CORRECTION: BP AZERBAIJAN DODGES BULLET

1. (C) SUMMARY: On December 12, BP Azerbaijan President Bill
Schrader told Charge that BP would be willing to give SOCAR
more associated ACG gas over the whole of 2007 if it were
sufficiently compensated, and that his sense of the December
8 Tbilisi Energy Minister meetings was that Turkey was
willing to surrender two-thirds of its 2007 Shah Deniz gas,
which it was and would be unable to receive in winter 2007,
instead of getting caught in a take or pay, situation.
Schrader said he felt the Shah Deniz partners would have to
accept any probable worst case scenario, for compensating
Turkey for re-distributing this 2007 gas. Schrader said he
felt BP "dodged a bullet" by coming up with its proposal to
give increased amounts of associated ACG gas to Azerbaijan to
help it through the 2007 winter. Schrader also told Charge
that Presidential Energy Advisor Ali Asadov had that day
cancelled the "First Gas" ceremony for the following week
that one day previously he had ordered BP to arrange. END
SUMMARY.

On Again, Off Again 'First Gas'


--------------------------





2. (C) In a December 12 meeting with the Charge, UK
Ambassador, BP External Affairs Director Clare Bebbington and
BP Azerbaijan Commercial Vice-President Dr. Phil Home, BP
Azerbaijan President Bill Schrader said that Presidential
Energy Advisor Ali Asadov had that day cancelled the "First
Gas" ceremony that he had yesterday instructed BP to prepare
for next week. Schrader said that Asadov cited the reason as
the President being "too busy next week." Schrader
speculated that since the Georgian President originally
suggested the idea, that Azerbaijan had asked BP to conduct
the ceremony on short notice in the hopes that BP would prove
unable to do so, and so Azerbaijan could go back to Georgia
with the news that BP could not implement the request. But
when BP dutifully said it would put a ceremony together, the
GOAJ was forced to go ahead and turn off the ceremony, as it
did not want to needlessly anger Russia. Schrader said that
a "First Gas" ceremony would probably occur in mid-January


2007.

BP: 'Everything is Currency'


--------------------------





3. (C) Speaking of his December 9 meeting with Socar
President Rovnaq Abdullayev, Schrader said that Socar was
still insisting on receiving additional amounts of free
associated ACG gas past winter 2007, despite BP's analysis
that ACG additional volumes may no longer be required after
the first quarter. Schrader said Socar was linking this
issue to BP's ability to develop ACG deep gas. Saying that
"everything is currency," Schrader said that BP had the
numbers as to how much income the AIOC partners would lose
based on increased associated ACG gas delivered to Socar, and
that if Socar were willing to "keep the partners whole," then
he would have no problem accommodating Socar's request for
additional associated ACG gas for all of 2007. He said that
BP would start negotiating with Socar on this issue starting
in January 2007, when "everything would be on the table," to
include ACG Deep Gas and PSA extension.



4. (C) Speaking of his December 9 meeting with Presidential
Energy Advisor Ali Asadov, he said that Asadov, as well as
Socar's Abdullayev, both now understand and accept the fact
that Azerbaijan will face a gas shortage in the first quarter
of 2007 regardless of the additional 2007 Shah Deniz gas
received from Turkey and the additional ACG associated gas
received from AIOC. Schrader said both Abdullayev and Asadov
seem "ok with that." Reviewing a presentation on "Analysis
of Supply to Demand Shortfall in Azerbaijan, Post Shah Deniz
Redistribution (see Appendix), Schrader said that for the
first half of January 2007, before the second Shah Deniz well
was due to begin production, depending on various scenarios
Azerbaijan would experience a 4.7 million cubic meter per day
(mcm/d) shortage, with Azerbaijan and Georgia together facing
a 8.4 to 11.2 mcm/d shortage in this time (note: Schrader

said that Socar preferred to work in mcm/d, vice standard
cubic feet per day - scf/d. He said approximately 35 times
mcm/d yields scf/d).

