BP AND STATOIL UPDATE EUR DAS BRYZA ON CASPIAN GAS

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001193

SIPDIS

SIPDIS

DEPT FOR EB AND EUR

E.O. 12958: DECL: 08/04/2016
TAGS: ENRG EPET ECON PREL PINR RU GG AJ
SUBJECT: BP AND STATOIL UPDATE EUR DAS BRYZA ON CASPIAN GAS


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


1. (C) In an August 1 meeting, executives from BP and
Statoil briefed EUR DAS Bryza on current prospects for
increasing Caspian gas exports to European markets. BP and
Statoil reported that delays in completion of the Turkish
segment of the South Caucasus Pipeline (SCP) will force
diversion of initial Shah Deniz phase I production solely to
Azerbaijani and Georgian domestic needs, at least through the
end of October. They said that negotiations for sale of Shah
Deniz phase II volumes to Europe will depend on Turkey's role
as a transit country, Azerbaijan's still unknown plans to
divert some portion of the phase II volumes for domestic
consumption, and ongoing Azerbaijani-Russian negotiations
over Gazprom sales to Azerbaijan for 2006-2007. Russia, they
said, does not want to see Azerbaijan sell gas to Turkey
below Blue Stream prices. Prospects for Azerbaijani gas
sales to Europe are further complicated by what the
executives characterized as a complete lack of strategic
planning capacity within SOCAR. Until Azerbaijan determines
its own long-term domestic gas needs, BP and Statoil said
they will not be able to make a commercially viable proposal
for gas sales to Europe. For this reason, Azerbaijan could
not be expected to make more than a symbolic gas sale to
Greece before the end of the year. BP said USG political
support will be necessary to resolve the Turkish transit
issue. End summary.


2. (C) The Ambassador and visiting EUR DAS Bryza met with
BP/Azerbaijan President David Woodward and Statoil/Azerbaijan
VP for Gas Jan Heiberg on August 1 to review current
prospects for increasing Caspian gas exports to European
markets. Confirming that delivery of first gas from the Shah
Deniz field was on track for early September, Woodward said
that delays in completion of the Turkish segment of the South
Caucasus gas pipeline would require diversion of Shah Deniz
gas for domestic consumption in Azerbaijan and Georgia at
least through the end of October. Woodward speculated that
the delay could drag into 2007. Woodward said that SOCAR was
completing the upgrades to Azerbaijan's gas infrastructure
necessary to handle the in-fill from Shah Deniz (a short
connection from the Sangachal terminal to Azerbaijan's gas
network),which should be ready by September 1. Woodward
said that the excess gas -- which cannot be sold to Turkey
until the Turkish segment of SCP is completed -- could easily
be absorbed by Azerbaijan and Georgia's domestic markets.
(In a separate July 28 meeting with Charge, Woodward said
that Azerbaijan could supply up to twenty percent of
Georgia's gas needs this winter.) Woodward added that
Azerbaijan's current gas network has a maximum capacity of
four bcma. (Once the Turkish segment of SCP is fully
operational, just 1.5 bcma of Shah Deniz phase I production
will go to Azerbaijan's domestic market.)


3. (C) Woodward said that Azerbaijan and Georgia currently
are negotiating the exact amount of excess SCP gas that will
be sold to Georgia until the Turkish segment of SCP is
complete. He said that a basic agreement to sell the gas to
Georgia had been reached on the margins of the BTC
celebrations in Istanbul, but the two sides are still
haggling over quantity and price. Azerbaijan and Georgia are
expected to reach an agreement before August 15. Woodward
noted that the Georgian offtake for SCP is under construction
and should be completed by late September.


4. (C) Separately, Azerbaijan and Russia are negotiating the
terms of Gazprom gas sales to Azerbaijan for 2006-2007.
(Azerbaijan currently relies on Gazprom for roughly 50
percent of its natural gas needs.) Woodward said that Russia
is threatening to cut off all gas exports to Azerbaijan if
Azerbaijan exports any new gas volumes of its own to Turkey.
Russia, Woodward said, is extremely worried that Azerbaijan
will sell gas to Turkey below Blue Stream prices. For this
reason, Azerbaijan wants to wait to move forward on any new
gas deals with Turkey until the Gazprom negotiations are
finished. Bryza commented that anything more than a symbolic
shipment of Azerbaijani gas to Greece would be very difficult
to achieve before the end of the year.


