AZERBAIJAN ENERGY MINISTER: TRILAT GAS DEAL

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001815

SIPDIS

SIPDIS

DEPARTMENT TO DAS BRYZA

E.O. 12958: DECL: 12/12/2016
TAGS: ENRG PREL PGOV TU GA AJ
SUBJECT: AZERBAIJAN ENERGY MINISTER: TRILAT GAS DEAL
REACHED, DETAILS TBD DECEMBER 14-17

REF: (A) BAKU 1794 (B) BAKU 1789 (C) BAKU 1771 (D)

BAKU 1807

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


1. (C) SUMMARY At a December 12 meeting Energy Minister
Natiq Aliyev briefed US and Georgian diplomats and energy
company representatives on the results of the December 8
Energy Ministers' Trilateral in Tbilisi. Aliyev said the
Energy Ministers came to a general agreement that Turkey's
2007 Shah Deniz gas be re-distributed, with greater amounts
going to Azerbaijan and Georgia and with Turkey receiving no
gas before July 2007. The Ministers also agreed to an
experts meeting in Baku December 14-17 to work out the
details. Aliyev asked the Shah Deniz partners' help in
drawing up a draft Intergovernmental Redirection Agreement
for the December 14 meetings, at which a corresponding new
agreement between Botas and the Azerbaijan Gas Supply Company
(AGSC - the Shah Deniz partners' marketing entity) would be
drawn up. On compensation for Turkey, Natiq said that he
"didn't want to talk mechanisms" and would leave that "for
the companies' lawyers," at the Baku meetings. He assured
the companies that they would be kept financially whole.


2. (C) SUMMARY (CONTINUED): Based on this meeting, it seems
that the two key documents expected to come out of the
December 14 Baku meetings would be a final Intergovernmental
Redirection Agreement and a corresponding new agreement
between Botas and AGSC. Although it is incorrect to say that
an agreement has been reached, certainly the general outlines
of one have been. There are serious issues still on the
table, and Azerbaijan and the Shah Deniz partners expect that
Turkey will seek some form of compensation for their
willingness to forego some 2007 Shah Deniz gas. Having said
that, Energy Minister Aliyev and the Shah Deniz partners
believe that all involved can work out an acceptable
agreement. Concerning possible high-level USG involvement in
December 14 mtg, Natiq told EnergyOff after the December 12
meeting that although USG representatives from Washington
were welcome to come, since the upcoming December 14th
meeting was at the experts level, he felt their presence
wouldn,t be necessary. END SUMMARY.


3. (C) On December 12 Azerbaijan Energy Minister Natiq Aliyev
summoned representatives of Socar, BP and Statoil, and
Georgian and US diplomats to brief them on the December 8 gas
Energy Ministers' Trilateral Meeting in Tblisi. Main
participants included: (from BP) BP Azerbaijan President Bill
Schrader, Vice-President for Commerce Dr. Phil Home, External
Affairs and Policy Forum Manager Seymour Khalilov; (for
Statoil) Statoil Azerbaijan President George Gundersen and
Vice-President for Gas Jan Heiberg; (for Socar)
Vice-President Elshad Nassirov and Foreign Investments
Division General Manager Vaqif Aliyev; Georgian Ambassador to
Azerbaijan Zurab Gumberidze and EnergyOff.


4. (C) Speaking throughout in Russian (with BP personnel
translating),Aliyev started by saying that delays in Shah
Deniz production and in the construction of the South Caucus
Pipeline (SCP) had worsened Azerbaijan's 2007 gas balance,
with the GOAJ estimating that even with domestic reserves,
there would be a supply deficit of 1.3 billion cubic meters
(bcm). Although negotiations with Gazprom were ongoing, the
price offered (USD 230 per thousand cubic meter - mcm) was
high enough to make the increased burning of mazout in
Azerbaijani power plants economically preferable. This
mazout burning would lead to losses, but not major ones,
Aliyev said.

GA-AZ Solidarity
--------------


5. (C) Aliyev said Georgia was also in a similar situation in
its negotiations with Russia for 2007 gas, and that Georgia
and Azerbaijan had agreed to coordinate their actions in
relation to Gazprom. Aliyev said he thought that neither
Azerbaijan nor Georgia would get any Russian gas this winter,
and that Russia was trying to delay or stop Azerbaijan gas
from reaching international markets. Georgian Ambassador
Gumberidze said he too assumed that come January first 2007,
Georgia would be receiving no Russian gas.


