SCENESETTER FOR 5TH US-TURKEY ENERGY WORKING GROUP

C O N F I D E N T I A L ANKARA 000316

SIPDIS

STATE FOR EEB/S-EEE RICHARD MORNINGSTAR
DOE FOR OFFICE OF RUSSIAN AND EURASIAN AFFAIRS: LANA EKIMOFF

E.O. 12958: DECL: 02/24/2020
TAGS: ENRG EPET PGOV PREL TU
SUBJECT: SCENESETTER FOR 5TH US-TURKEY ENERGY WORKING GROUP
MEETING

REF: A. ANKARA 195

B. ANKARA 127

Classified By: DCM Doug Silliman for reasons 1.4 (b,d).


1. (C) In preparation for the U.S.-Turkey Energy Working
Group meeting to be held in Washington on March 1, we would
like to update you on where our relationship with Turkey
stands, where Turkey's relationships with other key countries
stand, and how these relationships are affecting energy
issues.

WHAT TO RAISE:

-- We realize that the current political environment poses
challenges to negotiations with the Azeris on Shah Deniz, but
we urge you to continue push toward an agreement. (paras 3-5)

-- The U.S. commitment to Iraq remains strong, as does our
interest in cooperating with you to help develop Iraq's
energy sector. (paras 6-7)

-- The U.S. has a sincere interest in having Turkey choose
the best possible technology to meet its needs in future
solicitations for nuclear power generation. (para 8)

WATCH OUT FOR:

-- Claims that Iraqi gas can replace Azeri for the Nabucco
project. While this may be possible at some point, there is
as yet no Iraqi gas that is definitely available for export
in the time horizon needed to finance the Nabucco project.
(paras 6-7)

-- Claims that Turkey must pursue the option of expanding its
natural gas dealings with Iran, even if Iran is not the GOT's
preferred option as a source or transit state for Turkmen
gas. (paras 9-11)



2. (C) With the exception of the nuclear plant deal with
Russia, and despite a flurry of visits to various countries,
the Turks have made little progress on energy affairs since
the last Energy Working Group (EWG) meeting in December 2009.
Politics, both domestic and international, appear to play an
increasingly significant role in energy decisions--or
reluctance to make decisions. Three of the GOT's top areas
of foreign policy concern -- Armenia/Azerbaijan, Iran, and
Iraq -- have direct connections to energy, but there is no
indication that increased Turkish diplomatic efforts in these
countries have led to any progress on the energy front.

Turkey-Armenia, and Azerbaijan
--------------


3. (C) Mindful of the Turkish public's sympathies with their
"cousins" in Azerbaijan and the parliamentary opposition's
desire to make political hay by criticizing Turkey-Armenia
reconciliation, the government has been unwilling to seek
ratification of the Turkey-Armenia protocols without some
progress on Nagorno-Karabakh. That progress is not
forthcoming and, though we refuse to accept linkage of the
protocols to the Minsk Process, the former's
failure would likely damage, if not derail, the latter.


4. (C) We believe that, absent something the Turks can define
as progress on Nagorno-Karabakh, or a wink for Aliyev,
Erdogan could not get all his own MPs, let alone the
opposition, to vote to ratify the protocols. If Turkey does
not move forward on the protocols, Turkey and Azerbaijan may
look for ways to reaffirm a strong, mutual relationship and
energy deals could be fast-tracked. However, a deterioration
of U.S.-Turkey relations following any failure of the
Turkey-Armenia reconciliation process could reinforce
Russia's energy relationship with Turkey, to the detriment of
the Southern Corridor and Turkey's own interest in reducing
its over-dependence on Russia for energy.


5. (C) For now, Turkey-Azerbaijan negotiations on Shah Deniz
gas continue but are seeing minimal progress. On February 3,
Energy Minister Yildiz told the Ambassador the parties had
reached agreement on price for Shah Deniz I gas but had not
agreed on Shah Deniz II price or volumes, or on transit fees
(reftel A). The Turks' perspective on the negotiations has
not changed: they believe they have made reasonable offers
to the Azeris and are doing all they can to move the process
forward. They also believe politics related to the Armenia

protocols, and not commercial concerns, are preventing the
Azeris from reaching a final agreement.

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


6. (C) In FM Davutoglu's words: "Iraq is an existential
issue for Turkey." From the USG's perspective, Turkey has
been, by far, the most constructive of Iraq's neighbors in
contributing to its stability. Last October, Erdogan led a
delegation of eight of his ministers to Baghdad where they
signed nearly 50 MoUs and agreements that laid legal
foundations for cooperation on counter-terrorism, commerce,
hydrocarbons trade, transportation infrastructure
construction, health care, and water management. As they
have made clear to us at prior EWG meetings, the Turks are
eager to work with us to help develop Iraq's energy sector as
a key element of the country's economic stability.


