SCENESETTER FOR SPECIAL ENVOY MORNINGSTAR: FOURTH U.S.-TURKEY ENERGY WORKING GROUP MEETING

C O N F I D E N T I A L ANKARA 001692

SIPDIS

DEPARTMENT FOR S/EEE RICHARD MORNINGSTAR

E.O. 12958: DECL: 11/23/2019
TAGS: ENRG EPET PREL TU
SUBJECT: SCENESETTER FOR SPECIAL ENVOY MORNINGSTAR: FOURTH U.S.-TURKEY ENERGY WORKING GROUP MEETING

REF: ANKARA 1566

Classified By: Amb. James Jeffrey for reasons 1.4 (b,d).

SUMMARY
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1. (C) Over the past several months, Turkey has been actively
exploring its energy options--from Azerbaijan and Russia to
Iran and Qatar (reftel). As the GoT prepares next steps in
several areas of its energy relations, your bilateral meeting
with Energy Minister Yildiz and the fourth round of the
U.S.-Turkey Energy Working Group will be good opportunities
to remind Turkey of key points of concern for the U.S. and
the international community.

POINTS TO RAISE
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2. (C) You should raise the following points during the
Working Group meeting:

--Conclusion of a fair, transparent gas pricing and transit
agreement with Azerbaijan will jump start the Southern
Corridor and help with Azeri-Armenian relations. The Turks
understand the urgency and, by all indications, are serious
about reaching an agreement soon. Encourage them to identify
the specific areas in which we can help the process. (para 4)

--Development of Iraq's energy sector is a shared priority
for the U.S. and Turkey. Expect to hear ideas of how to
deepen our cooperation in working toward this goal. (para 7
and 8)

--Turkey should be cautious of the Iran Sanctions Act as it
considers potential Turkish Petroleum Company (TPAO)
investment in Iran's energy sector. (para 9)

--The U.S. has a sincere interest in having Turkey choose the
best possible technology to meet its needs for nuclear power
generation. (para 10)

WATCH OUT FOR
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3. (C) The Turks are likely to raise the following points:


--Further assurances that negotiations with the Azeris will
be concluded soon without any concrete progress toward doing
so. (para 4)

--Interest in acting soon to secure an oil and/or gas field
in northern Iraq. There is some concern in the GoT that
Turkey is missing out on opportunities while waiting for
passage of the Iraqi Hydrocarbons Law. (para 7 and 8)

--Expectation that some Iranian gas deals will be excluded
from U.S. sanctions because Europeans need the gas and
because the deals would be useful as a bargaining chip in
U.S.-Iranian negotiations. (para 9)


Caspian Gas
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4. (C) For many months the Turks have been telling us they
are close to reaching agreement with Azerbaijan on Shah Deniz
gas pricing and transit. The increased specificity with
which they have made this claim in recent weeks leads us to
believe it is now more than just wishful thinking. All of
the officials with whom we have spoken recently have stressed
that they understand the urgency of concluding this deal, and
most have expressed optimism that it will happen soon.
Energy Minister Yildiz told Amb. Jeffrey and Mark Parris a
delegation would travel to Baku for further negotiations the
week of November 23, and he was hopeful significant steps
would be taken before PM Erdogan's December 7 visit to
Washington. For the first time, Yildiz said Turkey may be
flexible on price in order to reach agreement. He has
traveled to many potential supplier countries in the past
several months and has concluded that no other deals can go
ahead until the agreement with the Azeris is decided. Other
officials have told us PM Erdogan wants an Azeri deal in hand
for his next visit to Moscow, expected sometime later this
year or in early 2010.


5. (C) Turkish interest in Turkmen gas remains strong. Hakki
Akil, the newly appointed deputy undersecretary for economic
affairs at MFA, believes the Turkmen now realize they need a
third alternative--other than Russia and China--for gas
exports, and they may decide Turkey and Europe are that
alternative. On October 26 Turkey and Iran signed a
memorandum of understanding that included transit of Turkmen
gas through Iran to Turkey, reviving a decade-old proposal.
The item comprises just a couple sentences in the MOU,
however, and includes no detail. MFA officials have told us
Iran is not their preferred route, and some are skeptical
Iran would allow Turkmen gas to transit if it cannot export
its own gas to Turkey. In a meeting with econ counselor
November 2, TPAO President Mehmet Uysal speculated a swap
would be arranged: Iran would import Turkmen gas in the north
and export Iranian gas to Turkey from the south, although MFA
officials maintain their preference remains for Turkmen gas
to transit the Caspian. The Turks are exploring options to
do so without breaching the territory demarcation dispute.

