VZCZCXRO7214
RR RUEHAG RUEHDBU RUEHDF RUEHIK RUEHLN RUEHLZ RUEHVK RUEHYG
DE RUEHAK #5455/01 2621043
ZNR UUUUU ZZH
R 191043Z SEP 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 8800
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHGB/AMEMBASSY BAGHDAD 0754
RUEHDM/AMEMBASSY DAMASCUS 1585
RUEHNE/AMEMBASSY NEW DELHI 0429
RUEHDA/AMCONSUL ADANA 1116

UNCLAS SECTION 01 OF 03 ANKARA 005455 
 
SIPDIS 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
EXIM FOR P ROSS AND M KOSTIC 
OPIC FOR R CORR AND C CHIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG BEXP EINV EXIM OPIC TU
SUBJECT:  TURKEY ENERGY SECTOR - MAKE NO SMALL PLANS 
 
REF:  (A) ANKARA 5332, (B) ANKARA 5000, (C) ANKARA 4379 
 
ANKARA 00005455  001.2 OF 003 
 
 
Sensitive but Unclassified. 
 
¶1.  (SBU)  Summary: On the heels of completion of the 
Baku-Tbilisi-Ceyhan (BTC) oil pipeline, Energy Minister Hilmi Guler 
announced ambitious plans for $130 billion in new energy projects in 
Turkey, calling on the private sector to take up these new 
opportunities.  Turkey is committed to developing Ceyhan as a "new 
Rotterdam" energy hub, replete with an oil refinery, LNG terminal, 
and multiple pipeline terminuses (ref b).  The biggest component of 
the wished-for energy, $105 billion out of $130 billion, is for the 
electricity sector: the newly launched electricity distribution 
privatization, new electricity generation capacity to address an 
imminent shortfall in supply, and launching an ambitious nuclear 
power program.  The World Bank is financing an underground natural 
gas storage facility that will be key to Turkey's plans to transit 
Central Asian gas to Europe and upgrading of a huge coal-fired power 
plant (Afsin-Elbistan) in Central Turkey.  Virginia-based AES is 
very interested in the electricity distribution privatization, but 
U.S. firms are not visible in the other projects.  End Summary. 
 
--------------------------------------------- --- 
ELECTRICITY DISTRIBUTION TENDER FINALLY LAUNCHED 
--------------------------------------------- --- 
 
¶2.  (SBU)  On August 30, the GOT announced the tender for the 
long-awaited electricity distribution privatization.  The three 
areas tendered were: Baskent (Central-North Anatolia, including 
Ankara, Kirikkale, Zonguldak, Bartin, Karabuk, Cankiri and 
Kastamonu); Ayedas (Anatolian side of Istanbul); and Sakarya (Thrace 
region, including Sakarya, Bolu, Duzce and Kocaeli).  This group 
tendered is the first of four batches of tenders the GOT is planning 
to conduct for a total of 20 distribution regions.  Interested 
companies are expected to make their prequalification applications 
in October.  The bidding deadline for the tenders is December 15. 
Under the privatization's "Transfer of Operating Rights (TOR)" 
mechanism, TEDAS, the existing state-owned distribution company, 
will retain legal ownership of the physical assets of the 
distribution networks, but will transfer operating rights and 
responsibilities to the private investors. 
 
¶3.  (SBU)  Alexandria, Virginia-based AES told us they remain very 
interested in the regional electricity privatization and would 
aggressively pursue all of the three regions in the first tender 
batch, despite their concerns over some of the terms of the tender. 
AES's main concern has been the lack of a clause that would allow 
international arbitration for dispute-resolution.  In this regard, 
they are particularly concerned about the rights TEDAS will retain 
to terminate the TOR contracts, and how disputes with TEDAS will be 
equitably resolved. 
 
¶4.  (SBU)  Privatization Agency (PA) President Metin Kilci told the 
press that financial adequacy would be the main criterion in 
evaluating the prequalification applications.  This is likely 
intended to give local companies a chance, given their lack of 
electricity distribution experience.  Although the GOT did not set 
foreign partnership limits for this specific tender, there is an 
ambiguous 50 percent limit for total foreign investor share in 
electricity distribution.  Over the longer term, the GOT also aims 
to privatize Turkey's state electricity production company (EUAS), 
excluding large hydroelectric facilities. 
 
