Cablegate: Gas Market Update From Emra and Botas

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

This cable is sensitive but unclassified, not for internet
distribution. Please handle accordingly.

1. (SBU) Summary. Turkey's ambitious program to liberalize
and privatize its natural gas market has stalled. The Energy
Market Regulatory Authority (EMRA) told us that it has
completed the necessary secondary regulations for the
implementation of the Natural Gas Law and has already issued
32 licenses to new market entrants. Despite the initial
progress, EMRA claims the transition to a competitive market
is delayed, and an amendment to the Law is necessary because
the Petroleum Pipeline Corporation (BOTAS), which currently
holds a monopoly in the gas market, is reluctant to reduce
its dominance in the sector. While admitting that BOTAS will
not meet its legal obligation to transfer a 10 percent share
of its import and wholesale obligations to private entities
every year, BOTAS officials explained that it faced
difficulties releasing gas contracts and complained that the
liberalization process was becoming political. Close
cooperation between EMRA and BOTAS remains key to successful
gas market liberalization. End Summary.

2. (SBU) In separate meetings, EMRA and BOTAS discussed
developments in gas market liberalization with Econoff and
Econspecialist. EMRA told us on September 29 that the pace of
liberalization in the natural gas market has slowed, although
the secondary legislation is in place and Turkey is in
compliance with the EU's Gas Directive. The Natural Gas Law
passed in May 2001, and EMRA had initially envisioned a
transiton period of 18-24 months to establish a competitive
market. Under the Law licenses are required in order to
engage in any natural gas market activity, and EMRA claims
that the licensing process only takes one month. As of
September 2003, 32 licenses have been issued: 8 for
compressed natural gas (CNG); 9 for imports; 3 for wholesale;
7 for distribution; 2 for transmission; and 3 for storage.

3. (SBU) EMRA grants distribution licenses (10-30 years)
through a tender process; all Turkish companies and
registered foreign companies are elibible to participate. The
Regulator is confident that it would be able to conclude
tender procedures for 19 cities in 2003 as planned; tenders
for Kayseri, Konya, Erzurum, Corlu, Gebze, Inegol, and
Catalca have been completed. According to EMRA's timeline,
construction of the facilities is to begin within 6 months of
receiving a license, gas deliveries should start within 18
months, and the companies have 5 years to supply all eligible
consumers. For example, the license for the Kayseri
facility was issued in June and construction began on October

4. (SBU) In the meeting on October 8, BOTAS was very
critical of the Natural Gas Law, claiming that the model
envisioned by this Law is unworkable for Turkey, arguing that
the Law should not be technical but should be a code of
practice. BOTAS told us that, in late September, its Board
approved a Network Code, which establishes a code of conduct
for all parties as the first step toward releasing gas
contracts to permit new private entrants to import,
wholesale, transmit, distribute, and store natural gas.
BOTAS is legally obligated to transfer 10 percent of its
market share annually until its wholesale market share is
reduced to a maximum of 20 percent by 2009, but cannot meet
the November 2003 deadline to start tranferring shares to the
market for a variety of reasons.

5. (SBU) Although BOTAS has the sole authority to release
gas contracts to buyers, most of these contracts have
take-or-pay obligations and are liabilities instead of
assets, making it difficult to find buyers. BOTAS also
claims that there are confidentiality issues that would
preclude tender nominees from viewing contract details
beforehand. Germany and Austria were cited as countries
facing similar problems liberalizing gas markets, and BOTAS
emphasized that these countries have recently opted to use
volume release instead of contracts to liberalize the market.
Some contracts with project finance, such as Blue Stream and
Shah Deniz, have debt-service issues, further complicating
any transfer. Given these complex contracts, BOTAS maintains
that it cannot release liabilities without agreement from
suppliers or partners. Another reason for the delay is that
suppliers are reluctant to deal with new market entrants with
an unproven record in the natural gas market, according to
BOTAS. Under the current system, suppliers only face
sovereign country risk since BOTAS is implicitly backed by
the GOT and many of the current import contracts are
state-to-state agreements; however, with market
liberalization suppliers would face additional business or
market risks that could raise costs.

6. (SBU) BOTAS claims that the World Bank understands the
problems with the Law and supports amendments to facilitate
market liberalization. The Energy Ministry is considering
legislative fixes: the Ministry had initially planned to
attach a clause to the pending Petroleum Law but has now
decided to draft a separate amendment to the Natural Gas Law,
according to BOTAS. The proposed amendment would extend the
deadline for tranferring shares, but BOTAS is also exploring
other clauses to alleviate gas release problems.

7. (SBU) BOTAS took the opportunity to respond to criticism
about the slow pace of natural gas market liberalization and
complained that the problem has become political. For
example, BOTAS objected to charges by some politicians and
EMRA's President that gas prices are higher because one-third
of the cost comes from BOTAS' financial and operational
costs. BOTAS contends that any buyer would face similar
overhead costs. BOTAS also noted that the current Turkish
government has reduced its reliance on natural gas and has a
preference for indigenous energy sources. As a direct
consequence, the State Electricity Generation Company (EUAS)
used only 2 billion cubic meters (bcm) of natural gas this
year as compared to 5 bcm in 2002. This helps to overstate
Turkey's gas surplus and complicates decisions on how to
assess and manage the domestic gas needs, according to BOTAS.

8. (SBU) Commenting on the domestic natural gas distribution
network, BOTAS told us that two existing distribution
networks, Bursa and Eskisehir were transferred to the
Privatization Administration for sale. BOTAS also criticized
EMRA for making price the most important criteria in the
tender process and granting concessions mainly to
construction companies, which may only be interested in
building the facilities instead of operating these networks
over the longer term. BOTAS emphasized that EMRA granted
tenders to contractors for as low as TL 100,000 (.04 cents)
per cubic meter, which is insufficient to lure prudent
investors to the gas market because distributors cannot make
a profit at such a low price when current retail prices are
about 2.5 cents per cubic meter in big cities. BOTAS
speculated that distribution companies eventually may levy a
surcharge to each household to recoup losses from the low
prices offered to win the tender. BOTAS also is concerned
about the guarantee letter of up to $2 million that EMRA
requires before granting the contract. With such a modest
guarantee requirement, BOTAS fears that these construction
companies would turn over the facilities to EMRA and walk
away from the deal if unable to recover costs due to low
prices. The guarantee letter would be miniscule compared to
the overall cost of running the facility at the given price
for the specified period.

9. (SBU) Comment. Relations between EMRA snd BOTAS appear to
be strained and close cooperation remains essential to
overcoming implementation hurdles and speeding up the pace of
natural gas market liberalization. End Comment.

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