Domestic Factors
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6. (SBU) Although supply for the domestic market continues to
be the top objective in Turkey's energy dealings, the country
has seen a significant drop in demand for gas due to the
economic crisis and the rise in prices as the automatic
pricing mechanism has taken effect over the past year. This
fall in demand, combined with deficiencies in the State
Pipeline Company's (BOTAS's) infrastructure, have left Turkey
facing sizable take-or-pay obligations--as high as USD 2
billion for 2009 and potentially reaching a cumulative 14
billion cubic meters (USD 3.5 billion assuming an average
price of USD 250/thousand cubic meter) in 2010, according to
some sector analysts.

Iraq
--------------


7. (C) Turkish government and industry representatives
repeatedly indicate that Iraqi energy is a priority. In a
November 18 meeting, Yildiz stressed to the ambassador that
Turkey wants a field in Iraq, preferably from the central
government. He noted that the private sector, however, is
very anxious to go into northern Iraq and many feel Turkey is
being excluded from some of the best offerings because it is
not dealing now with Erbil. (Note: Although Yildiz did not
offer details, he most likely meant the GoT wants a field in
Iraq for Turkish Petroleum Company (TPAO),as it was the only
Turkish company found eligible to bid on Iraqi tenders.)


8. (C) The Turks realize that development of a national gas
system in Iraq would help Turkey, as it would address
infrastructure development and determine Iraq's own energy
needs, thereby clarifying export potential. MFA officials
have indicated they would like to share some ideas with us at
the Energy Working Group meeting about deepening our
cooperation on Iraqi energy development. We have indicated
we would be receptive to their suggestions.

Iran
--------------


9. (C) In November 2008, Turkey and Iran signed a one-year
memorandum on energy. In October this year, they agreed to
extend the MOU by three months to mid-February. The MOU
covers three items: transit of Turkmen gas (mentioned above),
import of Iranian gas for Turkish and European markets, and
TPAO development of South Pars gas field blocks. The
three-month extension was made to allow more time for TPAO
and Iran to come to agreement on details of the third item.
Uysal, however, has low expectations of reaching agreement
but told us TPAO will continue the talks at the GoT's
request. Uysal also told us that both the Iranians and the
Europeans expect the South Pars gas field will be exempt from
U.S. sanctions because Europe needs the gas and because a
deal could be a useful bargaining chip the in the
U.S.-Iranian negotiations. You should dispel this assumption
if raised.

Nuclear Tender
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10. (C) With the now final decision to cancel the nuclear
tender won by the Russian-led consortium, the GoT is
preparing to tender two nuclear plants at the same time, in
Akkuyu and Sinop. Yildiz told the ambassador they would

expedite the tenders, as he wants the projects to begin in

2010. The ambassador told Yildiz we want Turkey to choose
the best technology for its needs, whichever company provides
it. In prior conversations, Energy Ministry officials have
told us any new tender would have a public-private structure,
completely different from the canceled tender. When asked by
the press about the new tenders, Yildiz said, "let's not call
it a 'tender process,' but a 'process.'" According to Faruk
Demir, an energy sector advisor close to the government, such
comments may allude to a plan whereby the GoT would create a
new public nuclear power company that would invite various
foreign private companies to take part in joint projects.

Renewables
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11. (C) Draft legislation currently in parliament would amend
the existing renewable energy law to include higher and
differentiated feed-in tariffs for plants that go into
operation before the end of 2015. The parliament is not
expected to pass the legislation this year, however, and
Deputy PM Babacan has raised objections to the overall cost
of the legislation--particularly the solar tariffs--both for
public finances and for the GoT's overall aim of lowering
energy costs in Turkey. Analysts expect the solar tariffs
will be revised downward, likely to levels too low to spur
investment, but they do not expect significant changes to the
other tariffs proposed in the current draft.

JEFFREY

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