--------------------------------------------- --------- 
COAL PLANTS - TENDER FOR NEW AND REHABILITATION OF OLD 
--------------------------------------------- --------- 
 
¶5. (SBU) On August 23, Energy Minister Hilmi Guler announced the 
start of the tender process for Afsin-Elbistan, what he termed the 
"biggest energy project in the history of the Turkish Republic." 
Guler said a "Turkish style investment model" would be implemented 
in this project, under which the GOT would lease lignite mines in 
the area to private investors.  Instead of paying cash to the 
Government, tender winners would renovate the lignite and build two 
new power plants (Afsin-Elbistan C and D).  The GOT will transfer 
operating rights of the two plants to the private sector for 30 
years, with a possible extension of up to 50 years. 
 
¶6. (SBU) The project will require $5 billion in private sector 
 
ANKARA 00005455  002.2 OF 003 
 
 
investment.  Several foreign and domestic companies are reportedly 
interested in various phases of the project. According to our energy 
sector contacts, U.S. companies remain reluctant to invest in this 
kind of project in Turkey. 
 
¶7.  (SBU)  Meanwhile, the World Bank has signed a $350 million loan 
to increase the efficiency of the existing Afsin-Elbistan A 
coal-fired plant.  The loan required some waivers beause the 
environmental standards do not met the levels expected for a new 
plant.  According to Guler, the entire new and rehabilitated 
Afsin-Elbistan complex will generate 30 billion KWH of electricity 
annually, about 18% of Turkey's total at the time of completion. 
 
-------------------------------------- 
QUEST TO ADD NUCLEAR TO THE ENERGY MIX 
-------------------------------------- 
 
¶8.  (SBU)  After receiving private companies' proposals on nuclear 
power investment in May, the GOT established a commission with the 
participation of the Ministry of Energy and Natural Resources 
(MENR), Turkish Atomic Energy Agency (TAEK), the Energy Market 
Regulatory Authority (EMRA), and other related agencies.  The 
commission evaluated proposals, and prepared a report in August to 
serve as a road map for developing nuclear power.  Based on the 
report, the GOT drafted a "Law on Establishment and Operation of 
Nuclear Power Plants," which should be submitted to the Parliament 
in the new legislative session that begins in late September.  The 
draft reportedly sets minimum state guarantees as the main criterion 
for the interested companies. 
 
¶9.  (SBU)  Energy Minister Guler told the press the GOT wanted to 
see the private sector developing nuclear projects.  Guler stated 
that rather than selecting the contractor through a tender process, 
the GOT would choose the company offering the minimum cost 
(including least state guarantee), maximum technology transfer, and 
greatest domestic input.  In line with the draft legislation, MENR 
will be the lead agency in this project. 
 
----------------------- 
CEYHAN AS NEW ROTTERDAM 
----------------------- 
 
¶10.  (SBU)  As described in ref B, Turkey is eager to build on its 
BTC and Kirkuk-Ceyhan terminus and oil storage, first by 
reinvigorating the near moribund Iraq oil pipeline, then by 
potentially adding natural gas egress and processing to this right 
of way.  Turkey has licensed a prospective Samsun-Ceyhan oil 
pipeline and has urged Russia to support this route both for oil and 
natural gas pipelines to feed oil and gas processing at Ceyhan. 
Calik/Indian Oil and Petrol Ofisi/OMV have applied for refinery 
licenses for Ceyhan and Prime Minister Erdogan has encouraged Lukoil 
to shift its interest from Zonguldak to either Samsun or Ceyhan. 
 
------------------- 
NATURAL GAS STORAGE 
------------------- 
 
¶11. (SBU) Natural gas storage is a key requirement for satisfying 
domestic seasonal requirements, tested each winter by cut-offs from 
Iran and concerns about Russia, and for establishing transit to 
Europe.  Rehabilitation of a 1.2 BCM TPAO Thrace-Marmara gas storage 
is close to completion and a tender is underway for construction of 
a natural gas storage under the Salt Lake south of Ankara in an 
amount of 0.7 BCM - with potential to expand to 2-3 BCM under a 
World Bank loan for $300 million. 
 
------- 
COMMENT 
------- 
 
¶12.  (SBU)  Despite the relatively new electricity and natural gas 
laws' focus on market liberalization and private investment, the 
Turkish Government has been frustrated by the dearth of private 
energy investment garnered to date.  Over the years, Turkey's court 
system has struck down a number of privatizations and privatization 
models (BOT's, TOR's, etc.), increasing uncertainty for investors. 
While the government is expressing enthusiasm, commitment, and 
vision for partnering with private investors, it is not clear how 
successful it will be with its energy ambitions.  Meanwhile, Turkey 
 
ANKARA 00005455  003.2 OF 003 
 
 
has sought to bring greater market forces to grapple with a looming 
electricity shortfall (Ref C), but the government is still the main 
player and the energy regulator still struggles to stake out its 
role and maintain independence.  End Comment. 
WILSON