TURKEY'S SEARCH FOR A PLAN B ON NATURAL GAS

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 001566

SIPDIS

DEPARTMENT FOR S/EEE RICHARD MORNINGSTAR

E.O. 12958: DECL: 10/28/2019
TAGS: ENRG EPET PREL TU
SUBJECT: TURKEY'S SEARCH FOR A PLAN B ON NATURAL GAS

REF: 1997 STATE 153545

Classified By: Economic Counselor Dale Eppler for reason 1.4 (b,d).


1. (C) SUMMARY: As negotiations with Azerbaijan have stalled
-- in Turkey's view, because of Azeri pique over its
rapprochement with Armenia -- the GoT has been actively
developing its options for a short to medium term natural gas
picture without a deal with Azerbaijan. It believes that
having a credible Plan B will make the Azeris more reasonable
in their ongoing negotiations, and also provide Turkey a real
alternative if negotiations fail. But all of the plan-B
options carry significant challenges - technical, financial
and/or political. Russia presents the most ready alternative,
though over-dependence on Russia remains a concern, and
increasing supplies via Blue Stream would require delivery
infrastructure investments. Iraq is the second most likely
alternative. Turkey and Iraq signed an MOU on October 16 to
develop an export gas corridor but no gas is yet being
exported. The GOT also is looking at other alternatives -
Turkmenistan, Kazakhstan, Iran, and Qatar -- but none of
these appears promising in the near term. PM Erdogan and
Energy Minister Yildiz reaffirmed Turkey's commitment to
develop the South Pars field during their October 27 visit to
Tehran, but Turkish Petroleum (TPAO) has been frustrated with
its inability reach agreement with the Iranians even on
technical issues over the past year. Similarly, Erdogan
signed an MOU in Tehran reviving the decade-old idea of
transiting Turkmen gas through Iran. Coming just days before
going back to the negotiating table with the Azeris, this
likely is intended as another signal that Turkey has
alternatives to Azerbaijan. End summary.

Politics Stall Turk-Azeri Negotiations
--------------


2. (C) The Azeris will arrive in Ankara October 28 for the
next round of negotiations on Shah Deniz gas. Although Energy
Minister Yildiz told the press October 27 that he remains
hopeful of reaching a deal shortly, all indications --
including those from MFA and Ministry of Energy officials --
are that the negotiations are not going well. Undersecretary
of Energy Kilci told econ counselor and econ officer on
October 15 that the negotiations had stalled for political
reasons, alluding to Nagorno-Karabakh and the recent protocol
signing with Armenia. Kilci said it has been hard to convince
the Azeris "they're our good friends and brothers." Despite
hopes earlier in the year of completing the negotiations by
September, Kilci said the process is now "back where it
started." Similarly, MFA Energy Department Head Berris
Ekinci said October 20 that a gas deal with Azerbaijan is
unlikely given the current state of bilateral relations.

Formulating a Plan B
--------------


3. (C) Although Turkey has not given up on negotiations with
the Azeris, the GoT believes it needs to have an alternative
to Azeri gas. The GoT began working on its alternative
supply options several months ago. Minister Yildiz told
Ambassador Jeffrey in August that they were looking for
additional supplies from various potential supplier
countries. Now that the negotiations with Azerbaijan have
stalled, Turkish officials seem increasingly committed to
having a plan B in place -- both as a credible alternative to
use as leverage in the negotiations with the Azeris and to
employ should those negotiations finally fail.

Russia: The Most Ready Alternative
--------------


4. (C) For the short term, Russia is the most likely source.
During Russian President Putin's visit to Ankara in August,
the two countries agreed to extend the West-1 Line contract,
though most details were left unspecified. Through the Blue
Stream pipeline, Turkey last year received 9 bcm of gas,
leaving about 40 percent of the line's 16-bcm capacity
available. The problem with Blue Stream, however, is getting
the gas from the entry point near Samsun to the high-demand
area of western Turkey. According to Berris Ekinci, head of
the MFA Energy Department, infrastructure investments would
be needed to send any increased volumes west from Blue
Stream.


5. (C) Turkey continues to pursue Russian gas as a potential
supply for transit as well. Kilci told us the GoT remains
interested in Blue Stream II. Statements from Putin's August

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visit indicate Blue Stream II would target eastern
Mediterranean markets. As the Turks frequently raise the
option of Russian gas for Nabucco, however, they may also eye
Blue Stream II as the feed-in route. Kilci told us that after
five days of meetings with the Russians, he personally
believes the Russians are growing more interested in Blue
Stream II as a cheaper and easier option than South Stream.
He said although Blue Stream II would not help Russia
diversify its export routes, "Russia must realize the fact
that Turkey is the most reliable route among its choices."


