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 -------------- 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 BAKU 00001011 002 OF 003 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." -------------- 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. -------------- 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. -------------- AZERBAIJAN-KAZAKHSTAN FOR TRANS-CASPIAN OIL -------------- BAKU 00001011 003 OF 003 ¶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). -------------- 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. -------------- 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