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Cablegate: Azeri Gas Arrives, Contract Issue Unresolved

VZCZCXRO3273
RR RUEHAG RUEHDBU RUEHDF RUEHIK RUEHLN RUEHLZ RUEHROV RUEHVK RUEHYG
DE RUEHAK #1709/01 1860502
ZNR UUUUU ZZH
R 050502Z JUL 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 2834
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHGB/AMEMBASSY BAGHDAD 0976
RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUEHIT/AMCONSUL ISTANBUL 2972
RUEHDA/AMCONSUL ADANA 2101

UNCLAS SECTION 01 OF 02 ANKARA 001709

SIPDIS

USDOE FOR ALAN HEGBURG
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
TDA FOR DAN STEIN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EPET EINV TU
SUBJECT: Azeri Gas Arrives, Contract Issue Unresolved


ANKARA 00001709 001.2 OF 002


SENSITIVE BUT UNCLASSIFIED

1. (SBU) Summary. After months of delay, Turkish officials
confirm that natural gas from Azerbaijan's Shah Deniz field should
begin flowing into Turkey in the next few days despite the lack of
resolution to the issue of the contract period. The head of
Azerbaijan's SOCAR is coming to Turkey within the week, hopefully to
discuss this subject as well as the broader issue of transit
arrangements for Azeri gas going to Greece and Italy via Turkey.
Senior GOT energy officials ask for U.S. help in resolving the
contractual issue with Azerbaijan and working with Greek and Italian
authorities to include Turkey's key principle of netback pricing for
a fixed amount of transit gas in the Intergovernmental Agreement
that Turkey, Greece and Italy are currently negotiating. End
Summary.

--------------------------------------------
"First Year" Contract Issue Still Unresolved
--------------------------------------------

2. (SBU) Acting BOTAS Director General Sakir Arikan confirmed July
3 that pressurization of the Baku-Tbilisi-Erzurum gas pipeline is
underway and that the first flows at the contractual level (about 8
mcm/day, equivalent to 3 bcm/year) will begin arriving in Turkey
within a day or so. Arikan said, however, that the contractual
issue of when to begin counting the first year of deliveries
remained unresolved. The first year contract was orginally
scheduled to run from October 2006 until October 2007 at the initial
price of $120 per cm, but neither the Azeris nor the Turks were
ready last October. Turkey believes the first year should begin
concurrently with the first delivery, while their Azeri partners are
pushing for a much earlier date. Saying he had taken a risk by
accepting delivery without agreement on the issue, Arikan asked for
USG support with Azeribaijan (specifically AGSC). He said a dispute
with Turkey that went into arbitration would send bad signals to
markets and interfere with other projects (e.g. TGI). Arikan said
Statoil agrees as a commercial matter that the period should start
with the first delivery, but that SOCAR's board had not concurred --
apparently for political reasons.

3. (SBU) Consistent with Arikan's report, Energy Undersecretary
Sami Demirbilek told EUR DAS Matt Bryza on June 30 that AGSC agrees
with Statoil that the 365 days should start with the first delivery
but had asked for the GOAJ's "opinion" on the issue. Minister Guler
discussed this with Energy Minister Natiq Aliyev in Istanbul during
the last week of June. Aliyev was reportedly "positive" about
Turkey's position. Demirbilek said he believed that starting the
gas flow would make it easier to resolve the contract issue. During
our July 3 meeting, Arikan received a telephone call from SOCAR
official Vaqif Aliyev arranging for a visit to Turkey by himself and
SOCAR CEO Rovnaq Abdullayev with the next few days. Arikan said he
hoped that Abdullayev and Energy Minister Guler would resolve the
contract issue during their meeting. He thought they would also
discuss transit arrangements for Azeri gas going to Greece and Italy
(see below).

----------------------------------
Greece Interconnector Almost Ready
----------------------------------


4. (SBU) Arikan said that the physical work on the Turkish portion
(up to the Meric/Martiza River) of the Turkey-Greece gas
interconnector should be completed this week. Work on the
cross-border section under the river was underway and should be
complete at latest by the end of the first week of August. Then, 15
days is needed for testing and to complete the connection (golden
weld) on the Greek side. If this schedule holds, gas could not flow
before around August 20, vice the Aug 10 date earlier agreed with
Greece. (Arikan said they heard from DEPA in May that more work was
needed to finish the 85 km segment within Greece. He didn't know
the current status of this.) The later flow would not necessarily,
he said, interfere with a "first gas" ceremony on August 10 as
recently announced by Minister Guler. He did not have any
information on the ceremony, however.

5. (SBU) Arikan said that Greece would receive gas at the same
daily rate provided for by the first year contract.

--------------------------
But IGA Still not Resolved

ANKARA 00001709 002.2 OF 002


--------------------------

6. (SBU) Confirming Demirbilek's earlier comments to Bryza, Arikan
said that the Turkey-Greece-Italy Inter-Governmental Agreement (IGA)
remained held up over Turkey's desire to include language ensuring
that Turkey would have access to up to a fixed percentage of gas
transiting its territory (15-20%) at a "netback" price that only
included transportation costs up to the Turkish border. While
Italian Edison had agreed, Demirbilek and Arikan said the Greek
Government was asserting that the language regarding the percentage
was a commercial issue that should not be in the IGA. Demirbilek,
however, said that this was a crucial point of principle for Turkey.
Arikan said the issue was "Turkey's energy security."

7. (SBU) Demirbilek explained at some detail to Bryza why the new
pricing methodology Turkey is pushing is so critical. Rather than
setting prices based on formula linked to other energy sources,
Turkey's method would reflect the actual costs involved in producing
and transporting gas to the consumer. Thus, the price paid to the
producer would reflect the cost of production plus a return, while
the purchaser would additionally pay the cost of transporting the
gas from the producer to the consuming country. This was more fair
and transparent than the current method of selling gas, whereby
every consumer pays the same price regardless of the distance from
the producer and regardless of the relative costs.

8. (SBU) Since Turkey is closer to producers, this would result in
a reduction in the price paid by Turkey. In fact, Demirbilek said,
if he obtains these lower prices from Azerbaijan, he would have the
right under his current contracts with Russia and Iran to
renegotiate Russian and Iranian price downward. Those contracts
contain clauses obligating the producer to match the lowest price
Turkey can obtain elsewhere. This would be a very large financial
benefit to Turkey, far exceeding the smaller financial benefits
coming from the Azeri deal.

--------------
The Heat is On
--------------

9. (SBU) Both Demirbilek and Arikan agreed that it was critical to
resolve all these contractual issues in the very short term and to
thereby send a convincing signal to markets of the viability of
sending Caspian Gas to Europe. Arikan also pushed for a higher
profile effort with Turkmenistan. Both Arikan and Demirbilek were
dismissive of the Russia-Greece South Stream announcement. Arikan
pointed to the extremely high cost of such a project ($10 billion,
he said), while Demirbilek thought it would not work technically
("it would require compressor stations underneath the Black Sea").
Both, however, took it seriously as intended to turn up the
political and psychological heat against TGI and Nabucco.

-------
Comment
-------

10. (SBU) The long-awaited start of Shah Deniz gas flow to Turkey
is an excellent signal to markets that the southern corridor holds
promise as new source of supply for Europe. We need to build on
this progress quickly, including by pushing for a resolution of the
first year contract issue and the broader IGA problem.
Wilson

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