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Cablegate: Turkey Plans to Amend Natural Gas Market Law to Free Gas

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RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAK #2011/01 3251322
ZNR UUUUU ZZH
R 201322Z NOV 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 8065
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHIT/AMCONSUL ISTANBUL 5047
RUEHDA/AMCONSUL ADANA 3413
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 002011

SENSITIVE
SIPDIS

EEB FOR SPECIAL ENVOY FOR EURASIAN ENERGY GRAY
EEB FOR ENERGY COORDINATOR MANN
EUR FOR DAS BRYZA

E.O. 12958:N/A
TAGS: ECON ENRG TU
SUBJECT: TURKEY PLANS TO AMEND NATURAL GAS MARKET LAW TO FREE GAS
IMPORTS

REF: Ankara 1710

ANKARA 00002011 001.2 OF 002


1. (SBU) Summary: The GOT is expediting long-awaited legislative
amendments to liberalize the natural gas market in Turkey. Iran's
gas cut-off the past few winters, and increasing pressure from
companies wanting to enter the market pushed the Energy Ministry to
prepare a Gas Sector Strategy Paper that proposes amending the 2001
Natural Gas Law by lifting state pipeline company BOTAS' monopoly in
gas imports and opening the way to its unbundling. The amendments
are expected to be sent to the Parliament by the end of this year.
If passed, they will make Turkey a more attractive market for gas
sales and give a boost to regional gas projects like Nabucco and
transit of Iraqi gas. But the GOT may have trouble selling the
advantages of liberalization to a skeptical Parliament, a public
already angered by utility price increases, and a defiant BOTAS.
End Summary.

2. (SBU) Ministry of Energy and Natural Resources (MENR) Supply
Security Branch Director Ozturk Selvitop said the Ministry is
working on a Gas Sector Strategy Paper, which he hoped would be
finalized by the end of 2008. Selvitop said the 2001 Natural Gas
Market Law must be amended to facilitate market liberalization.
BOTAS still dominates the market, and only one of the four private
companies who won the right to take over 4 bcm of BOTAS's contracts
(approximately 10% of the total gas market) in 2005 has been able to
get an import and trading license. Selvitop said the Strategy Paper
will propose amendments to the natural gas law to: 1)lift the ban on
BOTAS signing new purchase contracts; 2) remove all restrictions on
gas imports by the private sector (Note: the Law now bars companies
from signing purchase contracts with supplier countries who Qready
have contracts with BOTAS. End note.); and 3) unbundle BOTAS, in a
way that the company keeps its monopoly position in transmission,
but becomes a market player in gas import and trading. Selvitop
noted these amendments could face opposition in Parliament.

3. (SBU) Private sector companies may be behind MENR's initiative to
amend the law. Kazim Turker, CEO of large construction company
Turkerler Group, told us his company's project to build a new gas
pipeline to import Iraqi gas has won the approval of high-level GOT
officials including the PM, and is awaiting legislative changes
before a gas import/export license can be granted (reftel). This
project cannot go forward without amendments to the Natural Gas
law.

4. (SBU) E.ON Ruhrgas Turkey General Manager Cenk Pala, a former
Department Head at BOTAS, said the 2011 expiration of Russian-BOTAS
West-Line 1 contract for 5-6 BCM of natural gas could be an
opportunity for private companies to make a deal with Russia and
bring gas to the Turkish market. Pala said E.ON is looking to
contract its own supply for an 800MW gas-fired power plant his
company plans to build in Denizli. Given the gas shortages in
Turkey the last few winters and BOTAS' financial problems, Pala
claimed BOTAS does not have much choice but to accept more players'
in the gas market. The critical article in the Natural Gas Market
Law is the one preventing private companies from importing gas from
source countries with which BOTAS has existing contracts. "This
practically removes all the options for private companies," said
Pala. Several companies, including his own, are waiting for these
amendments before signing contracts with source countries and
securing gas for their energy generation projects.

5. (SBU) In public comments at the STEAM Energy Conference on
November 13-14, MENR Undersecretary Selahattin Cimen and Energy
Market Regulatory Authority (EMRA) President Hasan Koktas both
supported amending the Natural Gas Market Law and reiterated their
commitment to take the necessary steps to form a well-functioning
gas market. Shell Gas Turkey GM Nusret Comert, who also gave a
presentation at the conference, said the sector wants to see a
reduction in BOTAS' market share. Comert added that the sector
welcomed the GOT's recent decision to implement a cost-based pricing
strategy, which he thought was an encouraging step for the
companies. He urged the GOT to unbundle BOTAS, and make the company
a fair player in a competitive market. (Note: We understand Shell
is losing USD 9 million/year selling gas in Turkey. End note.)
Commenting on the proposed amendments, OMV Gas Turkey GM Oktay Sen
said BOTAS' pricing policies are a serious impediment to the
functioning of a free market. Sen noted that even after several gas
price increases this year, BOTAS' profit margin in the price formula
is zero. "There is no margin left for the private sector to
operate," said Sen, and commented that the upcoming amendments were
necessary but might not be sufficient to give the market a

ANKARA 00002011 002.2 OF 002


jumpstart.

6. (SBU) AKP MP Soner Aksoy, Head of the Energy Committee, supports
liberalizing gas imports as a way to increase gas supply to Turkey.
However, others in Parliament seem less sure about the positive
effects of gas market liberalization. In a separate meeting, Ozgur
Guven, Advisor to the U.S.-Turkey Parliamentary Friendship Caucus
told us many MPs don't understand how opening the market will result
in more gas to Turkey since the regional pipelines that supply
Turkey will not change. We responded that liberalization could have
many positive effects, such a competition for gas prices and
services as well as increasing private sector interest in projects
currently under consideration like Nabucco, Turkey-Greece-Italy and
a northern gas route from Iraq that would bring more gas to Turkey.

7. (SBU) Comment: The GOT's attempt to liberalize its gas market is
a late, but positive step. Given Turkey's increasing energy demand
and BOTAS's financial difficulties, the GOT has little choice but to
open the market more, supported by the push by private sector
companies to enter the gas market. A more liberal gas market can
only help Turkey to meet its supply security concerns and help it
realize important regional projects like Nabucco and a northern gas
route from Iraq. But the GOT may have trouble selling the advantages
of liberalization to a skeptical Parliament, a public already
angered by utility price increases, and a defiant BOTAS. End
comment.


SILLIMAN

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