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115594 7/16/2007 16:39 07ANKARA1809 Embassy Ankara CONFIDENTIAL 07ANKARA1412|07ANKARA1608|07ANKARA803 VZCZCXRO3854 OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR DE RUEHAK #1809/01 1971639 ZNY CCCCC ZZH O 161639Z JUL 07 FM AMEMBASSY ANKARA TO RUEHC/SECSTATE WASHDC IMMEDIATE 2986 INFO RUCNCIS/CIS COLLECTIVE RUEHZL/EUROPEAN POLITICAL COLLECTIVE RUEHTH/AMEMBASSY ATHENS 8227 RUEHKB/AMEMBASSY BAKU 1518 RUEHBM/AMEMBASSY BUCHAREST 1013 RUEHUP/AMEMBASSY BUDAPEST 0265 RUEHRO/AMEMBASSY ROME 6665 RUEHSF/AMEMBASSY SOFIA 1174 RUEHVI/AMEMBASSY VIENNA 1664 RUEHIT/AMCONSUL ISTANBUL 3021 RUEAIIA/CIA WASHDC RHEHAAA/NSC WASHDC RUEUITH/ODC ANKARA TU RUEHNO/USMISSION USNATO 5815 RHMFISS/CDR USEUCOM VAIHINGEN GE RUEHBS/USEU BRUSSELS RUEKJCS/SECDEF WASHINGTON DC RHEBAAA/DEPT OF ENERGY WASHINGTON DC RUCPDOC/DEPT OF COMMERCE WASHDC C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 001809

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USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK DOE FOR ALAN HEGBURG EUR ALSO FOR MATT BRYZA SCA ALSO FOR STEVE MANN EEB FOR GALLOGLY AND EIGHMIE TDA FOR STEIN

E.O. 12958: DECL: 07/16/2017 TAGS: ENRG, EPET, PREL, TU, IR SUBJECT: IRAN-TURKEY NATURAL GAS MOU

REF: A. ANKARA 1608 B. ANKARA 1412 C. ANKARA 0803

Classified By: Acting Economic Counselor Andrew Snow for reasons 1.4 (b ) and (d).

1. (C) Summary: Turkish MFA officials MFA confirm that Energy Minister Hilmi Guler signed a preliminary MOU with Iranian Oil Minister Kazem Variri-Hamaneh that, after further study, may involve (1) construction of pipelines and the transit of gas from Turkmenistan through Iran to Turkey, (2) development of phase 22, 23, and 24 of Iran's South Pars gas field by TPAO, under so-called "buy-back" terms, and (3) construction of a pipeline to transport South Pars gas to Turkey for sale to Europe through Nabucco. MFA officials downplayed the significance of the MOU, emphasized the word "preliminary," explained that all details will be developed by a joint technical working group during the next one to two months as a proposal for a final agreement, and stressed that the final agreement will not be contrary to UNSC Resolutions 1737 and 1747. Discussions with an Energy Ministry official and the Energy Minister's unofficial advisor shed more light on Turkish thinking, suggesting there may be more to the MOU than the MFA officials suggested. End summary.
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MFA Officials Downplay Significance but Provide Few Details
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2. (C) MFA Deputy Director General for Energy Vural Altay and Deputy Director General for South Asia M. Babur Hizlan requested a meeting to clarify press reports of the Turkey-Iran natural gas memorandum of understanding (MOU). Altay confirmed that Iranian Oil Minister Variri-Hamaneh made an official visit to Ankara on July 13-14 and signed a "preliminary MOU" with Energy Minister Guler to conduct technical study of: a) possible transit of Turkmenistan natural gas through Iran to Turkey, b) possible transit of Iranian gas to Turkey and beyond to Europe, and c) Turkish development of South Pars phases 22, 23, and 24. Explaining that he is speaking on instruction from his superiors, he stressed, "Only an MOU was signed, not an agreement." Altay denied that the details reported in the press had been agreed to. Altay explained that a joint technical working group will be formed "with the appropriate government institutions" to prepare and present a paper "maybe by the end of August" that will serve as the draft for a final agreement.

3. (C) When asked to give examples of inaccurate press reports, Altay explained that the MOU is "not a historic agreement" but instead only "a start of a process" to explore gas options in Iran. Altay explained GOT energy policy has not changed. Turkey's priorities remain securing its own energy needs and contributing to European energy supply through a diversity of sources and a diversity of routes. Turkey is against any monopolization of gas markets, and works to prevent a Russian monopoly of gas supplies. Altay explained that Gazprom's June 23 announcement of the South Stream pipeline was "disturbing," and the GOT views a gas agreement with Iran as "balancing the Russian initiative." When asked how Turkey views the prospects for the trans-Caspian pipeline (TCP) for Turkmen gas through the South Caucasus Pipeline, Altay stated Turkey's continued support for TCP and his hope that the possibility for an Iranian route for Turkmen gas may accelerate TCP

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decision-making. When asked how Turkey's Nabucco partners view the MOU, Altay explained that partners have already discussed the transport of Iranian gas to Europe. Furthermore, Turkey has existing gas agreements with Iran (10 bcm/year) and Turkmenistan (16 bcm/year).