7. (C) Turkish companies' interest in the Iraqi energy sector
remains strong, though no Turkish company has succeeded in
obtaining a gas export license from Iraq or import license
from Turkey, and the one Turkish company exporting oil from
Iraq has yet to be paid by Baghdad for its services. The GOT
continues to push the idea that Iraq should be a primary
source of gas for Nabucco, though there is little indication
Iraq will be able to provide suitable volumes in the
necessary timeframe, especially as the Hydrocarbons Law and
other necessary legislation on revenue sharing and the Iraqi
Oil Ministry and state hydrocarbons company are delayed until
after elections and the formation of a new government.

Future Nuclear Power Plant Projects
--------------


8. (C) Yildiz also told the ambassador the GOT still plans to
build a second nuclear power plant in Sinop, which they will
open for bids. He said they have formed a team to work on
regulatory, safety, and other aspects of nuclear power.
Members of the team are in touch with relevant U.S. agencies,
but Yildiz said they would also welcome an opportunity to
send a group on a USTDA orientation visit on peaceful nuclear
power generation.

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


9. (C) Turkey remains profoundly fearful of the collateral
damage to its economy that could result from sanctions or an
Iranian decision to retaliate by throttling back its
hydrocarbons exports to Turkey. Turkey imports 36 percent of
its oil from Iran and roughly 11 percent of its natural gas
(2008 figures). If Iran were to cut off that supply, some
Turks could grow cold in their homes and angry at their
government.


10. (C) Hoping to forestall sanctions, Foreign Minister
Davutoglu has repeatedly attempted to mediate a compromise
between the Iranians and the world community, most recently
on a February 16th visit to Tehran. We have mildly
discouraged his shuttle and telephone diplomacy, but his
efforts have not resulted in a real shift in Iranian policy.


11. (C) The GOT also continues to negotiate with Iran for
Turkish Petroleum Company (TPAO) to develop two blocks of the
South Pars gas field and it continues to explore the
possibility of importing Turkmen gas through Iran. However,
neither of these pursuits is moving forward quickly. TPAO GM
Mehmet Uysal has been very downbeat on reaching agreement on
South Pars. He has been careful to note that TPAO has not
signed any agreement with Iran, that TPAO would make a report
to the GOT in February on South Pars, but that the GOT would
make the decision on whether to continue. No significant
developments have arisen regarding transit of Turkmen gas to
Turkey via Iran since the three governments announced their
mutual interest in such an arrangement in early January in
Turkmenistan (reftel B).

Russia
--------------


12. (C) One shift that has occurred in Turkey's energy
affairs since the December EWG meeting is the re-promising of
Turkey's first nuclear power plant project to Russia. In a
January 3 meeting with the ambassador, Yildiz confirmed the
project would be given to Russia through an intergovernmental
agreement (the legal equivalent of a treaty that would allow

the deal to proceed without any public tender). In other
energy matters with Russia -- the Samsun-Ceyhan oil pipeline,
possible refinery construction, Southstream -- talks continue
but with no changes or milestones of note in recent months.

Domestic Energy Issues
--------------


13. (C) Little has changed since December on domestic energy
issues. In February, the Privatization Administration
accepted bids on another four electricity distribution
regions. The winning companies are now working through the
full approval process. Analysts now expect that incentives
for solar energy will be dropped from the renewable energy
bill before it passes due to continued objections from Deputy
PM Babacan over the cost. We have heard no estimates,
however, of when the legislation will be passed. The natural
gas law also remains stalled. Ibrahim Arinc, an advisor at
the Ministry of Energy (MENR),told us the law and
restructuring of the State Pipelines Company (BOTAS) is a
priority for the ministry, but he expects no movement on the
law until at least the second half of 2010. The quarterly
review of the price of natural gas was scheduled for
February, and we expected a price increase permit back
payment of higher-priced Shah Deniz I gas already delivered
over the past two years. PM Erdogan said he personally would
announce any price increases, but there has been no
announcement of a price change. We suspect PM Erdogan is
wary of announcing a gas price increase amid the other issues
now challenging his popularity and with elections approaching.


14. (C) Also due to domestic politics, it appears a split has
developed between Erdogan and Yildiz in recent months and
Erdogan has become directly involved in decision making on a
growing number of energy matters. As the political rivalry
between Erdogan and Gul has grown, many political analysts
name Yildiz as "a Gul man." Energy Undersecretary Kilci, who
will attend the March 1 EWG meeting, is generally considered
to be "Erdogan's man" at MENR. He also is the primary
proponent in the ministry for breaking up BOTAS.
Jeffrey

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