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