Identifier
Created
Classification
Origin
06BAKU1789
2006-12-08 13:58:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AZERBAIJAN: BP WILLING TO MAXIMIZE ACG GAS TO

Tags:  ENRG PGOV PREL AJ TU GA 
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O 081358Z DEC 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1920
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001789 

SIPDIS

SIPDIS

DEPT PLEASE PASS TO EUR A/S DAN FRIED, EB A/S DANIEL
SULLIVAN, EUR DAS MATT BRYZA

E.O. 12958: DECL: 12/07/2016
TAGS: ENRG PGOV PREL AJ TU GA
SUBJECT: AZERBAIJAN: BP WILLING TO MAXIMIZE ACG GAS TO
SOCAR TO HELP MEET SHORT-TERM GAS CRUNCH

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

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001789

SIPDIS

SIPDIS

DEPT PLEASE PASS TO EUR A/S DAN FRIED, EB A/S DANIEL
SULLIVAN, EUR DAS MATT BRYZA

E.O. 12958: DECL: 12/07/2016
TAGS: ENRG PGOV PREL AJ TU GA
SUBJECT: AZERBAIJAN: BP WILLING TO MAXIMIZE ACG GAS TO
SOCAR TO HELP MEET SHORT-TERM GAS CRUNCH

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


1. SUMMARY: BP Azerbaijan President Bill Schrader told the
Ambassador on December 8 that BP has come up with a proposed
course of action to help Azerbaijan out of its upcoming
winter gas supply shortage, part of which would be giving
Azerbaijan "as much ACG associated gas as it can" over a six
to eight week period. He would also tell President Aliyev
that this excess free gas would stop 'come April,' when the
crisis was over, and Azerbaijan should not get used to it --
it was essential to re-inject this gas to preserve the health
and production of the ACG field. BP would not seek
compensation for any losses incurred by this extra ACG gas to
Azerbaijan. According to demand numbers agreed to by both
BP and SOCAR, Schrader said that Azerbaijan would be able to
get through the winter even without any gas from Russia, and
would be able to give as much gas to Georgia as Georgia is
technically able to receive, replacing it with mazut in
Azerbaijani power plants. END SUMMARY.


2. (U) On December 8 the Ambassador met with BP Azerbaijan
President Bill Schrader to discuss the upcoming regional gas
situation. BP External Affairs Director Clare Bebbington and
EnergyOff (notetaker) were also present.


3. (C) Schrader said that he and his staff had been working
'nonstop' over the previous 36 hours to arrive at a solution
for Azerbaijan's upcoming winter 2007 gas shortage. The
proposed solution, which Schrader will seek to deliver to
President Aliyev this weekend, is predicated upon three
assumptions:

- the key months are January through March 2007.
- Turkey will not be able to take any Shah Deniz gas until at
least April 2007 (Schrader said that BP's "guys with
binoculars" had made this assessment after looking at the
pipeline construction in Turkey)
- BP's Shah Deniz producing wells come on schedule.


4. (C) Schrader said that he was seeking a meeting with

President Aliyev on December 9 to tell him that BP was
willing to forego BP's optimal gas reinjection schedule and
instead maximize delivery of associated gas from the ACG
field for six to eight weeks this winter to the extent
allowable by the existing infrastructure - "We're going to
push as much gas at them as they can take." Additionally, he
would not ask "to be made whole" for any losses stemming from
giving this increased amount of ACG gas to Azerbaijan.
However, he said he would also tell Aliyev that that this is
a good-faith short-term effort by BP to help Azerbaijan out
of a tough situation, but that "come April, the free gas will
stop," i.e. Azerbaijan should not expect these additional
amounts of free ACG associated gas to continue. Schrader
would point out to Aliyev that maintaining the reinjection
schedule over the long-term was essential to preserve the ACG
field's health and productive ability. He added that it was
by no means certain that BP's partners in Shah Deniz would be
pleased with this proposal, as heretofore they had always
asked to be 'made whole' by any increased transmission of
associated ACG gas to Azerbaijan.


5. (C) In this regard, Schrader explained that BP's
reluctance to agree to giving increased amounts of ACG gas to
Azerbaijan stemmed from their concern that Azerbaijan would
"get used" to this free gas (note: Many GOAJ interlocutors,
to include President Aliyev and FinMin Sharifov, have told
the Ambassador that BP's unwillingness to give increased
amounts of ACG associated gas stemmed from BP's desire to
'link' this issue with access to ACG deep gas, or extension
of the current PSA). Schrader said that he was aware that
many in the Azerbaijan government ascribed sinister motives
to BP's reluctance to help out with additional ACG associated
gas, but that he would tell Aliyev frankly that BP was not
seeking to "blackmail Azerbaijan over ACG deep gas," but that
it was concerned about Azerbaijan "getting used to" free ACG
gas.