6. (C) Aliyev said that he had met with the Gazprom's Deputy
Director during Russian Prime Minister Fradkov' recent visit
to Baku. He said Gazprom offered Azerbaijan a 'swap deal'
whereby Azerbaijani gas would go to South Russia in exchange

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for Russia selling gas to Europe. Gazprom also offered to
increase Azerbaijan's gas storage capacity for its domestic
market in exchange for Azerbaijani gas for South Russia.
Aliyev said that he declined both offers.

Tbilisi Readout
--------------


7. (C) Briefing on the December 8 Tbilisi meeting, Aliyev
said that he had consulted with Socar prior to Tbilisi and
had gone there "with a draft agreement in my pocket," but
that he had not shown it to the other Energy Ministers
"because I saw no need to." He had
conveyed the following points, approved by Prime Minister
Rasulzada and President Aliyev, to Turkish Energy Minister
Gular in Tbilisi:

- President Aliyev is committed to help Georgia through the
winter. Georgia needs a minimum of 1.1 bcm of which
Azerbaijan will seek to provide 0.8 bcm.

- if Azerbaijan had to buy Gazprom gas at USD 230/mcm and
sell Shah Deniz gas to Turkey at USD 120/mcm, there would be
'social disorder in Azerbaijani streets;'

- Some Shah Deniz gas has to reach Turkey in 2007 to prevent
the appearance of failure in the project of exporting
Azerbaijan gas to and through Turkey;

- In light of Turkey's deal to sell 0.7 bcm to Greece, it
would be "good for all" if some Shah Deniz gas reached the
Greek market in 07.


8. (C) In reaction to these points, Aliyev said Energy
Minister Gular initially tried to 'maintain the status quo'
in Tbilisi, insisting that Turkey had already allocated the
Shah Deniz gas it expected to receive, and that getting less
would be a breach of contract. Turkey also tried to broach
the matter of direct compensation, but Aliyev explained to
him that this issue was "not linked" to the general political
one, and that what was most important was that a mutual
political decision be reached. Despite Gular's contention
that only parties to the contract could discuss the matter
and that there needed to be talks about an overarching legal
framework, eventually the three Energy Ministers agreed on
the following general points:

- Turkey would be willing to redistribute its Shah Deniz gas
as follows: 1.3 bcm to Azerbaijan, 0.8 bcm to Georgia and
0.7, keeping 0.7 for itself;

- Turkey would accept its first Shah Deniz gas no earlier
than July 07 (this date driven by contract with Greece)

- There would be an amendment to the existing contract, with
experts meeting in Baku on the 14-17 to work out the details.


9. (C) Aliyev said that although Gular agreed to the above
points, he said he would need to consult with his Prime
Minister. Energy Minister Aliyev said he thought that the
SCP pipeline in Turkey would not be ready until July 2007,
based on Turkey's willingness to forestall receiving Shah
Deniz gas until that date. He said that in Tbilisi Turkey
had offered to re-distribute all Shah Deniz gas available
before July 2007 in exchange for all Shah Deniz gas available
post-July to December 2007, an offer which he rejected
immediately. Aliyev said he briefed the Georgian President
after the Tbilisi summit, who approved of the agreement, as
did President Aliyev when he was briefed.

Baku Dec 14
--------------


10. (C) Energy Minister Aliyev said that these next,
expert-level meetings in Baku December 14-17 would include
representatives of Botas, Socar, BP and Statoil (Statoil
being marketer for the Shah Deniz marketing arm, the
Azerbaijan Gas Supply Company )AGSC). At this time the
details of the Tbilisi political agreement would be worked
out (Note: there is a BTC meeting in London December 13-16,
as a result of which all top level Socar officials will be
out of Azerbaijan during this time. Therefore, according to
Elshad Nassirov, Socar Gas Operations Department head Kamal
Abbasov will probably be the main Socar representative at
these meetings in Baku). Georgian Ambassador Gumberidze said
that he had heard unofficially that Botas would be sending

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four representatives.

Companies' Reaction
--------------


11. (C) After having heard Aliyev, BP Schrader said BP was
pleased to see that the three governments had come to an
general agreement, and he urged that a new Intergovernmental
Redirection Agreement (IRA) be drawn up expeditiously, with
the parties (Botas and AGSC) notified once it is signed. In
response, Aliyev said that he wanted the companies to draft
an IRA in time for the December 14 talks. When Statoil
pointed out that it would need more information in order to
prepare an IRA, and more generally to prepare itself for the
December 14 meetings, Aliyev fired back that it was he who
needed more information, such as when and how much Shah Deniz
gas would be ready, as the date always seemed to be slipping.
He said that if Azerbaijan could get 3.0 bcm from Shah
Deniz, 1.3 would stay in Azerbaijan with the rest going to
Georgia and Turkey. He added that the only documents from
the Tbilisi energy summit were the meeting minutes, which
were unsigned. Statoil said that AGSC would need both an IRA
and a letter from Botas, requesting revision of the existing
commercial agreement. Aliyev said that the companies
themselves should draft an IRA, and that AGSC would get such
a letter from Botas.

