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Cablegate: Turkey As the Hub in the East-West Energy Corridor

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

UNCLAS SECTION 01 OF 04 ANKARA 005719

SIPDIS

SENSITIVE

USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: EPET EWWT TU GA
SUBJECT: TURKEY AS THE HUB IN THE EAST-WEST ENERGY CORRIDOR
- BTC ON TRACK

REF: A. ANKARA 4892

B. ANKARA 4623
C. ANKARA 4443
D. ISTANBUL 1484
E. ANKARA 4421

Sensitive But Unclassified. Please Handle Accordingly.

1. SUMMARY: (SBU) The centerpiece of Turkey's growing role
as hub in the East-West Corridor, the Baku-Tbilisi-Ceyhan
(BTC) pipeline, is broadly on track and nearing completion.
Government of Turkey (GOT) Officials and BTC company
officials assert that BTC is on track at 80 percent complete
for mid 2005 oil flow at the Ceyhan terminus. GOT has still
not delivered permits on potential Bosphorus bypass projects,
but appears to favor Samsun-Ceyhan or expansion of BTC.
Turkey's pipeline company BOTAS is scrambling to build
domestic natural gas pipelines to provide for consumption
needs while facing an overhang of excess supply from
take-or-pay contracts. BOTAS' privatization of purchase
contracts faces internal opposition and has been delayed.
While dealing with the near-term surfeit of natural gas by
renegotiating terms with Russia and starting links to Greece,
GOT and BOTAS are working on grander prospects of transiting
gas to Europe (which would ultimately require additional
supply contracts). End Summary.

BTC on track in Turkey
----------------------

2. (SBU) GOT and BOTAS officials at all levels (including
Minister Guler to Secretary Abraham reported septel) assert
that the Baku-Tbilisi-Ceyhan (BTC) oil pipeline is 80 percent
complete and on track for mid 2005 oil flow at Ceyhan. When
pressed, officials note that construction in Turkey is "a
little" behind, but assert that BOTAS has resolved problems
contributing to past delays to bring construction broadly on
schedule. According to GOT officials, BOTAS (Turkey's
pipeline company and responsible for construction in Turkey)
took more direct control over three subcontractor segments in
Turkey and now only about 120 miles of Turkey's 620 miles of
pipeline remain to be welded. GOT and BTC officials note
that some questions linger about timely completion of pumping
station A in Turkey, which requires a gas spur for provision
of power, but insist that there is suitable contingency
planning to assure that this will not delay oil flow.
Officials project substantial completion by the beginning of
2005, followed by testing and three months to fill the
pipeline. BTC Officials note that filling could be expedited
by filling from both ends (assuming oil flow from the
infrequently functioning Iraq oil pipeline to Ceyhan).

3. (SBU) GOT and BTC officials note the need for all
interested parties to remain vigilant for continued and
timely construction in Georgia, where a work-stoppage
occurred in July and related discussions on pipeline security
in the environmentally sensitive Borjomi region continue.
Officials report no significant construction problems in
Azerbaijan. BTC celebrations are targetted for around May in
Baku and sometime thereafter in Ceyhan.

Movement on Bosphorus By-passes - Concerns about Trans-Thrace
--------------------------------------------- ----------------

4. (SBU) GOT officials proudly point at BTC as achievement
of the first "Bosphorus Bypass", although technically it does
not displace any oil currently transitting the Bosphorus.
With BTC near completion, GOT officials now express
commitment to facilitating the (next) Bosphorus Bypass(es).
GOT officials say they fully share USG principles that
realization of a bypass project be transparently based on
commercial feasibility and chosen by the market. They agree
with the principle of timely provision of conditional
licenses to facilitate companies securing through-put and
financing. However, in effect, the GOT has not been able to
reach internal agreement on route and environment issues in
respect to 4-5 applications for 2 routes solely within
Turkey, so the permit process remains stuck in the Council of
Ministers. There are two Trans-Thrace routes: 1) Thrace
Development Company (American Howard Lowe advocacy request;
Kazakh interests) applied June 2003 and 2) Anadolu
Construction/ Okan Tapan/ Transneft "copycat" route applied
June 2004. There is one serious Samsun-Ceyhan route
sponsored by Turkish Calik Energy with some participation by
American Universal Ensco. Reftels A-C provide background on
these projects.

