A NEW ENERGY AGENDA: EUR DAS MATT BRYZA AND

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001011

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/CARC AND EB/ESC
USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 06/12/2016
TAGS: ENRG ECON EPET PREL AJ KZ RU TR
SUBJECT: A NEW ENERGY AGENDA: EUR DAS MATT BRYZA AND
TURKISH ENERGY ENVOY BALKAN MEET AZERBAIJAN FOREIGN
MINISTER MAMMADYAROV

Classified By: Charge d'Affaires Jason P. Hyland, reasons 1.4 (b,d,e).


1. (C) SUMMARY. On June 6, EUR DAS Matthew Bryza and Turkish
Energy Envoy Ambassador Mithat Balkan met with Azerbaijani
Foreign Minister Elmar Mammadyarov to discuss a new
partnership on energy issues, particularly on bringing
Azerbaijani gas to Europe. Foreign Minister Mammadyarov said
that Azerbaijan is willing to go ahead with such a project,
even beginning with largely symbolic deliveries of small
quantities of gas to Greece, but that Azerbaijan needs the
political support of the United States. DAS Bryza identified
four distinct tasks associated with the project --
negotiating a gas delivery deal among Azerbaijan, Greece and
Italy; negotiating an agreement for Azerbaijani gas to
transit Turkey; satisfying Azerbaijan's and Georgia's
short-term domestic gas demand; and finding a way forward on
the long-term goal of trans-Caspian gas. Mammadyarov agreed
with this formulation and said that Azerbaijan agreed to send
delegations to Athens and Rome to discuss gas sales.
Ambassador Balkan advocated a high-
level joint statement on gas at the Ceyhan BTC ceremonies
later this summer. On trans-Caspian oil transport, Bryza and
Balkan advocated a swift conclusion to the IGA negotiations.
DAS Bryza stressed that investor concerns had to be taken
into account; Mammadyarov seemed to resist. END SUMMARY.


2. (U) The following were present at EUR DAS Matt Bryza's
June 6 meeting with Azerbaijan Foreign Minister Elmar
Mammadyarov:

UNITED STATES:

EUR DAS Matthew Bryza
S/P Steven Hellman
Charge Jason Hyland
Energy Officer Kerem Bilge (notetaker)

TURKEY:

Special Energy Envoy Ambassador Mithat Balkan
Energy Officer Zeynep Savas (notetaker)

AZERBAIJAN:

Foreign Minister Elmar Mammadyarov
Deputy Foreign Minister Khalaf Khalafov
Israfil Akhmedov, MFA
MFA notetaker

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A NEW PARTNERSHIP IN GAS EXPORT
--------------


3. (C) DAS Bryza began the meeting with a discussion of the
renewed strategic partnership between the United States and
Turkey, including energy issues, and symbolized by the joint
presence of DAS Bryza and Ambassador Balkan. DAS Bryza
described the vision of a new "southern corridor" to bring
Caspian gas resources to Europe, specifically bringing
Azerbaijani gas to Greece, and introduced S/P consultant
Steve Hellman as someone with extensive commercial experience
who would provide subject-matter expertise.


4. (C) DAS Bryza noted that in the past, President Aliyev was
"on the fence" about Azerbaijan as a gas exporter, acutely
conscious of Azerbaijan's domestic needs. But following his
visit to Washington, DAS Bryza continued, Aliyev expressed
his realization that Azerbaijan is not in an either/or
situation between meeting domestic needs and export, and is
now expressing great interest in the idea of gas export to
Greece to prevent Gazprom from seizing markets in Southern
Europe and shutting in Azerbaijan's gas for years. DAS Bryza
pointed out that Edison Italia is interested in Azerbaijani
gas and that BP expressed confidence that it can accelerate
production in the Caspian to the point of producing 20 bcm by

2012. If Azerbaijan goes ahead with exploitation of "deep
gas" at the ACG field and full-field development of the Shah
Deniz field, Bryza continued, Azerbaijan could produce 50
bcma by 2015. This will provide Europe with a serious
alternative to Gazprom, and allow an escape from the current
monopsony setup, where Gazprom buys gas for USD 65 per

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thousand cubic meters in Central Asia and then resells it for
USD 265 in Europe. Bryza said that a multi-step process is
needed, starting with getting Azerbaijani gas into the
Turkey-Greece-Italy pipeline. DAS Bryza said that during his
meeting with President Aliyev earlier in the day, the
Azerbaijani leader accepted Bryza's suggestion to send
delegations to Greece, Italy and Turkey to discuss gas
exports, an idea the United States welcomes.


5. (C) Ambassador Balkan followed, noting that there is
complete agreement in Turkey with President Aliyev's stated
energy export goals. There is a "communality of vision"
between Turkey, Azerbaijan and the United States, he said.
The BTC and SCP pipelines will be the "backbone" for future
projects, he added, and these energy projects are a way for
Turkey and Azerbaijan to achieve further integration with
Europe. One such project would be the Nabucco pipeline to
Austria, another is the Turkey-Greece-Italy interconnector
(TGI). It is important, he added, to move beyond the shared
vision to practical matters -- these projects require urgency
because of other gas producers in Europe who want to "block
the artery" by getting their gas in place first. In response
to a question from the Foreign Minister, Balkan agreed that
TGI is the project requiring the most urgency, with
trans-Caspian gas from Central Asia a close second."