Tbilisi Summit


--------------------------





5. (C) Concerning the December 8 Tbilisi Energy Ministers'
trilateral meeting, Schrader said he thought that because
Turkey was not and would not be ready to receive Shah Deniz
gas in time for the 2007 winter and was therefore willing to
'redistribute' two-thirds of its 2007 Shah Deniz gas, rather
than being caught in a take or pay, situation. He pointed
out that the price for the gas Turkey was re-distributing
would be USD 120 per thousand cubic meters (mcm) "regardless
of who gets it," and that Turkey would have one year to buy
at USD 120 whatever allocated Shah Deniz gas they don't
redistribute. However, ultimately he felt that the AIOC
partners would have to accept any probable worst case
scenario, re compensating Turkey for re-distributing its
2007 gas, even if it meant re-selling to Turkey the same
amounts of gas, at the same low price, it agreed to
redistribute to Azerbaijan and Georgia in 2007. Overall, he
said he had a much better feeling about events than he did a
week ago, when it seemed as if BP was "being set up for a
trip to the woodshed" by Azerbaijan. By coming up with a
program to share increased amounts of ACG associated gas with
Azerbaijan in order to help them with their winter gas woes,
Schrader said "I think we dodged a bullet."



--------------------------


APPENDIX


--------------------------



The following are the main points extracted from a handout
given to Charge by BP Azerbaijan President Bill Schrader on
December 12:

BP "Analysis of Supply to Demand Shortfall in Azerbaijan
Post-Shah Deniz Redirection"



I. Gas Balance 2007, mcm/d (shortage)/excess:

Note:

- Assumes 5.66 mcm/d maximum individual well rate from Shah
Deniz
- Well start-up schedule: SDA01: 13 Dec 2006; SDA02: 18 Jan
2007; SDA03 1 Mar 2007



A. January 1-17 (i.e. after First, before Second Shah Deniz
Well Begins Production):

Base Operating Efficiency (50 percent): AZ (7.5); AZ plus GA
(11.2)
Upside Operations Efficiency (80 percent): AZ (5.8); AZ plus
GA (9.5)
Installed Production Capacity (100 percent): AZ (4.7) AZ plus
GA (8.4)



B. 18 January - 28 February (after second, before Third Shah
Deniz Well):

Base Operating Efficiency (50 percent): AZ: (4.7); AZ plus
GA: (8.4)
Upside Operations Efficiency (80 percent): AZ: (1.3); AZ plus
GA: (5.0)
Installed Production Capacity (100 percent): AZ: 1.0; AZ plus
GA: (2.7)



C. 1-31 March (after start of Third Shah Deniz Well):

Base Operating Efficiency (50 percent): AZ: (1.9); AZ plus
GA: (5.1)
Upside Operations Efficiency (80 percent): AZ: 3.2; AZ plus
GA: (0.0)
Installed Production Capacity (100 percent): AZ: 6.6; AZ plus
GA: 3.1

II. Supply Sources 2007 (daily volumes in mcm/d; total annual
in bcm)

SOCAR: 12.3 mcm/d; 4.5 bcm
ACG, total: 8.2 mcm/d; 3.0 bcm
- ACG base: 4.0 mcm/d; 1.4 bcm
- ACG additional: 4.3 mcm/d; 1.6 bcm
Shah Deniz, total: 10.4 mcm/d; 3.8 bcm
- Shah Deniz base: 6.8 mcm/d; 2.5 bcm
- Shah Deniz additional: 3.6 mcm/d; 1.3 bcm
TOTAL: 30.9 mcm/d; 11.3 bcm

- The above assumes 10.4 mcm/d requirement from Shahd Deniz
(3.8 bcma) - post redirection
- Georgia assumed to be 3 mcm/d (1.1 bcma)
- Current Georgia contract is 1 mcm/d (max) equal to 0.25 bcma
DERSE