VZCZCXYZ0001
RR RUEHWEB
DE RUEHAK #1222/01 1891434
ZNR UUUUU ZZH
R 071434Z JUL 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 6769
INFO RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHGB/AMEMBASSY BAGHDAD 1263
RUEHIT/AMCONSUL ISTANBUL 4439
RUEUITH/ODC ANKARA TU
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
UNCLAS ANKARA 001222
SENSITIVE
SIPDIS
EEB FOR A/S SULLIVAN
SPECIAL ENVOY FOR EURASIAN ENERGY GRAY
EEB FOR ENERGY COORDINATOR MANN
EUR FOR DAS BRYZA
E.O. 12958: N/A
TAGS: ENRG EPET TU
SUBJECT: SCENESETTER FOR C. BOYDEN GRAY'S JULY 10-13 VISIT
TO TURKEY
REF: A. ANKARA 1070
B. ANKARA 1085
C. ANKARA 1172
1. (SBU) Summary. Your visit coincides with political
uncertainty surrounding the fate of the ruling Justice and
Development Party (AKP) due to a closure case against it
pending in the Constitutional Court. Recent high-profile
detentions in connection with a year-long investigation into
suspected anti-government plotting have fueled a crisis
atmosphere in Ankara. The Turkish government is working hard
to project a business-as-usual image and welcomes your visit.
Despite the charged political atmosphere, you will have an
opportunity to reaffirm our commitment to working with Turkey
to further our shared energy goals. Becoming a large-scale,
reliable gas transit hub to Europe will bring many benefits
to Turkey including the development of resources for Turkey
itself; more revenues from gas transit and closer ties to
Europe and Central Asia. Turkey supports Nabucco, the gas
line to Greece and Italy, and the development of Iraqi gas
resources and means to bring them to market. Your visit will
be a key step in our engagement of Ankara on the policy
choices and practical steps to realize these efforts.
Background on Energy Cooperation
--------------------------------
2. (SBU) Our cooperation with Turkey on energy issues has a
long history. In the 1990s, the U.S. worked with Georgia,
Azerbaijan and Turkey to bring about the first and only major
non-Russian route for Caspian oil to world markets, the
Baku-Tbilisi-Ceyhan pipeline that was inaugurated almost
exactly two years ago. More recently, our work with Turkey
has been guided by the Shared Vision agreed upon by Secretary
Rice and then Foreign Minister Gul in June 2006 that
reaffirms our strategic partnership and determination to work
together on common challenges and opportunities.
Specifically on energy, the Shared Vision commits both sides
to work together to "enhance energy security through the
diversification of routes and sources, including from the
Caspian basin."
Growing Domestic Energy Demand
------------------------------
3. (SBU) Rising domestic energy demand makes energy supply
security a top Turkish foreign policy goal. On average,
Turkey's energy demand has grown by 8 percent per year.
Demand for natural gas grows even faster at 15 percent per
year as the government continues the country's transition
from dirty coal to cleaner gas usage. By 2020, Turkey will
be 18 billion cubic meters (bcm) short of its gas needs, and
its supply predicament becomes more dire if contracts with
Russia and Algeria are not renewed. A key issue for Turkey
is striking the right balance between satisfying its domestic
gas needs and its strategic interests in developing a gas
corridor to Europe.
Coming to Agreement with Azerbaijan
-----------------------------------
4. (SBU) Thus far, Turkey's negotiating strategy had been to
link its need for domestic gas with tariff arrangements for
gas transiting Turkey to Europe. We and other European
countries have been telling Turkey this strategy will not
work. There is some evidence that Turkish leaders may now be
understanding this. They have been in high-level discussions
with Azerbaijan and SOCAR for a bilateral contract that would
go a long way toward meeting Turkey's domestic gas needs. We
should urge Turkey to make these negotiations and coming to
closure on realistic gas transit arrangements its top
priorities.
5. (SBU) To come to an agreement, Turkey and Azerbaijan will
need to agree on the quantity of gas to be sold by Azerbaijan
and also the price. Of the two issues, the two sides seem
closer on volumes (SOCAR willing to offer 5 bcm, and Turkey
seeking 8 bcm). Turkey maintains that it wants a "good
price" from Azerbaijan that reflects its close location to
the source. The GOT's idea of a good price varies. Some say
a price below the Gazprom price (roughly USD 400/tcm) while
others believe the price should be below the Baumgarten price
(roughly USD 350/tcm).
