TURKEY EXPECTS RIPPLE EFFECTS FROM NABUCCO IGA

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 001031 SIPDIS E.O. 12958: DECL: 07/14/2019 TAGS: ENRG EU TU SUBJECT: TURKEY EXPECTS RIPPLE EFFECTS FROM NABUCCO IGA SIGNING Classified By: Ambassador James Jeffrey for reasons 1.4 b,d ¶1. (C) Summary: The heads of state of Turkey, Bulgaria, Romania, Hungary and Austria signed the Nabucco pipeline Inter-Governmental Agreement (IGA) July 13 in Ankara, with EU Commission President Barroso, Georgian President Shaakashvili, Iraqi Prime Minister Maliki, ministers from Germany, Egypt, Azerbaijan, Sweden and Syria and high level delegations from the EBRD, EIB and USG looking on. The senior participation at a summit announced only two weeks in advance added to the symbolic value of this first, essential but not sufficient step towards making the Nabucco pipeline a reality. In public and private comments surrounding the event, GOT officials made clear that the decision to sign the IGA and hold the ceremony in the Turkish capital was made at the highest levels and forced onto the bureaucracy. That decision carried with it both subsidiary decisions (e.g., to drop, at least for now, the 15 percent gas offtake formula long-championed by state pipeline company BOTAS and many in the Energy Ministry) and policy expectations (e.g., that the IGA will advance Turkey's EU accession, be taken by the Azeris as a positive step vis-a-vis Armenia rapprochement, and spur progress on gas deals with Azerbaijan, Iraq, Russia and other suppliers). President Gul told the US delegation that the GOT expects Iraqi gas to be the first gas committed to Nabucco, and that this announcement will spur a race by Azerbaijan, Turkmenistan and others to fill up the pipe, while Energy Minister Yildiz said Nabucco should have two or three sources and we should be flexible about which countries supply it, hinting that Russia and Iran could be a source. Iraqi PM Maliki announced during the General Session that Iraq could supply 15 BCM to Nabucco (nearly half the pipeline's capacity) but clarified in a private meeting that Iraq will have that much gas available only when Iraqi oil production reaches 6.6 million barrels per day (from current approximately 2.2 MB/D). Azeri Industry and Energy Minister Aliyev said Azerbaijan would supply gas "to Europe," but avoided mentioning Nabucco in public comments. In private, Aliyev said Turkey and Azerbaijan had reached agreement on 8 BCM for Turkey, 4 BCM from Shah Deniz phase II and 4 BCM from SOCAR's reserves (that SOCAR would directly market into Turkey),leaving 7-8 BCM of Shah Deniz II for Europe, but not necessarily via Nabucco. He confirmed that there is no longer a transit fee issue with Turkey regarding Nabucco (now it is an issue for the Nabucco consortium),but complained of the lack of a generic transit agreement across Turkey (important for the Turkey-Greece-Italy (TGI) pipeline, which would use Turkey,s existing pipeline network) and the GOT's failure to open the domestic gas market as promised. A Turk-Azeri gas agreement would help clarify the gas supply available for Nabucco. Both sides appear to be posturing in those negotiations -- the Azeris asserting they have other buyers and the Turks that they have other suppliers. In order to attract Shah Deniz II gas, the Nabucco consortium will need to convince Azerbaijan that its project is at least, if not more, lucrative than TGI in terms of profits for SOCAR. End summary. ¶2. (SBU) The IGA signing ceremony July 13 in Ankara was surprisingly well organized given that the GOT had only two weeks to prepare for it. The General Session finished 45 minutes ahead of schedule, to the obvious delight of Prime Minister Erdogan, who chaired it. Erdogan also appeared pleased with the high level of participation, including six visiting heads of state/government (from the other four IGA countries -- Austria, Bulgaria, Hungary and Romania -- plus Georgia and Iraq). The US delegation was led by Special Envoy for Eurasian Energy Ambassador Richard Morningstar, with Senator Richard Lugar and EUR DAS Matthew Bryza. Erdogan used his introductory remarks to argue that the IGA shows Turkey should be a member of the EU. Ambassador Richard Morningstar, analogized the IGA signing to the Istanbul declaration in 1999 that set the stage for the Baku-Tblisi-Ceyhan (BTC) oil pipeline. Senator Lugar said the signing would tie Turkey more firmly to Europe and advanced the east-west energy corridor, a long-time USG policy priority. Next Step: Find Gas Supply -------------- ¶3. (SBU) Several potential supplier countries were invited to the summit. Iraqi Prime Minister Maliki surprised many by ANKARA 00001031 002 OF 004 announcing that Iraq would have 15 bcm of gas available