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A NEED FOR ACTIVE AMERICAN SUPPORT
--------------


6. (C) In response, Mammadyarov recalled a 2004 meeting in
Brussels when EU countries had shown "zero interest" in
Azerbaijani gas. Now the situation is different, he said, as
energy security has become not just a regional issue but a
global one. American support is key - "without the full
support of the United States, we can't move forward," he
said. The technology exists to get more gas out of Shah
Deniz, but this will take time. However, he added, from a
political perspective, Azerbaijan is ready to move ahead,
even if the most immediate result would be to provide only a
small symbolic volume of gas to Greece. Ultimately,
Kazakhstan needs to be brought into this process to get the
volumes where they should be, said Mammadyarov. Georgia will
want more gas for its needs, said the Foreign Minister, and
though "I am not Nostradamus," it is likely the Russians will
increase their prices this winter.


7. (C) DAS Bryza said that Azerbaijan would have the
political support of the United States in this venture, and
added that per President Aliyev's request the United States
would not engage in anti-Gazprom rhetoric. The focus needs
to be on putting together a deal that is commercially viable,
said Bryza. Ambassador Balkan added that Turkey is not
"merely" a transit country in this deal but also wants to be
actively involved.


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A MONOPOLIST SEEKS TO PRESERVE A MONOPOLY
--------------


8. (C) Foreign Minister Mammadyarov asked if Gazprom was
trying to expand Blue Stream to block these projects.
Ambassador Balkan answered that Gazprom wants to build a
second Blue Stream, block other routes and thus monopolize
gas sales to Turkey and Greece. DAS Bryza added that General
Director Papageorgiu of DEPA, the Greek state gas company, is
under tremendous pressure to sign contracts with Gazprom that
would lock out Azerbaijani or any other gas providers.
Papageorgiu has told Bryza that Gazprom has threatened to
refuse to renew its gas supply contract with Greece off if
DEPA did not agree to exclusive purchases of Russian rather
than Azerbaijani gas via the Turkey-Greece Interconnector.
Azerbaijan has to engage with Greece to reach a gas
sales/purchase agreement, said Bryza, but "we will all stand
together." Mammadyarov replied that Azerbaijan is ready and
interested to act.

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AZERBAIJAN-KAZAKHSTAN FOR TRANS-CASPIAN OIL
--------------

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8. (C) Ambassador Balkan noted that besides gas projects, it
is also important that Azerbaijan and Kazakhstan conclude an
Inter-Governmental Agreement (IGA) soon to bring Kazakhstan's
oil into the BTC pipeline. In response, the Foreign Minister
said that the Azerbaijan-Kazakhstan IGA is close to signature
and should be signed by mid-June in Almaty. DAS Bryza said
that it is important that the IGA address specific commercial
concerns and issues. Mammadyarov replied that state
interests also have to be addressed and that investors "can't
have an open field for themselves" and that this to an extent
is a political issue (COMMENT: Mammadyarov's remark is
worrisome but within the context of Azerbaijan and
Kazakhstan's less-than-friendly approach to investor concerns
during the IGA negotiations. END COMMENT).

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TRANS-CASPIAN GAS
--------------


9. (C) DAS Bryza agreed that securing trans-Caspian gas is
crucial to repairing Europe's gas market by mitigating the
price disparity between gas bought in Central Asia and sold
in Europe. Bryza opined that working out a trans-Caspian
link would take some time; meanwhile, it was imperative to
expand gas production in Azerbaijan and deliver it to Europe
via the Turkey-Greece-Italy and (prospective) Nabucco
pipelines, as these projects were much further along.
Ambassador Balkan agreed - trans-Caspian gas would be helpful
but would be a long-term project. Other resources are
present now. The future might also include options with
Iran, Iraq or Egypt. Turkish consumption is increasing, said
Balkan, which is why Gazprom sees an opening to further
consolidate its monopoly - such as by expanding Blue Stream
and pressures the Turkish Government accordingly.


10. (C) Foreign Minister Mammadyarov did not dispute the
above, but said that it would be important for experts to
examine the issue and determine what the situation really is
in terms of volumes and demand, including Georgian demand.
Citing Gazprom's history of sudden and arbitrary increases in
prices, Mammadyarov said "we need to protect ourselves."
Ambassador Balkan said he understood Azerbaijan has limited
room for maneuvering.

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THE WAY FORWARD
--------------


11. (C) DAS Bryza identified four tasks associated with this
initiative:

--negotiating a deal between Azerbaijan, Greece and Italy for
gas deliveries
--negotiating a specific agreement for the transit of
Azerbaijani gas through Turkey
--satisfying Azerbaijan's and Georgia's short-term domestic
needs (i.e., before Shah Deniz Phase II),and
--finding a way forward on the long-term goal of
trans-Caspian gas from Central Asia.


12. (C) Foreign Minister Mammadyarov agreed with this model,
but again for the record emphasized the importance of having
the strong support of the United States, especially for the
trans-Caspian venture. Ambassador Balkan recalled the
history of the BTC and said that a strong joint statement
explicitly outlining the gas initiative (including the
trans-Caspian option) could be made - perhaps at the upcoming
Ceyhan BTC ceremonies, if attendees were high-level enough.


13. (C) Foreign Minister Mammadyarov said that he would
encourage Azerbaijan's state oil company SOCAR, and allied
electricity and gas companies AzerEnergy and AzeriGaz to put
together a trip to Athens and Rome as soon as possible. DAS
Bryza welcomed this and said that Edison Italia and DEPA
would undoubtedly welcome it as well.


14. (U) EUR DAS Matt Bryza has cleared this cable.
HYLAND