6. (SBU) Some Shah Deniz consortium members believe that the
price that emerges from the Shah Deniz Phase I (SD I)
re-negotiations will also be the price for Shah Deniz Phase
II gas. The price renegotiation will be difficult for
Turkey. Turkish Economy Minister Simsek has estimated that a
USD 1 dollar increase in oil prices has a USD 350 million
impact on the Turkish budget. The market price for gas is
now 3 to 4 times the contract price for SD I gas.
Implementing such a steep price increase would be a
considerable political risk for the GOT. Previous BOTAS
management has faced criminal prosecution for agreeing to
price increases much less dramatic. Some sources tell us SD
I price renegotiation is likely to go to arbitration which
would be a long, drawn out process.
Nabucco
-------
7. (SBU) Turkey appointed a coordinator to lead negotiations
with Nabucco companies, partner countries and the EU, Osman
Goksel. There have been a series of discussions with
working-level EU counterparts following the February 2008
visit of EU Nabucco Coordinator Jozias van Aartsen to Ankara,
van Aartsen's failure to come back to Ankara has hurt these
efforts. Turkish authorities have drafted a timeline and
schedule for negotiating the various commercial and
intergovernmental agreements that will have to underpin
Nabucco, showing a renewed determination and focus on the
details of realizing this project. The GOT has also
re-organized and re-focused its efforts on Nabucco by
bringing in the Foreign Ministry to play a coordinating role
for the interagency. On July 1, PM Erdogan announced that
Turkey will be ready to sign an Intergovernmental Agreement
(IGA) for Nabucco in a few months.
8. (SBU) An important topic for EU-Turkey negotiations on
Nabucco has been strategizing on ways to bring Turkmen and
Kazakh gas to the project. Turkey would like to play a
supporting role in bringing these new gas resources to Europe
and would like to use the opportunity to develop a commercial
gas hub in Turkey. It understands that these additional
resources are necessary for the viability of proposed
infrastructure projects, European gas supply security, and
the Central Asians' real independence from Moscow. Turkey
believes the hub would increase the competitiveness and
transparency of Europe's gas market by establishing an open
trading platform where any company could buy or sell gas.
Spot trading at the hub would be in addition to, rather than
in place of, long-term supply and transit contracts.
Iraq
----
9. (SBU) Turkey is interested in helping Iraq develop its
oil and gas sectors but waits like everyone for the passage
of hydrocarbon legislation. It would like to see U.S. and
Turkish firms partner in Iraq. At the April meeting of the
bilateral U.S.-Turkey Economic Partnership Commission, Turkey
offered to host, with U.S. support, an investment conference
for Iraq in Istanbul that it hopes will take place late this
year or in 2009.
10. (SBU) Turks understand that Iraqi gas could make an
important contribution to the commercial viability of
Nabucco. To get this gas to market, they have proposed a new
gas pipeline to follow the route of the existing
Kirkuk-Ceyhan oil pipeline. To make this route economically
feasible, it should be linked to the development of new gas
fields in Iraq, which require the passage of the hydrocarbon
law. The EU has proposed moving early Iraqi gas via the Arab
Gas pipeline through Syria. This line is almost built and
may provide the cheapest, fastest and most practical route to
market. There are, however, other claimants on Iraqi gas,
and inadequate cooperation among the Europeans and Turkey
could lose these assets to other buyers.
Iran
----
11. (SBU) Turkey's relationship with Iran is
multidimensional. The GOT has supported and assures us it is
implementing the Security Council resolutions sanctioning
Iran, and has recently urged Tehran to seriously consider the
latest P-5 1 offer. On the other hand, it also continues to
discuss energy cooperation with Iran, mesmerized by that
country's resources and determined not to be left out as
others make deals with Tehran. A bilateral MOU concluded
nearly a year ago contemplates Turkish-Iran cooperation to
develop a block in the South Pars gas field and build a
dedicated pipeline to Turkey. To do this, Turkey will need
partners both for financing and technical expertise.
Negotiations have been proceeding slowly at the technical
level. Turkey knows from experience that Iran is a difficult
and unreliable business partner. Turkey currently imports
6.2 bcm from Iran annually, roughly 17% of its total gas
usage. Iran has cut off supplies for the past several
winters and left Turkey paying high spot market prices for
LNG to meet demand. Your visit is an opportunity to remind
Turkey that doing business with Iran is risky, brings little
reward and is against US policy and law.
Visit Ankara's Classified Web Site at
http://www.intelink.sgov.gov/wiki/Portal:Turk ey
WILSON