6. (C) Responding to the claim by some GOAJ officials that BP
could maintain well pressure by reinjecting water, Schrader
explained that optimal reserve recovery is predicated on both
water and gas re-injection, water for the aquifer below the
oil, and gas for the wellhead gas sitting above the oil.
Reinjecting merely water and not adequate gas would result in
decreased reservoir pressure and sub-optimal reserves
recovery. Longer term non-adherence of the ACG gas

BAKU 00001789 002 OF 003


reinjection schedule could also increase the chance of water
'fingering' into the oil being extracted, which would lead to
well shut-down, drilling of a sidetrack well (cost:
approximately 20 million USD),and other attendant financial
losses. Responding to the charge that BP is continuing to
flare significant amounts of gas, Schrader said that the
previous week there had been an 'inexplicable' arcing out and
consequent explosion of an 11 thousand ABB volt breaker at
the platform, which caused loss of power generation to
compressors and the resultant necessary flaring of 100
million scf/d. He said this problem should be solved by next
week, with the flaring ended. He said that GOAJ security
(MNS) suspected sabotage, and was seeking to investigate.


7. (C) Schrader said that he was seeking to see Aliyev the
following day, as he "did not want to be called on the
carpet" at a proposed December 14 'Trilateral plus Two'
meeting in Baku, about which he had heard from BP in
Washington.


8. (C) Concerning the recent Turkish announcement to BP that
it is ready to receive Shah Deniz gas, Schrader said that BP
"doesn,t' want to be in the middle of a 'take or pay' fight
between Azerbaijan and Turkey, and would let the two
countries decide. Schrader said that BP's proposed solution
sought to address Azerbaijan's gas supply shortage for the
coming winter, with the realization that Azerbaijan could use
this revised gas balance in winter 2007 to send Georgia as
much gas at it could technically be able to receive from
Azerbaijan.

Shah Deniz Wells
--------------


9. (C) Schrader said that the first Shah Deniz well should
begin production the week of December 11, and should be
producing approximately 230 million standard cubic feet per
daily (scf/d - equal to 2.3 billion cubic meters annually -
bcm/a). The second Shah Deniz well, estimated to produce an
equivalent amount, will begin production in mid-January 2007,
with the two wells eventually producing a total of 460
million scf/d (4.6 bcm/a). He predicted the third Shah Deniz
well will begin production in mid-March 07.

January Supply-Demand
--------------


10. (C) Schrader said that BP sees the solution to the
problem of the upcoming winter 07 gas shortage on a
month-to-month basis, and that their calculations showed that
January would be the most difficult month. However, he said
that the proposal BP would put forward would meet the need
even in January. Schrader gave the following numbers to the
Ambassador, pointing out that this demand projection had been
agreed to in the joint BP-SOCAR Working Group:

Azerbaijan Demand in January 2007: 1350 million scf/d

Available from storage: 300 million
scf/d
SOCAR produces: 420 million
scf/d
ACG Associated Gas: 290 million
scf/d
Shah Deniz Well #1 Gas: 230 million scf/d
Shah Deniz Well #2 Gas (month avg): 115 million scf/d

Total Supply in January 2007: 1355 million scf/d


11. (C) When asked about Georgia's gas needs, Schrader said
that BP estimated that in January 07 the most Georgia could
receive from Azerbaijan was 180 million scf/d (1.8 bcm/a).
According to Schrader, Azerbaijan could "easily" send this
amount to Georgia and make up for the loss by increased
burning of mazut in its power plants. He pointed out that
Georgia could also burn increased mazut in its power plants.

Russia
--------------


12. (C) BP's projections assumed zero gas from Russia.
Schrader said that in his opinion Azerbaijan was right not to
accept gas from Russia at USD 230 per mcm, as this price once
accepted would become a new benchmark below which it was
unlikely to drop. Referring to recent GOAJ announcement that

BAKU 00001789 003 OF 003


it would forego using the Northern Supply Route for exporting
oil, Schrader said that Russia would not only lose the
tariffs, but that without Azeri light to mix with in the
pipeline, its own Ural blend would become that much less
commercially desirable. Concerning the currently shut-down
for repairs Western Supply Pipeline to Supsa, Schrader said
that it should be back on line by late December, early
January 2007.


13. (C) Schrader said that according to BP's calculations,
the gas crunch problem would by and large be over by April
2007, adding that Shah Deniz would be producing at excess of
demand for the rest of 2007. When the Ambassador asked for
the reason in Shah Deniz production delays, Schrader said
that pressure testing of a new wellhead design on the TPM-500
platform had gone awry, causing a two to three month delay in
production.
DERSE