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DE RUEHAK #0316/01 0571756
ZNY CCCCC ZZH
P 261756Z FEB 10
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 2268
INFO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 1588
RUEHKB/AMEMBASSY BAKU PRIORITY 1670
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY

C O N F I D E N T I A L ANKARA 000316 
 
SIPDIS 
 
STATE FOR EEB/S-EEE RICHARD MORNINGSTAR 
DOE FOR OFFICE OF RUSSIAN AND EURASIAN AFFAIRS: LANA EKIMOFF 
 
E.O. 12958: DECL: 02/24/2020 
TAGS: ENRG EPET PGOV PREL TU
SUBJECT: SCENESETTER FOR 5TH US-TURKEY ENERGY WORKING GROUP 
MEETING 
 
REF: A. ANKARA 195 
     ¶B. ANKARA 127 
 
Classified By: DCM Doug Silliman for reasons 1.4 (b,d). 
 
¶1. (C) In preparation for the U.S.-Turkey Energy Working 
Group meeting to be held in Washington on March 1, we would 
like to update you on where our relationship with Turkey 
stands, where Turkey's relationships with other key countries 
stand, and how these relationships are affecting energy 
issues. 
 
WHAT TO RAISE: 
 
-- We realize that the current political environment poses 
challenges to negotiations with the Azeris on Shah Deniz, but 
we urge you to continue push toward an agreement. (paras 3-5) 
 
-- The U.S. commitment to Iraq remains strong, as does our 
interest in cooperating with you to help develop Iraq's 
energy sector. (paras 6-7) 
 
-- The U.S. has a sincere interest in having Turkey choose 
the best possible technology to meet its needs in future 
solicitations for nuclear power generation. (para 8) 
 
WATCH OUT FOR: 
 
-- Claims that Iraqi gas can replace Azeri for the Nabucco 
project.  While this may be possible at some point, there is 
as yet no Iraqi gas that is definitely available for export 
in the time horizon needed to finance the Nabucco project. 
(paras 6-7) 
 
-- Claims that Turkey must pursue the option of expanding its 
natural gas dealings with Iran, even if Iran is not the GOT's 
preferred option as a source or transit state for Turkmen 
gas. (paras 9-11) 
 
 
¶2. (C) With the exception of the nuclear plant deal with 
Russia, and despite a flurry of visits to various countries, 
the Turks have made little progress on energy affairs since 
the last Energy Working Group (EWG) meeting in December 2009. 
 Politics, both domestic and international, appear to play an 
increasingly significant role in energy decisions--or 
reluctance to make decisions.  Three of the GOT's top areas 
of foreign policy concern -- Armenia/Azerbaijan, Iran, and 
Iraq -- have direct connections to energy, but there is no 
indication that increased Turkish diplomatic efforts in these 
countries have led to any progress on the energy front. 
 
Turkey-Armenia, and Azerbaijan 
------------------------------ 
 
¶3. (C) Mindful of the Turkish public's sympathies with their 
"cousins" in Azerbaijan and the parliamentary opposition's 
desire to make political hay by criticizing Turkey-Armenia 
reconciliation, the government has been unwilling to seek 
ratification of the Turkey-Armenia protocols without some 
progress on Nagorno-Karabakh.  That progress is not 
forthcoming and, though we refuse to accept linkage of the 
protocols to the Minsk Process, the former's 
failure would likely damage, if not derail, the latter. 
 
¶4. (C) We believe that, absent something the Turks can define 
as progress on Nagorno-Karabakh, or a wink for Aliyev, 
Erdogan could not get all his own MPs, let alone the 
opposition, to vote to ratify the protocols.  If Turkey does 
not move forward on the protocols, Turkey and Azerbaijan may 
look for ways to reaffirm a strong, mutual relationship and 
energy deals could be fast-tracked.  However, a deterioration 
of U.S.-Turkey relations following any failure of the 
Turkey-Armenia reconciliation process could reinforce 
Russia's energy relationship with Turkey, to the detriment of 
the Southern Corridor and Turkey's own interest in reducing 
its over-dependence on Russia for energy. 
 
¶5. (C) For now, Turkey-Azerbaijan negotiations on Shah Deniz 
gas continue but are seeing minimal progress.  On February 3, 
Energy Minister Yildiz told the Ambassador the parties had 
reached agreement on price for Shah Deniz I gas but had not 
agreed on Shah Deniz II price or volumes, or on transit fees 
(reftel A).  The Turks' perspective on the negotiations has 
not changed:  they believe they have made reasonable offers 
to the Azeris and are doing all they can to move the process 
forward.  They also believe politics related to the Armenia 
 
protocols, and not commercial concerns, are preventing the 
Azeris from reaching a final agreement. 
 
Iraq 
---- 
 
¶6. (C) In FM Davutoglu's words:  "Iraq is an existential 
issue for Turkey."  From the USG's perspective, Turkey has 
been, by far, the most constructive of Iraq's neighbors in 
contributing to its stability.  Last October, Erdogan led a 
delegation of eight of his ministers to Baghdad where they 
signed nearly 50 MoUs and agreements that laid legal 
foundations for cooperation on counter-terrorism, commerce, 
hydrocarbons trade, transportation infrastructure 
construction, health care, and water management.  As they 
have made clear to us at prior EWG meetings, the Turks are 
eager to work with us to help develop Iraq's energy sector as 
a key element of the country's economic stability. 
 
