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