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