AZERBAIJAN: SHAH DENIZ PRODUCTION DELAYS COULD

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001839 SIPDIS SIPDIS DEPT FOR EUR DAS BRYZA E.O. 12958: DECL: 12/18/2016 TAGS: ENRG PGOV PREL TU AJ GA SUBJECT: AZERBAIJAN: SHAH DENIZ PRODUCTION DELAYS COULD COMPLICATE REGIONAL GAS SOLUTION Classified By: Charge Jason P. Hyland, Reasons 1.4 (b,d) ¶1. (C) SUMMARY: In a December 19 conversation, SOCAR President Abdullayev said December 19 that the two main problems facing Azerbaijan,s 2007 winter gas balance were Turkish unwillingness to follow up on the general political agreements on gas redistribution discussed in Tbilisi, and the latest in a series of production setbacks in Shah Deniz, which led him to question to what extent the GOAJ could rely on Shah Deniz gas for the coming winter. (We are following up with BP to ascertain the true nature and implications of latest Shah Deniz production problem.) SOCAR Vice-President Nassirov said that the USG should use its influence with Georgia to "make it more realistic" and to seek an accord with Gazprom. Nassirov also reported that Gazprom had increased its price offered to Azerbaijan from USD 230 to USD 235 per mcm, a move Nassirov described as a sign of Russian displeasure at the Tbilisi trilateral meeting. END SUMMARY. ¶2. (C) On December 19 the DCM met with SOCAR President Rovnaq Abdullayev. Also present were SOCAR Vice-President Elshad Nassirov, SOCAR Foreign Investments Division General Manager Vagif Aliyev, Press and Public Relations Department Head Nizameddin Guliyev, and EnergyOff. Problem 1: No Shah Deniz Gas -------------- ¶3. (C) Abdullayev said that Azerbaijan was in a bad way regarding its upcoming winter gas balance. Given the decrease in gas offered from Russia from 4.5 billion cubic meters annually (bcma) to 1.5 bcma, Azerbaijan's gas balance for 2007 would decrease 45 percent. Abdullayev said Azerbaijan faced two main problems concerning the upcoming winter's gas situation. The first problem was that, as he had just learned on the previous day, the first Shah Deniz well (which started production on December 15) was no longer operational. Additionally, the estimated start date for the second Shah Deniz well had also slipped from January 15 to early February, with the start date for the third Shah Deniz well consequently slipping from mid-March to early April. ¶4. (C) Abdullayev said that prior to receiving this news, SOCAR and BP had jointly worked out a plan on gas production and delivery for the months of January through March 2007 which they had put forward to the government, but with this latest setback "we cannot be confident" of Shah Deniz production. He now had to inform the government of this latest news. (During the meeting Abdullayev absented himself for ten minutes to take a call from President Aliyev on this topic; upon returning he said that Aliyev had the same questions that Charge did.) ¶5. (C) Abdullayev pointed out that Shah Deniz gas was originally supposed to begin to flow on September 1, but added that "these things happen in the oil business." However, given this latest piece of bad news, "he did not know what to do" regarding planning for the winter. Nassirov pointed out that by the original timetable Shah Deniz was supposed to have started production in September 2006, at which time the Turkish portion of the SCP pipeline was to have been ready. However, due to the well being more paraffinic than had been anticipated, and due to BP's releasing a column into the well which took three and a half months to get back, the December 15 start was well behind schedule. Abdullayev pointed out that according to BP's original timetable, Shah Deniz was supposed to have provided 1 bcm in 2006, but with two weeks left in the year it had provided only 2 mcm. ¶6. (C) (Note: EnergyOff subsequently confirmed the news about Shah Deniz later on December 19 with a BP contact (protect), who said that there was a leak at SD01 which led BP as well operator to shut in the well pending further testing, and that he would know more the following day. He added parenthetically that in his opinion the amounts of Shah Deniz gas that would be available for the 2007 winter would be small, only enough for Azerbaijan and Georgia, and that talk of redistributing Turkey,s share of Shah Deniz gas was "hypothetical."). Problem 2: No Turkish Buy-In -------------- ¶7. (C) Abdullayev said the second problem was that Turkey was still unwilling to follow up on the general commitments it BAKU 00001839 002 OF 003 had made for Shah Deniz Gas