Identifier
Created
Classification
Origin
06BAKU1839
2006-12-20 14:05:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AZERBAIJAN: SHAH DENIZ PRODUCTION DELAYS COULD

Tags:  ENRG PGOV PREL TU AJ GA 
pdf how-to read a cable
VZCZCXRO0058
PP RUEHAG RUEHDBU RUEHROV
DE RUEHKB #1839/01 3541405
ZNY CCCCC ZZH
P 201405Z DEC 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 2010
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
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)

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