South Stream to move
forward because, while it may prove useful in negotiations
with Turkey, the apparent momentum being gained by South
Stream may well discourage companies and governments from
pushing forward with Nabucco and other pipeline options. End
Comment.
.