redistribution in Tblisi. According to Abdullayev, the Turkish Energy Minister did not sign the draft protocol that Azerbaijani Energy Minister Aliyev had brought with him, and Botas did not make any specific commitments. Abdullayev said that the previous day (December 18) the Georgian Energy Minister had come to Baku for a one-day trip. Abdullayev said that Georgia claims that it needs 7.5 million cubic meters/day (mcm/d) throughout the winter. Abdullayev said that even with optimal Sah Deniz production (i.e. before this latest badnews) and with maximal delivery of ACG associate gas for the January-March period, Azerbaijan cold deliver only 3.5 mcm/d to Georgia. Although Azrbaijan had agreed in principle to send Georgia his 3.5 million cubic meters per day, this agreement was predicated upon the Azerbaijan gas balance arrived at jointly between SOCAR and BP, whereby out of 5 mcm/d Shah Deniz production, Georgia would get 3.5 mcm/d and Azerbaijan 1.5 mcm/d. But with this latest Shah Deniz news, Abdullayev said "who knows" how much gas the GOAJ will be able to get to Georgia. "Georgia - Gazprom" Option -------------- ¶8. (C) When Abdullayev was out of the room talking to President Aliyev on the phone, SOCAR V-P Nassirov said that the USG should focus on "making Georgia more practical." Georgia is an independent country, but it is "going too far" in its attempts to rid itself of regional dependencies. "Georgia is more proud than it can afford to be," Nassirov said. Pointing out that under the existing Shah Deniz agreements, Azerbaijan gets the largest annual amount of gas in 2007 (2007 = 2.7 bcm, 2008 = 2.5, then 1.5 bcm to 2012), Nassirov said that Azerbaijan is facing a situation over the coming years where it will not have enough for its domestic use, and as the price of gas increases over the coming years, it will be harder to accommodate Georgia. He pointed out that the trigger date for Shah Deniz prices occurs only one year after 2.5 bcm is delivered to Turkey, and that even after that date there is a long process involved in re-negotiating the price upwards. Until this long process is over Turkey can still buy at USD 120. Nassirov believes that Azerbaijan will still face the situation in coming years where imports from either Russia or Iran would be necessary. Given the preceding, and given the fact that "Georgia only listens to the USG," Nassirov said the USG should tell the Georgians "to be more serious" about the situation they face. Abdullayev later said that he urged the Georgian Energy Minister to tell President Sakaashvili to "force Turkey" to sign the political agreement concerning Shah Deniz gas redistribution. Georgia Hardball w/Gazprom -------------- ¶9. (C) Nassirov said that the Iran-Armenia gas pipeline will not be ready until mid-February, leaving Armenia fully dependent on the gas pipeline that runs through Georgia. Nassirov, wryly quoting from Karl Marx's 'Das Kapital' to the effect that there is no crime a capitalist will not commit in order to get a fifty percent profit, said that Georgia would be unable to countenance a situation where USD 120 gas was transiting bound for Armenia while it was being forced to buy gas at USD 230 or more. He said that Georgia should go back to negotiations with Gazprom, and use the threat of cutting off Armenian gas to get a lower price from them. However, he also mused about the possibility of Armenian sabotage of the Azerbaijan-Georgia pipeline, should Georgia cut off Armenian gas. 230 to 235 -------------- ¶10. (C) Nassirov said that SOCAR is currently scheduled to travel to Moscow on December 22 to continue negotiations with Gazprom. Pointing out that yesterday Gazprom informed Azerbaijan that it was raising its offered price from USD 230 to USD 235, Nassirov said that this raise probably indicated Russian displeasure at the recent trilateral gas negotiations. Nassirov said that Azerbaijan always sought to diversify its gas sources so that it would not be dependent on one supplier. Later in the conversation Abdullayev said that in recent talks the new Gazprom Deputy Director told him that Gazprom didn't want to sell cheap gas to Azerbaijan as it feared that it would then sell more gas to Georgia. Abdullayev said that this quoted price was 'political.' BAKU 00001839 003 OF 003 ¶11. (C) COMMENT: Clearly, further Shah Deniz production delays would make a difficult situation even more so. Embassy will continue in its efforts to ascertain the nature of the problem at Shah Deniz and its impact on production. END COMMENT. HYLAND