to supply Nabucco. Egyptian Minister of Petroleum Fahmy said Egypt hoped to provide gas to Nabucco via an extension of the Arab pipeline north from Syria, and Syrian Minister of Oil al-Alao said Syria hopes to become a gas exporter as well. Azeri Industry and Energy Minister Aliyev, by contrast, spoke in support of Azeri exports to Europe without ever mentioning "Nabucco." Russia and Turkmenistan were invited but did not send delegations. ¶4. (C) In a bilateral meeting with the US delegation, Maliki and Deputy Minister of Petroleum Shamma clarified that the 15 BCM of free and associated Iraqi gas would be available only when Iraqi oil production reached 6.6 million barrels per day, a goal set for 2015. (Note: Up from approximately 2.2 MB/D now. End note.) Iraq also is planning to end the flaring of gas near Basra and is working with Shell on a contract to capture that gas for domestic use or export. There also are large areas in the western deserts of Iraq that, Shamma said, give indications of having more gas than oil, and the GOI will be looking to foreign oil companies to develop these fields. Two large gas fields - Akkaz and Mansouriya -- failed to get bids in recent tender because of fears that revenues would be too low from domestic consumption, but they expect to get foreign investment to develop those fields. Maliki was firm, however, that these developments could only go forward if the companies had contracts with Baghdad, not just with the KRG. ¶5. (C) In a bilateral meeting with Hungarian Prime Minister Bajnai Gordon, a representative of the Hungarian company MOL said it expects by 2012 to be able to export 3 BCM of gas from northern Iraq, and that this is only its 10 percent share of the field's 30 BCM of expected production. (Note: MOL is a partner in the Crescent/Dana gas field in Northern Iraq.) Some of that will be taken for domestic consumption, but some also will be exported. ¶6. (C) In a bilateral meeting with the US delegation, Turkish President Abdullah Gul praised the USG for its support of Nabucco, noting that as with BTC, US support was essential to moving Nabucco forward. Gul said the focus now is on finding gas supply for Nabucco. He expects that Iraqi gas would be the first gas committed to Nabucco, and that this announcement would produce a race by Azerbaijan, Turkmenistan and others to fill the rest of the pipe. ¶7. (C) Similarly, Energy Minister Taner Yildiz said in a bilateral meeting that the six companies in the Nabucco Consortium will now look for gas supply contracts. The supply and demand are there, and so financing the project should not be a problem. Yildiz repeatedly said we should be "relaxed and flexible" about sources of supply, saying that Nabucco should have at least two or three supply countries. He said the US could be helpful in encouraging suppliers to join the project. If Azeri gas were not available, other sources like Iraq or Turkmenistan would be, Yildiz said, and those suppliers would be decided by the competitive market. Russia also might supply gas to Nabucco in the competition to supply Europe. Yildiz emphasized that as a commercial project, price should be the determining factor for deciding on source of supply. Yildiz also noted that France is interested in joining the Nabucco project and extending the pipeline, and that the Balkans were another likely source of future expansion. Separately, MFA U/S Apakan suggested that the USG and Turkey jointly approach supplier countries (like Turkmenistan and Iraq) to identify gas supply for Nabucco. Positive Ripple Effects Expected -------------- ¶8. (C) GOT interlocutors expect the IGA signing to have a positive effect on several diplomatic and energy fronts. In his comments during the General Assembly, Prime Minister Erdogan said the IGA signing came about because of "sacrifices" (unidentified) by Turkey and was another indication that Turkey deserves to be an EU member. EU Commission President Barroso said Nabucco was critically important for Europe's energy security, while Energy Commissioner Piebalgs said the IGA signing would increase pressure on the EU to open the Energy Chapter in Turkey's EU accession. According to private sector sources, however, Austrian Chancellor Faymann was infuriated by Erdogan's ANKARA 00001031 003 OF 004 comments, saying Monday evening that Turkey sacrificed nothing for the IGA and that Nabucco is a commercial project that has nothing to do with Turkey's EU candidacy. ¶9. (C) Turkey also expects to see an improvement in relations with Azerbaijan, which have been strained by Turkish-Armenian rapprochement. Turkish interlocuteurs indicated that the IGA signing ceremony date was rushed in part so it would take place before Azeri President Aliyev meets Armenian President