5. (SBU) In response to the Thrace advocacy request, USG has
continuously emphasized that Thrace deserves a timely answer
to its thorough and long-standing application. GOT officials
have expressed strong concerns about environmental issues
raised by the Trans-Thrace projects, appearing to favor
Samsun-Ceyhan as less environmentally problematic and able to
use existing deep-water port structure at Ceyhan. In Embassy
Officers' most recent meetings, GOT officials have spoken in
favor of expanding capacity at BTC as a preferable option
(although this may not work as a near-term solution). BP
officials have estimated that the one million b/d capacity
could be increased to 1.2 million b/d with use of drag
reducing agent; 1.4 million b/d with larger pumps; and 2.0
million b/d with investment in three additional pumping
stations. Per septel USG has encouraged GOT to reinforce our
message to Kazakhstan and Azerbaijan to move forward on
realizing the Aktau spur from Kazakhstan to provide
incremental oil.

6. (SBU) Per Ref A Embassy officals at multiple levels,
including the Ambassador, voiced USG objections to the GOT on
the proposed "Voluntary Principles" on Bosphorus Bypass.
Although expressing admiration for the creative
public/private partnership concept of getting multiple
players together to engage the dilemma, the USG objected to
the commercially proscriptive approach and the (to date) lack
of engagement of the Russians. ChevronTexaco and others have
stressed the need for a separate and parallel approach to
emphasis on best practices on maritime safety. The MFA
author of the "Voluntary Principles", Hakki Akil, will be
posted as Ambassador to Turkmenistan, so it is not clear what
and when the next step will be. The GOT sought to engage the
Russians, but have not officially included them yet. BP has
told Embassy Officials that the company is supportive of the
Voluntary Principles (noting that BP is potentially
temporarily exacerbating the problem with TNK-BP involvement
in Odessa-Brody reversal schemes and serious oil/gas
exploration in the Black Sea). Embassy understands that some
companies met recently in London with ChevronTexaco to
evaluate Bosphorus Bypass proposals, which is a positive sign
of movement and commercial attention to the issue. To date,
none of the Turkey proposals has direct involvement or
commitment from a serious oil shipper. The Samsun-Ceyhan
proposal (like all of them) claim to have serious interest
from a number of shippers.

7. (SBU) Istanbul Ref D reports on a BP's mariner advisor's
tanker voyage in January 2004, experiencing first-hand the
costs and risks of delays in the Turkish Straits due to bad
weather. While noting that in good weather the Bosphorus and
Dardanelles passage is not that difficult, given one-way
passage, the mariner offers a number of suggestions to
optimize passage and increase safety. He spoke highly of the
new Vessel Transit System (VTS) and the captains that board
the big tankers for strait passage. He perceived that the
concentrated anchorage practice for waiting ships
(particularly in bad weather; his was among 70 waiting
tankers at each end of the Dardanelles) posed a much greatest
risk (safety and security) than individual tanker transit
through the Bosphorus and Dardanelles. The mariner estimated
that companies faced a cost of 300-700 million usd from last
winter's delays, including the shut-down of a Caspian
platform.

