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

150852Z Dec 05

UNCLAS SECTION 01 OF 02 ANKARA 007342 
 
SIPDIS 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EPET TU
SUBJECT:  TURKEY FUMBLES BOTAS GAS CONTRACT TRANSFER 
 
REF: (a) ANKARA 5080, (b) 04 ANKARA 6797 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
¶1.  (SBU)  Summary: In a complicated tale of intrigue and 
ineptitude, an apparent effort by the Turkish state-owned 
pipelines company BOTAS to demonstrate that the 2001 law 
requiring transfer of import contracts to the private 
sector was unworkable blew up in the company's face as 
the press leveled charges of corruption and insider 
dealing against the company and Turkish politicians.  The 
fiasco showed the depth of Turkey's difficulties in 
liberalizing its domestic energy markets and opening them 
up to foreign and domestic private investment.  Turkey 
will need major new investment in its energy sector over 
the coming years, but needs help, including from foreign 
companies, in designing an energy regime that will meet 
investors' needs.  End Summary. 
 
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Contract Release Model Fails - As Expected - Even Desired 
--------------------------------------------- ------------ 
 
¶2. (SBU) As the GOT seeks to liberalize Turkey's domestic 
energy markets, finding a practical way to get the GOT 
and its wholly-owned Pipelines Company BOTAS out of the 
natural gas import business has been a major challenge. 
A key issue has been the model for transferring BOTAS's 
contracts with foreign suppliers to private companies. 
One option for BOTAS has been whether it should "release" 
its existing purchase "contracts" to private sector 
companies -- leaving contract terms unchanged vis a vis 
the foreign supplier.  The second has been for BOTAS to 
auction the "volumes" those contracts represent, leaving 
the winners to negotiate new contracts and terms with the 
foreign supplier. 
 
¶3.  (SBU)  The "contract release" model was supported by 
the World Bank, and codified in the 2001 Natural Gas 
Market Law, which targeted the transfer to the private 
sector of 80% of BOTAS' import contracts by 2009.  This 
goal was widely viewed as unachievable, principally 
because it was believed suppliers would be unwilling to 
switch their counterparty from the GOT to a private 
company without a sovereign guarantee.  Reflecting 
misgivings about the law within BOTAS and the GOT, the 
release program has been "underway" for over one year, 
postponed four times, and subject to much debate.  Like 
BOTAS, private companies generally supported a "volume 
release" that allowed for the negotiation of new terms 
with the foreign supplier as more logical and doable. 
 
¶4.  (SBU)  Seeking to enforce the 2001 law, Turkey's 
Energy Markets Regulatory Agency (EMRA) pushed BOTAS hard 
to proceed with contract releases.  In 2004, EMRA fined 
BOTAS for not carrying out the process in a timely way. 
In order to comply with EMRA's requirements, but perhaps 
also to demonstrate the unfeasibility of the contracts 
model and force a change to the 2001 law, BOTAS conducted 
its first contract transfer tender on November 30.  As 
many predicted (and as BOTAS officials told us later they 
had expected), the tender failed miserably -- but not in 
the way BOTAS may have expected.  Both BOTAS and the 
process ended up tarnished and burned by the gamble. 
 
¶5.  (SBU)  Rather than fail to sell any of the contracts, 
BOTAS to its surprise succeeded in finding buyers for 16 
lots out of the total tender amount of 64 lots of gas, 
initially set as a target corresponding to 64% of 
Turkey's 25 BCM annual natural gas imports, tendered. 
Contracts with Nigeria, Algeria, Iran and Russia's Blue 
Stream and West-2 line failed to find takers because 
suppliers refused to agree to switch from BOTAS to a 
private company.  Surprisingly, however, Gazprom 
certified four Turkish and foreign companies -- Shell, 
Enerco, Avrasya and Bosphorus Gas -- as eligible to bid 
on the contract for one-half of Russian West line, the 
Turusgaz line, for 4 BCM of natural gas.  Out of the four 
bidders Gazprom certified to participate in the tender, 
Shell was the highest bidder, offering $2.0 million for a 
single lot.  Shell's bid was followed by Bosphorus Gas, 
known to have a partnership relation with Gazprom, which 
offered $1.8 billion per lot for 3 lots.  Enerco won 10 
lots, with a $1.6 million bid per lot, while Avrasya 
obtained 2 lots with a $910,000 bid per lot. 
 
--------------------------------------------- - 
But BOTAS and the GOT Tarnished in the Process 
--------------------------------------------- - 
 
¶6.  (SBU)  The second surprise for BOTAS was a firestorm 
of press allegations that there had been collusion 
between Gazprom, GOT officials, and the Turkish companies 
(excepting Shell) that participated in the tender 
process.  In particular, it was alleged that Enerco 
(which won the most lots at a relatively low price) used 
relationships between its owners and PM Erdogan and his 
political associates to secure the permission from 
Gazprom to participate in the tender.  (Erdogan and 
Putin, the story went, cooked up the deal at their 
November 17 meeting in Samsun to open the Blue Stream 
pipeline).  Also, the fact that Bosphorus Gas is 40% 
owned by Gazprom suggested that there had been improper 
collusion in its case.  Furthermore, the entire process 
was assailed by economic nationalists as granting 
privileges to a foreign entity -- since Gazprom was able 
to "choose" its Turkish counterparts -- that were 
reminiscent of the Ottoman-era capitulations. 
 
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Comment 
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¶7.  (SBU)  As Turkish Energy Under Secretary Sami 
Demirbilek told DAS Bryza in August (ref a), Turkey is 
flailing and failing as it tries to figure out how to 
manage a liberal energy market.  Its home-grown 
mechanisms, even with the advice of the World Bank, have 
not had private sector input and therefore do not seem to 
be working out.  As Demirbilek told Bryza, this offers an 
opportunity for foreign companies who want to take 
advantage of the opportunities in Turkey to engage with 
the GOT to help it shape its new mechanisms - drawing on 
the companies' experience with what has worked in other 
countries. 
Wilson