Sarkisian in Moscow on July 17. During lunch, Davutoglu expressed concern to Morningstar that Russia may be playing the spoiler by offering to protect Azeri interest in not moving forward on Nargono-Karabakh (N-K) in return for an Azeri pledge to sell Shah Deniz II gas to Russia. If true, this could negatively affect two US goals: (1) Turkey-Armenia rapproachement which requires some progress on N-K and (2) Azeri gas to Europe. GOT officials also expect it will provide momentum in their continuing negotiations over pricing on Shah Deniz phase I gas and purchase of additional gas for Turkey's domestic market. Yildiz said negotiations with Azerbaijan were very positive and that his July 10 meeting with SOCAR President Abdullayev was the "second to last" meeting in the negotiations, although he was not sure that any Azeri gas would enter the Nabucco pipeline. MFA Deputy Undersecretary Selim Kuneralp said that Azerbaijan is now more forthcoming in negotiations, because it sees that exports via Nabucco will link Azerbaijan and the EU, which helps the Azeris vis--vis Russia. President Gul said he told Aliyev that Nabucco's reliance on market mechanisms is very important. Gul said Aliyev understands the advantage to exporting via Nabucco even if Russia is offering a higher price and agreed that Nabucco is key for Azerbaijan's strategic interests. ¶10. (C) Azeri Energy Minister Aliyev, in contrast, was decidedly less optimistic concerning the Nabucco project in a dinner hosted by Ambassador Jeffrey. Aliyev said that negotiations with Turkey continue, but many issues remain to be resolved. In prior negotiations, Aliyev said, Turkey and Azerbaijan agreed on the sale of 8 BCM of gas to Turkey, 4 BCM from Shah Deniz Phase II and 4 BCM from SOCAR's reserves. But the reserve gas was to be sold directly into the Turkish market after Turkey liberalized its gas market, which it failed to do. This formula would leave 7-8 BCM of Shah Deniz Phase II gas for export to Europe, but not necessarily via Nabucco. Aliyev agreed that the IGA signing means that there is no longer a transit issue with Turkey for gas that flows through the Nabucco pipeline. Instead, the issue is now with the Nabucco Consortium, which has to specify the capacity utilization fees charged for using the line. Aliyev asserted that Nabucco would be much more expensive than the Euros 7.9 billion now projected, estimating it at closer to euros 11 billion (Comment: We understand that Aliyev arrived at this estimate by extrapolating from the construction cost of the South Caucusus pipeline. Euros 11 billion would make the fees charged on the Nabucco pipeline very high. End comment). Aliyev also complained that Turkey has not set a transit tariff for other projects, and this makes it impossible for Azerbaijan to sell its gas to any customer it chooses, without Turkish permission. Comment: Both sides in these long-running negotiations appear to be posturing as the talks may actually be approaching closure. With its recent 0.5 BCM gas sale to Russia, Azerbaijan signaled it might sell its gas to Russia instead. In response, the GOT is signaling that it has other possible sources of gas supply than Azerbaijan. In fact, both sides need each other. More troublesome for the Nabucco project is continuing Azeri doubts (echoed by BP as a Shah Deniz consortium member) about the profitability of selling the available SD II gas to the Nabucco consortium versus the Turkey-Greece-Italy line. End comment. Does 15 Percent Still Live? -------------- ¶11. (C) In press reports on July 14, BOTAS president Saltuk Duzyol said Turkey's proposal to take 15 percent of gas transitting Nabucco at discounted price was still on the table. Energy Minister Yildiz responded with press comments saying Turkey could buy up to 50 percent of the gas, so why limit itself to 15 percent? Comment: The 15 percent netback formula is a favorite of BOTAS and many in the Energy Ministry bureaucracy, while the Foreign Affairs bureaucracy sees it as at best a bargaining chip. President Gul heaped praise on MFA for helping close the IGA negotiations, but the ANKARA 00001031 004 OF 004 Energy Ministry and BOTAS are likely to be in charge of the Project Support Agreement negotiations between Turkey and the Consortium. OMV sources say that the Energy Ministry approached OMV and RWE in early July with a proposed contract that included the 15 percent offtake at netback price formula. OMV reportedly said this would not work within NabQco, as it would require them to sell gas at a loss. OMV is considering other options, including the possibility of selling Iraqi gas it to Turkey at a discount to get rid of the 15 percent formula. End comment. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey JEFFREY