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Cablegate: Turkey Steam Energy Conference in Istanbul -

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

UNCLAS SECTION 01 OF 03 ANKARA 006678

SIPDIS

SENSITIVE

USDOC FOR NEWMAN AND FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ENRG EPET EINV EWWT TU
SUBJECT: TURKEY STEAM ENERGY CONFERENCE IN ISTANBUL -
LIBERALIZATION AND REGIONAL CHALLENGES AND OPPORTUNITIES

REF: A. ANKARA 6195
B. ANKARA 6479

1. (SBU) SUMMARY: A well-attended energy conference in
Turkey provided expressions of commitment on the part of the
government to move forward on energy liberalization, but
failure to articulate next policy, legislative, and
regulatory steps. The private sector is eager to move ahead
and take advantage of potential investment opportunities, but
is frustrated that the liberalization process and timing
remain unclear. Conflict between the Energy Ministry and the
Energy Market Regulatory Authority (EMRA) contribute to the
lack of clarity. Because of long lead times for energy
project finance and construction, Turkey may face a shortage
of electric power generation capacity in 3-5 years if it
fails to foster a positive investment environment now. END
SUMMARY.

2. (SBU) Embassy Energy Officer David Young and Economic
Specialist Aysem Sargin attended the fourth STEAM (Strategic
and Technical Economic Research Center) sponsored "Energy
Arena" in Istanbul November 23-24. STEAM has established
itself as one of the premier sponsors of energy sector
conferences in Turkey and the session was well attended by
high-level officials from the GOT (Energy Minister,
Undersecretary, Dep U/S, MFA, TPAO, etc.) and the private
sector (Shell, BP, Chevron-Texaco, etc.) Overall, government
officials expressed commitment to energy liberalization,
while private sector reps expressed strong interest, but
frustration with continued questions on timing and process.
Regional issues, including East-West Corridor and Iraq
linkages were major topics.

Electricity
-----------

3. (SBU) The biggest domestic issues on participants' minds
were the prospective liberalization and privatization of
Turkey's electric and natural gas distribution networks.
While Turkish officials stressed their commitment to move
forward (Budak Dilli, DG Energy Affairs, MENR, was
particularly impassioned on the topic), private sector
players were frustrated by the many delays and lack of
clarity. Despite twenty municipal distribution networks for
electricity distribution having been identified, there have
still been legal and regulatory delays. The World Bank
electricity liberalization road map was viewed as very
helpful, but again implementation has been delayed because of
gaps in legal and regulatory underpinning. Many licenses
have been granted for electricity production, but, here too,
there have been delays in implementation. There was great
interest from the private sector in possible privatization of
EUAS (the state electricity production company), but still
questions on process and timing. (The most likely approach
would be bundling of small, regional groups of diverse energy
type facilities.)

Natural Gas ) Volumes Not Contracts Transfer?
---------------------------------------------

4. (SBU) In his speech, Energy Minister Guler emphasized
increased interest in renewables and nuclear (he recently
announced a desire to put in place multiple power plants), as
well as the recent tenders for transfer of BOTAS natural gas
take or pay purchase contracts to private companies (septel).
Although there are press reports of significant interest,
private comments indicated skepticism on whether the tenders
will succeed and questions about the exact rules and process.
In effect, the current tender is for the "right to
negotiate" with BOTAS' purchase contract sales partners
(i.e., Russia) without knowing confidential existing contract
terms. Many observers expect legal obstacles may force
Turkey to opt later to selling gas volumes via tenders,
rather than the underlying gas contracts. Public expression
of interest may be jockeying for the presumed next step of
transfer of gas volumes. There were also concerns expressed
in the corridor about Bosphorus Gas having insider knowledge
or position in the tender process because of significant
ownership from Gazprom (forty percent).

Russia Connection
-----------------

5. (SBU) BP officials also privately expressed concerns that
some expiring Russian contracts might be extended,
potentially putting at risk the procurement of Shah Deniz gas
from Azerbaijan. Separately, the GOT has tendered nineteen
contracts for municipal natural gas distribution. Russian
entities have indicated interest in these. (Note: There will
be incentives for GOT and GOR to find energy deliverables in
advance of President Putin visit December 5-6. End Note)
Although, the natural gas distribution privatization process
is still underway; many contacts felt pre-qualification
procedures have not been sufficient, so it is unclear if
early winners can achieve their commitments. (Note: The
World Bank and GOT released a natural gas sector strategy
paper in September, citing domestic liberalization as
critical from a number of perspectives, including realization
of regional transit opportunities.)

Electricity Export to Iraq
--------------------------

6. (SBU) Many discussions moved beyond domestic
liberalization to regional issues. Energy Undersecretary
Demirbilek privately blamed EMRA (Energy Market Regulatory
Authority) for the Karadeniz Company's problems in exporting
electricity to northern Iraq, including excessive costs for
purchases of electricity off the grid (Ref A). (Note: There
was general and frequent "bashing" of EMRA at the conference.
End Note.) Karadeniz was the main conference sponsor, which
earned them a seat on a panel to describe their challenges in
implementing their "power for friendship" program with Iraq.

Bosphorus Bypass
----------------

7. (SBU) MFA DDG for Energy Hakki Akil used the conference
as a platform to articulate the Bosphorus bypass dilemma and
the value of "Voluntary Principles" as a constructive
public/private approach for encouraging transit of oil
through pipelines "as long as it is commercially feasible",
as an alternative to shipping through the Turkish Straits.
While Akil applauded the new VTS (Vessel Transit System) as a
great addition for safety, he emphasized the importance of
working together to realize oil bypass pipeline solutions.
As an example of a country limiting tanker traffic for safety
reasons, he pointed out that Italy has forbidden passage of
oil tankers between Sardinia and the mainland. Akil
rearticulated support for Samsun-Ceyhan as the best bypass
option, given existing infrastructure and environmental
concerns about trans-Thrace proposals. There were some
private comments in support of the Voluntary Principles, but
also questions about next steps (who actually signs? how to
engage Russians?). On another topic, Akil noted that in
order to avoid succumbing to the pressure of connecting to
the large gas reserves in Iran, there should be collective
efforts to link with Turkmenistan.

8. (SBU) In BP rep Mike Bilbo's public comments, he stressed
the environmental standards set by BTC, noting the intense
NGO pressure which had come to bear on the project. Citing
Alaska, he noted that using pipelines over tankers was
becoming a more accepted solution for moving large quantities
of crude oil to markets. With respect to BTC, he noted that
there was no room to relax, now that construction was nearly
complete; the project would be operational fifty plus years
and would require consistent diplomatic efforts.

9. (SBU) In an opening speech and CNN Turk interview, Ankara
Energy Officer Young stressed the consistency of U.S.
regional energy policy, strong support for liberalization and
contract sanctity and a Bosphorus bypass (but we don't pick
the winner; GOT should move forward on awarding timely
permits to let investors take on the risk), and strong U.S.
opposition to links to Iran. Apart from an "agreement to
disagree" on policy with respect to Iran, there was broad
acceptance of U.S. regional energy policy and recognition of
the value of the U.S. as an actor in moving the East-West
Energy Corridor forward.

10. (SBU) Comment: Although interested in liberalization and
privatization opportunities, companies are skeptical and
frustrated about delays in filling in the blanks of the new
regulatory and legal structure for the energy sector. Lack
of clarity resulting in further delays in liberalization is a
clear disincentive to new investment. This could put Turkey
at risk in 3-5 years when the GOT and most observers estimate
that there will be a shortage of electricity generation
supply in Turkey. End Comment.

11. (U) Baghdad minimize considered. EDELMAN

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