"Don't Forget Where You Work"
--------------


12. (C) Statoil said that as the result of any new
arrangement the partners would have to be kept "financially
and reputationally whole." Aliyev told Statoil not to worry
) he assured the companies that they would be kept
financially whole, adding that the IRA would protect the
partners, who would not be losing any money because the Shah
Deniz gas was still going to be sold (Comment: Aliyev was
being disingenuous, since if Turkey does indeed insist on
later buying the amount of its 2007 Shah Deniz gas it has
agreed to 're-distribute' to Azerbaijan and Georgia at the
same 2007 price, then indeed someone is going to have to
either make up the lost income to the partners, or the
partners themselves will have to agree to take the loss).
Aliyev added that the Shah Deniz partners' reputation had
already been ruined due to production delays. Saying "don't
forget where you work," he said that the companies will do
what Azerbaijan says.


13. (C) In response to concerns from Statoil about working
within a legal framework, Aliyev said that everything would
be done legally. He added that there would be no payments
for contract violations sought, and that the main point was
that the companies "should get ready to negotiate with Botas"
starting December 14. He didn't want to talk about
mechanisms at this meeting ) "this is what your lawyers will
have to look at." All details would be worked out among
Socar, Botas BP, Statoil and others in the Baku meetings.
What was important was that a general political agreement had
been reached among the countries, the details of which had to
be hammered out in Baku. He said he would call the Turkish
Energy Minister after this meeting to request Botas to send
its representatives up to Baku. He repreated that it was
crucial that the IRA draft be ready for the Baku meetings.

Socar: Georgia Be Quiet
--------------


14. (C) Socar's Elshad Nassirov said that Azerbaijan was not
"looking to take over" the partners' gas, prompting Aliyev to
add that Azerbaijan "wasn't Venezuala." Nassirov added that
since "we haven't given up" in negotiations with Gazprom, he
asked the Georgian Ambassador that Georgia "not make any
forward-looking statements." (note: Nassirov has previously
expressed to EnergyOff his exasperation at Georgia for its
public pronouncements about its gas negotiations with Russia,
which he felt made negotiations more difficult for
Azerbaijan). Elshad also added that the National Iranian Oil
Company was coming to Baku on December 19.


15. (C) Statoil asked Aliyev if it were certain that
Azerbaijan would be receiving no gas from Russia in 2007.
Aliyev said that Socar President Abdullayev had been invited
to Moscow for more negotiations, but that he felt that the
basic Gazprom proposal would not change, and that
consequently Azerbaijan would be burning more mazout.


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16. (C). Concerning possible high-level USG involvement in
December 14 mtg, Natiq told EnergyOff after the meeting that
although USG representatives from Washington were welcome to
come, since the upcoming December 14th meeting was at the
experts level, he felt their presence wouldn,t be necessary.



17. (C) In a separate meeting between Charge and BP after
this meeting (upcoming septel),BP Azerbaijan President Bill
Schrader said that his sense of the just concluded meeting
was that it seemed as if Turkey instead of getting caught in
a take or pay, situation (since it wasn,t ready to
receive gas) was surrendering two-thirds of its 2007 Shah
Deniz gas. He said that he felt that the Shah Deniz partners
could accept any probable worst case scenario, re
compensating Turkey for re-distributing its 2007 gas and that
overall he had a much better feeling about events than he did
a week ago, when it felt like "BP was being set up for a trip
out to the woodshed" (Reftel D).


18. (C) COMMENT: Based on this meeting, it seems that the
two key documents expected to come out of the December 14
Baku meetings would be a final Intergovernmental Redirection
Agreement and a corresponding new agreement between Botas and
AGSC. Although it is incorrect to say that an agreement has
been reached, certainly the general outlines of one have
been. There are serious issues still on the table, and
Azerbaijan and the Shah Deniz partners expect that Turkey
will seek some form of compensation for their willingness to
forego some 2007 Shah Deniz gas. Having said that, it is
clear that Energy Minister Aliyev and the Shah Deniz partners
believe that a framework now exists within which all involved
can work out an acceptable agreement. END COMMENT.
HYLAND