5. (C) Both Woodward and Heiberg questioned the role Turkey
would play in the export of Shah Deniz phase II volumes to

BAKU 00001193 002 OF 002


Europe, noting that Turkey appears to want to sell gas at a
profit rather than simply serve as a transit country. Bryza
said that the U.S. shares this concern and relayed his own
conversations with Turkish Foreign Minister Gul and Energy
Minister Guler to ensure they understand that any
arrangements for the transit of Caspian gas through Turkey
must be commercially viable. Future sales of Caspian gas to
Greece, Bryza noted, will depend on the Turkish transit
arrangements. Heiberg agreed, and said that Statoil is
working on a concrete business proposal, along the lines of
the Nabucco agreement, that could be presented to Turkey.


6. (C) Prospects for Caspian gas exports to Europe are
further complicated by the current indecision within
Azerbaijan over how best to utilize volumes from full-field
Shah Deniz development, both Woodward and Heiberg said.
Azerbaijan has not yet decided how much of the phase II
volumes will be kept for domestic consumption. Woodward said
he is hearing signals that some within Azerbaijan's
leadership want to take all of the gas for domestic
consumption. Until Azerbaijan decides how much of the Shah
Deniz phase II volumes are diverted for domestic consumption,
Woodward said the international companies cannot plan
exports, particularly as the companies' share of production
will change over time under the Production-Sharing Agreements
(PSA). The PSA issue could be solved by a decision to merge
volumes for export, as had been undertaken for Shah Deniz
phase I production, but Woodward said a quick decision on
this strategic decision is unlikely. Bryza explained that
President Aliyev had noted during and since his Washington
visit that Azerbaijan's priority was now to accelerate Shah
Deniz Phase II production to seize market share in Greece and
Italy, before Gazprom beat Azerbaijan to those and other
European markets by expanding the Blue Stream pipeline to
Turkey. Woodward and Heiberg welcomed the news but lamented
that SOCAR and the Ministry of Energy were not yet acting to
implement this decision.


7. (C) Woodward and Heiberg both complained that SOCAR's
ability to undertake strategic planning was severely hampered
by the December 2005 appointment of Rovnaq Abdullayev as the
company's new President. Of the current SOCAR leadership,
only VP Elshad Nasirov has the capacity to undertake
strategic analysis and planning and Nasirov, according to
Woodward, had been tapped to lead all of SOCAR's ongoing
negotiations. Woodward and Heiberg said that all of their
business with SOCAR grinds to a halt when Nasirov is
otherwise occupied, as he currently is with negotiations with
both Georgia and Russia. Heiberg commented that SOCAR has no
capacity to determine Azerbaijan's long-term energy
consumption needs and hence its long-term export capacity.
Statoil is trying to help move the process along by preparing
a White Paper that will provide both a historical review of
Azerbaijan's energy development and a prospective look at all
of Azerbaijan's gas reserves. Woodward and Heiberg agreed
that capacity-building is desperately needed at all levels of
SOCAR, and commented that Azerbaijan's top leadership (e.g.,
President Aliyev) does not understand the depth of the
problem.


8. (C) In order to help secure access for Azerbaijani gas to
European markets, Woodward said that the U.S. could help by
building capacity at all levels in SOCAR and particularly in
the area of strategic planning. Politically, Woodward said
that USG help is needed to get further clarity and
transparency on Turkey's role in the transit of Caspian gas
to European markets. Bryza assured Woodward and Heiberg that
the USG was committed to helping bring Caspian gas to
European markets. He also said that the US may be able to
consider sending someone to discuss capacity-building with
SOCAR.


9. (U) EUR DAS Bryza cleared this message.
HYLAND