6. (C) Although Russia represents the most ready supply,
Turkey remains cautious of raising its dependence on Russia
too greatly. Emre Engur, head of the Strategic Development
and International Projects Department at the State Pipelines
Company (BOTAS),recently commented to econ officer that the
U.S. support for diversity of supply is important because
Turkey and Europe need Iraqi, Iranian, and Turkmen gas. He
said if these countries do not sell to Turkey, they will sell
to Russia, and then Russia will resell to Turkey and Europe.

Iraq: Big Hopes and Small Steps
--------------


7. (C) On October 15 in Baghdad, Yildiz and Iraqi Oil
Minister Shahrastani signed a memorandum of understanding
(MOU) on development of a gas export corridor. According to
Ekinci, the document says the parties will explore ways to
export gas to and through Turkey. Despite the MOU's focus on
intent, Ekinci said it is an important step forward, as it is
their first natural gas MOU with the Iraqis, who have been
very cautious about making any commitments on natural gas.
She also noted that at the most recent meeting on the Caspian
Development Corporation (CDC) in Brussels, the European
Commission discussed applying the CDC model to the Iraqi
market as well.


8. (C) Industry representatives are also encouraged by
prospects in Iraq. At a meeting October 15, Serhat Inanc,
deputy general manager of Turkerler Construction gave econ
officer and econ specialist an update on Turkerler operations
in northern Iraq. He said they are currently producing 2-3
bcm from the Chamchamal and Kormor fields. The supply goes to
two power stations in Iraq; none is exported as of yet. Inanc
estimated, however, that the two fields could easily produce
30 bcm, perhaps as much as 60 bcm. He added that new
estimates for the country as a whole suggest supplies that
could top a trillion cubic meters.

Iran, Turkmenistan, Qatar: The Best of the Rest
-------------- --


9. (C) The GoT and GoI agreed in 2007 that Turkish Petroleum
(TPAO) would produce an annual 20 bcm from Iran's South Pars
gas field. That MOU was set to expire next month but was
extended during PM Erdogan and Yildiz's visit to Tehran
October 26-27. In press statements from the visit, Yildiz
said Turkey will move forward with its $3.5 billion natural
gas development plans in Iran. He said TPAO would begin
exploration in South Pars next month and half of the expected
supplies from production would be re-exportable to Europe. In
contrast, however, both Ekinci and TPAO Vice President Murat
Altiparmak told us making progress with Iran has been
difficult. Ekinci said that political issues aside, they have
not even been able to reach agreement on technical issues
such as insurance after 11 months of talks.


10. (C) Regarding Turkmenistan, Ekinci said Turkmen
participation at the recent CDC meeting was an encouraging
sign. The Turkmen ambassador at the meeting informed the
Commission that Turkmenistan was interested in the project.
In contrast, Ekinci noted, Azerbaijan also sent an embassy
representative but he did not express interest in the CDC on
behalf of his country. Ekinci also reminded us that
Azerbaijan may pose an obstacle for getting Turkmen gas to
Turkey, as the GoT assumes Azerbaijan would not allow Turkmen
gas to transit its territory to Turkey until an agreement is
reached on Shah Deniz and transit. Comment: That assumption
is likely one of the factors that prompted the GOT to
reaffirm the decade-old plan to transit Turkmen gas across
Iran to Turkey during Erdogan's visit to Tehran.


11. (SBU) Qatar gas supplies remain a possibility for Turkey
as well. Ekinci told us they have taken some concrete steps
regarding liquefied natural gas (LNG) and are still
considering a pipeline (across Saudi Arabia to connect to the
Arab pipeline). Given the length of the pipeline needed,

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however, she considers that project a long-term possibility.

Comment
--------------


12. (C) It remains unclear how much of Turkey's effort to
secure these various gas supplies is a negotiating strategy
with Azerbaijan and how much is aimed at building a ready,
feasible plan B. Regardless of the true intent, all of the
plan-B options carry significant challenges, technical,
financial and/or political. Despite Yildiz's assured
statements to the press on increasing cooperation with Iran,
there is little to indicate that TPAO is any more likely to
conclude negotiations on South Pars than it was over the past
year. Similarly, the GOT has been signing MOUs on a
trans-Iran transit pipeline for Turkmen gas since the
mid-1990's (reftel) without a single meter of pipe being
laid. However, publicly reviving the option of transiting
Turkmen gas through Iran just days before returning to the
negotiating table with the Azeris does allow the Turks to
signal that it has alternatives to Azeri gas and to Azeri
transit.









JEFFREY

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