Cablegate: Turkey: Important, but Tentative, Step On Natural

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

Sensitive But Unclassified. Please handle accordingly.

1. (SBU) Summary: In a possible step forward on long-delayed
gas sector liberalization, the Turkish State Pipeline
Company BOTAS announced a tender for six of its natural gas
import contracts in November. Although legal obstacles may
eventually require that the tender be switched to gas
volumes, rather than contracts, the companies now expressing
interest seem to be positioning themselves for that next
step. In the context of President Putin's visit December 5-
6, the press has reported widely on Russian interest in
investment in natural gas distribution and transit in
Turkey. End Summary.

Legal Framework

2. (SBU) The 2001 Natural Gas Market Law requires BOTAS to
gradually transfer its gas import responsibilities to the
private sector through a program of tendering contracts
between BOTAS and foreign suppliers, such as Russia's
Gazprom and Iran's NIGC. Under the arrangement, BOTAS was
supposed to transfer 10% of its total contract amounts each
year starting from 2002, targeting a market share of 20% by
2009. However, BOTAS has so far failed to transfer any
contracts to the private sector, claiming it was impossible
due to confidentiality and take-or-pay clauses in the
agreements and the likely reluctance of suppliers to release
sovereign guarantees. In July 2004, the GOT submitted a new
draft law to the Parliament that would have amended the 2001
law in support of BOTAS' position, and also aimed at
maintaining BOTAS' monopolistic structure. The private
sector harshly criticized the draft and succeeded in having
the GOT withdraw it from the Parliament.

3. (SBU) In response to private sector urging and a recent
EU Progress Report's recommendations, the GOT decided to go
ahead with the contract transfer tender, even though a World
Bank report on the gas sector supported a switch to a "gas
volume release" model whereby entirely new lot contracts
would be negotiated between foreign gas suppliers and
private Turkish importers. BOTAS tendered a total of 16 BCM
of its gas imports from Nigeria, Algeria, Iran and Russia,
corresponding to 64% of Turkey's 25 BCM natural gas
consumption projection for 2005. Even if the actual
transfer of the contracts does not work out due to legal
obstacles or lack of approval from suppliers, tender
participants may expect their interest in contract transfer
to position themselves for a likely switch to bidding on gas
volume lots.

BOTAS Perspective

4. (SBU) In a meeting with Econoff and Econ Specialist on
October 6, BOTAS Natural Gas Purchase Director Arif Akturk
criticized the 2001 Natural Gas Market Law for setting
unrealistic targets. Akturk cited several problems related
to the contract transfer model stipulated by the law.
First, he said that since most of the contracts were based
on inter-governmental agreements -- "non-disputable" by law
-- suppliers would not be willing to give up their sovereign
guarantees and re-negotiate their contracts with a new
private entity. Akturk stated that the take-or-pay
liabilities in long-term contracts were another major
problem for potential private sector buyers. The BOTAS
Director was more optimistic about switching to the
alternative of "gas volume release", whereby BOTAS would
keep its contracts with its suppliers and sign a separate
contract with private companies.

Private Sector Interest

5. (SBU) Press reports claimed several international and
domestic energy companies, including BP, Shell, Statoil,
Unit International, Koc Group, Sabanci Group and Bosphorus
Gas, were interested in BOTAS' contract transfers. Econoff
and Econ Specialist met with Shell Turkey Director Nusret
Comert on November 9 to discuss the gas tenders. Comert
confirmed his company's interest in BOTAS' gas release, but
thought volume release would be a more realistic method than
contract transfer. Comert fully supported the GOT's stated
goal of liberalizing its gas sector, but thought that
reducing the state import share to 20% in a few years was an
extremely ambitious target for any country. Comert believed
BOTAS was likely to fail in transferring its gas contracts
with this tender, but noted the possible exception of
Bosphorus Gas, in which Gazprom has a 40% ownership share.
He observed this could offer it an advantage in the three
export contracts with Gazprom tendered by BOTAS. (Note:
BOTAS requires potential bidders having existing relations
with any one of BOTAS' suppliers to receive the Competition
Authority's approval to participate in the tender. Sector
representatives comment the Competition Authority would not
have a problem approving Bosphorus Gas. End Note)

6. (SBU) In a separate meeting, BP Business Development
Director Oktay Sen identified several uncertainties and
potential legal problems with respect BOTAS' tender, so BP
had not yet decided to participate in the tender. Sen
commented that an apparent BOTAS requirement for companies
to bid for the contract transfer tender in order to be able
to participate in potential subsequent volume release
process was unusual and problematic. Moreover, Sen said
that in effect the current tender is explicitly for the
"right to negotiate" with BOTAS' purchase contract partners
(i.e., Russia) without knowing specific contract terms.

The Russians are Coming

7. (SBU) The tender announcement comes against the backdrop
of the December 5-6 visit of President Putin. Embassy
contacts and the press have noted Russian interest in
signing a MOU with BOTAS expressing Gazprom's intention to
invest in Turkey's energy sector given its current gas
sales, specifically in natural gas distribution, gas
storage, gas transmission within and beyond Turkey, and a
potential LNG terminal in Ceyhan. BOTAS' Akturk said
Gazprom's taking over a significant portion of BOTAS' gas
imports from Russia, possibly through participation in
multiple companies, could pose risk of undue influence in
the market. The World Bank report notes the possibility of
unfair competition by Gazprom - the world's largest gas
producer, which has developed a strategy for expanding
downstream into European gas markets. While Gazprom has
shown flexibility in revising existing take-or-pay contracts
with Turkey, Russia may view its economic interests to be
compromised by the development of alternative gas transit
projects across Turkey.

8. (SBU) Comment: The gas tender announcement constitutes a
concrete step in the right direction. Despite confusion and
criticism with respect to BOTAS' two different gas release
models, there seems to be considerable interest from
companies. As existing dominant gas supplier, Russia is a
natural partner for opening up Turkey's gas market.
Turkey's regulatory and competition bodies will have to
remain vigilant to safeguard the transition to healthy
competition and to avoid undue influence from the dominant
supplier Gazprom. End Comment.


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