The Coming Great Game is Natural Gas - But not from Iran
--------------------------------------------- -----------

8. (SBU) Turkey officials express strong commitment to
realizing the next big step in Turkey's role as hub in the
East-West Energy Corridor: natural gas. GOT officials have
regularly expressed priority commitment to facilitating
transit of gas from the Caspian. Construction on the South
Caucasus (Baku-Tbilisi-Erzurum) gas pipline to parallel the
BTC pipeline from Shah Deniz will begin next year for 2006/07
delivery (Turkey is to construct the Turkish portion). In
the short to medium term, Turkey faces a significant surplus
of natural gas from take-or-pay contracts from Russia and
Iran and LNG from Algeria and Nigeria (up to 15 billion USD
over 2005-2015 per the GOT, noting that earlier demand
forecasts have been scaled back). Turkey's biggest supplier
is Russia (older lines via Bulgaria and controversial newer
Blue Stream) which currently supplies 60 percent of Turkey's
gas. Turkey has addressed its surfeit of natural gas by: 1)
renegotiating its Blue Stream contract with Russia; 2)
attempting, without success, to gain a comparable
renegotiated deal with Iran; 3) BOTAS scrambling to expand
the domestic network and storage capacity, some by
privatization tenders, and some gaining Russian interest; and
4) gaining an export agreement with Greece, in combination
with longer-term hopes to supply significant gas to Europe
(Nabucco-Austria one possibility). While managing its short
and medium term exposure to a excess supply of gas, in the
longer term Turkey has to jockey for additional gas from the
Caspian and Central Asia (Shah Deniz 2, Turkmenistan, Iraq,
etc.).

9. (SBU) In response to the USG's repeated message to resist
Iran, Turkey has said that its near-term priority remains the
Caspian, but longer term, Turkey cannot impede big demand
from Europe and huge supply from Iran (and direct negotiation
between the two). GOT officials have described Iran as a
hard bargainer, entirely resistant to budging on their
take-or-pay contract terms, and wholly focused on securing a
long-term contract to transit gas to Europe. These
discussions failed at the time of PM Erdogan's trip to
Teheran in early August. Most recently, the Iranian
parliament passed a law which could prevent two Turkish
investments in Iran and President Khatami cancelled a visit
to Turkey. Turkcell had reportedly gained a private mobile
phone license and a Turkish/Austrian consortium, TAV, had
gained rights to operate Teheran airport; however, Iranian
hardliners, citing national security reasons, have put the
deals on hold (ref e). GOT officials have asked for USG help
on securing incremental gas from alternative sources like
Azerbaijan, Turkmenistan, and Iraq to provision European
demand.

10. (SBU) Turkey energy sector liberalization has faced
delays. BOTAS liberalization of purchase contracts faces
internal opposition and has been delayed. According to BOTAS
officials Russian and other contract providers will not agree
to transfer of contracts (looking to GOT as sovereign
guarantor and issues of confidentiality of contract terms).
While some progress on privatization of the domenstic natural
gas network is underway and could facilitate growth and
satisfaction of domestic demand; there may be a perception on
the part of the GOT that BOTAS amd TPAO (the Turkish oil
company) should remain in state hands and strong to be able
to compete internationally with Russian and other foreign
players. On the other hand, GOT's attempt to privatize the
state refinery company TUPRAS, which gained a viable tender
offer from a consortium led by Tatneft, is now tied up in the
legal system. Russian firm Gazprom has reportedly shown
interest in investing in Turkey's domestic distribution
networks. Turkey's challenge will be to make progress on
liberalization, while not ceding control to monopolistic
tendencies in Russia.

11. (SBU) Comment: Embassy will continue to closely engage
with the GOT on realization of the mutually endorsed dream of
Turkey as East-West Energy Corridor Hub. In order to
emphasize East-West, and to avoid Iran and over reliance on
Russia, coordinated and reinforcing engagement with
opportunities in Turkmenistan, Kazakhstan, Iraq, and others
will be necessary in promoting transit of oil and gas. In
the short-term, close dialogue and engagement between all
interested parties will be necessary to resolve the problem
of growing congestion in the Bosphorus Straits. In the
meantime, we will work with companies and the GOT to
encourage maximizing safe passage; unfortunately, GOT does
not have sufficient incentives now to do this. While the BTC
is happily near completion, continued attention is required
to assure timely oil flow. It ain't over until it's over.
End Comment.
EDELMAN

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