¶7. (C) Turkish companies' interest in the Iraqi energy sector 
remains strong, though no Turkish company has succeeded in 
obtaining a gas export license from Iraq or import license 
from Turkey, and the one Turkish company exporting oil from 
Iraq has yet to be paid by Baghdad for its services.  The GOT 
continues to push the idea that Iraq should be a primary 
source of gas for Nabucco, though there is little indication 
Iraq will be able to provide suitable volumes in the 
necessary timeframe, especially as the Hydrocarbons Law and 
other necessary legislation on revenue sharing and the Iraqi 
Oil Ministry and state hydrocarbons company are delayed until 
after elections and the formation of a new government. 
 
Future Nuclear Power Plant Projects 
----------------------------------- 
 
¶8. (C) Yildiz also told the ambassador the GOT still plans to 
build a second nuclear power plant in Sinop, which they will 
open for bids.  He said they have formed a team to work on 
regulatory, safety, and other aspects of nuclear power. 
Members of the team are in touch with relevant U.S. agencies, 
but Yildiz said they would also welcome an opportunity to 
send a group on a USTDA orientation visit on peaceful nuclear 
power generation. 
 
Iran 
---- 
 
¶9. (C) Turkey remains profoundly fearful of the collateral 
damage to its economy that could result from sanctions or an 
Iranian decision to retaliate by throttling back its 
hydrocarbons exports to Turkey.  Turkey imports 36 percent of 
its oil from Iran and roughly 11 percent of its natural gas 
(2008 figures).  If Iran were to cut off that supply, some 
Turks could grow cold in their homes and angry at their 
government. 
 
¶10. (C) Hoping to forestall sanctions, Foreign Minister 
Davutoglu has repeatedly attempted to mediate a compromise 
between the Iranians and the world community, most recently 
on a February 16th visit to Tehran.  We have mildly 
discouraged his shuttle and telephone diplomacy, but his 
efforts have not resulted in a real shift in Iranian policy. 
 
¶11. (C) The GOT also continues to negotiate with Iran for 
Turkish Petroleum Company (TPAO) to develop two blocks of the 
South Pars gas field and it continues to explore the 
possibility of importing Turkmen gas through Iran.  However, 
neither of these pursuits is moving forward quickly.  TPAO GM 
Mehmet Uysal has been very downbeat on reaching agreement on 
South Pars.  He has been careful to note that TPAO has not 
signed any agreement with Iran, that TPAO would make a report 
to the GOT in February on South Pars, but that the GOT would 
make the decision on whether to continue.  No significant 
developments have arisen regarding transit of Turkmen gas to 
Turkey via Iran since the three governments announced their 
mutual interest in such an arrangement in early January in 
Turkmenistan (reftel B). 
 
Russia 
------ 
 
¶12. (C) One shift that has occurred in Turkey's energy 
affairs since the December EWG meeting is the re-promising of 
Turkey's first nuclear power plant project to Russia.  In a 
January 3 meeting with the ambassador, Yildiz confirmed the 
project would be given to Russia through an intergovernmental 
agreement (the legal equivalent of a treaty that would allow 
 
the deal to proceed without any public tender).  In other 
energy matters with Russia -- the Samsun-Ceyhan oil pipeline, 
possible refinery construction, Southstream -- talks continue 
but with no changes or milestones of note in recent months. 
 
Domestic Energy Issues 
---------------------- 
 
¶13. (C) Little has changed since December on domestic energy 
issues.  In February, the Privatization Administration 
accepted bids on another four electricity distribution 
regions.  The winning companies are now working through the 
full approval process.  Analysts now expect that incentives 
for solar energy will be dropped from the renewable energy 
bill before it passes due to continued objections from Deputy 
PM Babacan over the cost.  We have heard no estimates, 
however, of when the legislation will be passed.  The natural 
gas law also remains stalled.  Ibrahim Arinc, an advisor at 
the Ministry of Energy (MENR), told us the law and 
restructuring of the State Pipelines Company (BOTAS) is a 
priority for the ministry, but he expects no movement on the 
law until at least the second half of 2010.  The quarterly 
review of the price of natural gas was scheduled for 
February, and we expected a price increase permit back 
payment of higher-priced Shah Deniz I gas already delivered 
over the past two years.  PM Erdogan said he personally would 
announce any price increases, but there has been no 
announcement of a price change.  We suspect PM Erdogan is 
wary of announcing a gas price increase amid the other issues 
now challenging his popularity and with elections approaching. 
 
¶14. (C) Also due to domestic politics, it appears a split has 
developed between Erdogan and Yildiz in recent months and 
Erdogan has become directly involved in decision making on a 
growing number of energy matters.  As the political rivalry 
between Erdogan and Gul has grown, many political analysts 
name Yildiz as "a Gul man."  Energy Undersecretary Kilci, who 
will attend the March 1 EWG meeting, is generally considered 
to be "Erdogan's man" at MENR.  He also is the primary 
proponent in the ministry for breaking up BOTAS. 
Jeffrey 
 
           "Visit Ankara's Classified Web Site at http://www.intelink.s 
gov.gov/wiki/Portal:Turkey"