AZERBAIJAN: CONOCO-PHILLIPS CONCERNED ABOUT LOSING

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001693

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/19/2016
TAGS: PREL EPET AJ
SUBJECT: AZERBAIJAN: CONOCO-PHILLIPS CONCERNED ABOUT LOSING
UMID BABEK PROSPECT


Classified By: Ambassador Anne. E. Derse, reasons 1.4 (b,d)


1. (C) SUMMARY: On November 15 Conoco-Phillips executive
Steve Park told the DCM that another, higher-level
Conoco-Phillips executive was coming to Azerbaijan for a
November 30 meeting with SOCAR President Rovnaq Abdullayev.
The subject of that meeting will be Conoco-Phillips problems
with its current protocol for the Umid Babek offshore gas
field, in which Conoco-Phillips is unable to proceed due to
FCPA concerns with one of its protocol partners. Although
Conoco wishes for SOCAR to give it preferential bidding
rights when the current protocol expires in February 2007,
Park thinks it quite possible that SOCAR will instead wait
for the current protocol to expire, then proceed with
exploring the field itself. In her meetings with SOCAR
President Abdullayev and other GOAJ energy-related
interlocutors the Ambassador has raised the issue of Conoco's
involvement with Umid-Babek in the context of the
desirability of providing a level playing field so that US
companies, with their needed technology, expertise and
capital, will invest in Azerbaijan, and she will continue to
do so. END SUMMARY.


2. (C) On November 15 DCM met with Conoco-Phillips (C-P)
Manager, Negotiations and Exploration Contracts, Exploration
and Business Development Steve Park, and C-P Baku Office
Representative Ms. Fidan Aqayeva (at their request),
concerning C-P's involvement in the Umid Babek field. Econoff
was notetaker.


3. (C) BACKGROUND: C-P is a partner in a protocol for the
development of the Umid Babek offshore field with Target
Petroleum Azerbaijan Corporation and with SOCAR. C-P signed
this two-year protocol in February 2005, and it is due to
expire in February 2007. After signing the protocol, C-P did
due diligence on Target and found that for FCPA reasons it
could not continue with Target as a partner, and as such no
exploratory work has been done on the Umid-Babek prospect.
C-P has been seeking dissolution of the existing protocol
while still keeping a preferential position for any
subsequent protocols for the same field. (NOTE: C-P claims it
was pressured into a 'forced marriage' with Target in order
to get the protocol). Umid Babek is potentially a major
source of Azerbaijani gas: according to SOCAR estimates, it
could produce up to 14-15 billion cubic meters of gas
annually. END BACKGROUND.


4. (C) Park said that he had just met that day with his POC
at SOCAR, Senior Geologist Arif Narimanov, and that he was
told that C-P Executive Vice President for Exploration and
Production (Europe, Asia, Africa and the Middle East) Bill
Berry has an appointment to meet with SOCAR President Rovnaq
Abdullayev on November 30. (The meeting subsequently was
delayed due to Abdullayev's travels). Park said that after
that meeting, if Berry does not get the green light on
continued C-P involvement in the Umid Babek project after the
expiration of the existing protocol in February 2007, he will
seek an appointment with President Ilham Aliyev, per guidance
earlier received from Presidential Energy Advisor Ali Asadov.


5. (C) Recounting recent events, Park told the DCM that in
early October SOCAR had seemingly 'leaned on' Target to
withdraw from the protocol in which it was a partner with
C-P, and at that time Park was told that C-P was to receive a
Letter of Withdrawal from Target by the middle of October.
However, that letter never came and C-P subsequently learned,
in late October, that Target did not intend to withdraw from
the Protocol. Park said he believed that Target was seeking
to 'monetize' its share in the protocol, i.e. have a third
company pay Target for its interest in the Umid Babek
project. According to Park, the key condition for C-P
avoidance of FCPA issues was for Target to cede its interest
back to SOCAR, which could then issue it to a new company
(i.e. Target could not directly cede its interest to another
company). C-P's legal department believed that from a FCPA
viewpoint, if Target let its interest revert back to SOCAR,
and SOCAR then assigned it to another company, then C-P would
not be obligated to ask its new partner whether it had paid
Target any money for its interest. When there had been talk
in October of Target relinquishing its interest back to
SOCAR, C-P had heard that German company RWE or Indian
company ONGC were potential new partners, and it had started
doing due diligence on these companies just in case. C-P had
also heard that Russian automobile tire company Amtel was
another possible assignee. Park conjectured that the reason
Target decided not to withdraw from the project and to
monetize its interest was its concern that C-P might indeed
'ask the question' of any new company as to whether it had

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paid Target for its interest in Umid Babek.


6. (C) Econoff told Park that in the November 9 meeting the
Ambassador and visiting DOS Special Representative for
Commercial and Business Affairs Frank Mermoud had with SOCAR
President Abdullayev, she had raised the issue of C-P's
involvement with Umid Babek, noting the role US companies can
play in supporting SOCAR,s mission to optimally develop and
exploit Azerbaijan's oil and gas resources. During that
meeting, Abdullayev said, as he has before, that this
protocol was signed before he became SOCAR head, and that
since it was an agreement among three parties (i.e. SOCAR,
Target, C-P),it was up to all three parties to work out a
mutually satisfactory solution. Since both Target and SOCAR
were willing to proceed according to the protocol, Abdullayev
implied that it was up to C-P work out a mutually
satisfactory arrangement with Target.


7. (U) In an October 26 news article, SOCAR First
Vice-President Khoshbakht Yusifzade was quoted as saying that
SOCAR may start drilling of prospective natural gas
structures at Umid Babek in the spring 2007. However, he
noted that if SOCAR wanted to proceed before February 2007 it
would have to first resolve legal issues with C-P. Yusifzade
told Reuters that SOCAR would have to wait until the protocol
expired before independently starting operations on the block.


8. (C) COMMENT: Park was relatively downbeat about C-P's
prospects, feeling that SOCAR was going to let the existing
protocol expire on February 23, 2007. His contacts at SOCAR
have led him to believe that at that point SOCAR would not
re-bid the Umid Babek field but would instead seek to drill
some exploratory wells itself or through subcontractors. C-P
believes such a move would allow SOCAR to decide on
subsequent full-field development and to ask for a much
higher price when it eventually re-bids the fields. Park
said that the Umid Babek field is actually two adjoining
fields, one shallow and the other deep, and that in his
opinion SOCAR does not have the technical capability to drill
the deep, high-pressure portion of Umid Babek. Park said
that C-P is drawing up its regional budget for the coming
years, and might well be forced to walk away from its
involvement in Umid Babek, should the existing agreement
expire and SOCAR indeed decide not to re-tender the project.

9. (C) COMMENT (CONTINUED): In each of her meetings with
SOCAR President Abdullayev the Ambassador has raised the
issue of C-P's involvement with Umid-Babek in the context of
the desirability of providing a level playing field so that
US companies, with their needed technology, expertise and
capital, will invest in Azerbaijan, and she will continue to
do so. END COMMENT
DERSE