4. (C) We pointed out that investments in Iran's oil and gas sector could expand Iran's ability to finance terrorism and its nuclear program and could raise concerns under the Iran Sanctions Act (ISA). We also pointed out that this kind of agreement risked undermining the international community's efforts to convince Iran to comply with UNSC resolutions. Altay and Hizlan voiced familiarity with ISA, insisted that any agreement would be in compliance with UNSC Resolutions 1737 and 1747, and repeated that discussions are still "at the exploratory stage" with Iranian gas "as one option on the table."
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Energy Ministry Official Touts inclusion of Turkmen Gas
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5. (C) In a separate meeting, Energy Minister Deputy General Director Nilgun Acikalin offered her appraisal of the Turkey-Iran gas MOU. (Note: Acikalin was previously responsible for oil and gas pipelines within the Energy Ministry, and she was recently promoted to oversee renewable energy. End note.) Nilgun confirmed press reports of the elements of the MOU, but she explained that most important to Turkey was the agreement by Iran to allow a significant increase of Turkmen gas to transit to Turkey. She expressed her hope that the MOU will "make a lightning flash" to accelerate investment decisions regarding the TCP. She also explained that technical details, gas volumes, costs, investments, and investors have not yet been worked out. The Energy Ministry "will be very busy during the next month."
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Unofficial Advisor Details Turkey's Gas Strategy in Iran
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6. (C) Faruk Demir, the outside -- and unofficial -- advisor to Energy Minister Guler provided a very different spin, and much more detail. Unlike the MFA officials, Demir did not downplay the Iran deal. Instead, he reiterated to us the strategic vision behind Turkey's pursuit of a gas transit and production arrangement with Iran. He emphasized that the U.S. was Turkey's closest ally. He said Turkey's strategy was designed to counter Russia's monopolistic behavior by diversifying Turkish and European sources and routes of supply. Demir said Turkish policy towards Iran was clear: Turkey opposed the Iranian regime and was quite concerned about the Iranian nuclear program. He said this view was shared by the Turkish General Staff, the Prime Minister and the entire Turkish state. Where Turkey differed with the U.S. was on the tactical approach, although he claimed Turkey completely understands the U.S. position and supports the U.S. and international pressure on Iran.

7. (C) Demir said Iran will change in the next few years, and by the time these additional gas volumes flow to Turkey -- 2011 at the earliest -- Iran will be a different place. Turkey believes Iran will not be able to develop nuclear weapons for between five andeight years. If the U.S. and Turkey wait until Iran has changed to begin engaging, they will find that other countries, such as Russia and China,

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will already "be in every corner." Although he was well aware of the Iran Sanctions Act (ISA), Demir stated that other fields in the South Pars complex were being developed by Shell and Halliburton. He also said Halliburton was helping to build a pipeline for Turkmen gas to pass through Iran to the sea.

8. (C) More specifically on regional energy strategy, Demir reiterated skepticism about near-term realization of the Trans-Caspian pipeline given the significant obstacles to resolving delimitation issues and timing issues resulting from Russian efforts to strengthen ties with Turkmenistan and Kazakhstan. He also expressed skepticism about Azerbaijian's interest in resolving delimitation issues. With TCP looking remote, and Turkey overly dependent on Russian gas supply, Turkey needed to act quickly to pursue accessing Turkmen gas via Iran. Demir echoed the Energy and Foreign Affairs Ministry officials on one point: the Turkey-Iran announcement was a response to the announcement of the Gazprom-ENI South Stream transaction, bypassing Turkey.

9. (C) Demir confirmed that the understanding with Iran, for the first time, includes Iranian agreement to allow Turkmen gas to transit Iran to Turkey -- a major breakthrough for Turkey. Without explicitly saying the Turkmen were consulted on the Turkey-Iran discussions, Demir implied as much by referring to Minister Guler's recent trip to Turkmenistan.

10. (C) Demir provided other details on the MOU, along the lines of press reporting. The total cost of the package of pipeline and gas field development would be on the order of $6 billion dollars, of which $2 billion would be the pipeline. Demir said it was too early to say how it would be financed but expressed optimism based on the European members of the Nabucco consortium being able to help in this regard. Demir said the Nabucco partners were not consulted on the new MOU since these same companies had been talking separately with Iran about gas supply. In addition to construction of a pipeline from the South Pars field to Turkey, the MOU provides for the Turkish state oil and gas exploration and production company, TPAO to develop fields, 23, 24 and 25 at South Pars. Demir said these fields are "ready" for offshore development. Once final agreement on the details is reached, construction of the pipeline and the field development is expected to take approximately four years, such that the earliest possible completion date would be in 2011.

11. (C) Comment: Demir's explanation needs to be taken with a grain of salt. Since he is not a government official, he can speak frankly with us but it is not at all clear he is expressing official policy. End comment.

Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/

WILSON

Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/

WILSON