AZERBAIJAN: SOME PROGRESS IN TRILATERAL GAS

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001841

SIPDIS

SIPDIS

DEPARTMENT FOR EUR DAS BRYZA

E.O. 12958: DECL: 12/18/2016
TAGS: ENRG PREL PGOV TU AJ GA
SUBJECT: AZERBAIJAN: SOME PROGRESS IN TRILATERAL GAS
NEGOTIATIONS, ISSUES REMAIN


Classified By: DCM Jason P.Hyland, Reasons 1.4 (b,d)


1. (C) SUMMARY: Against the backdrop of 'First Gas' from
Shah Deniz gas field beginning to flow on December 15, the
question of how Turkey was to be compensated for allowing its
2007 Shah Deniz gas to be redistributed to Azerbaijan and
Georgia was left undecided during December 14-15 negotiations
in Baku. However, on December 18 President Aliyev told the
Ambassador that the GOAJ would compensate Turkey for its
share by giving it additional Azerbaijani gas in 2008 and
beyond. The President told the Ambassador that the only
remaining problem was that Georgia was unable to compensate
Turkey thusly for the additional gas it would receive.
However, on December 19 Embassy learned from SOCAR that the
first Shah Deniz well was no longer producing due to
technical problems and that the start dates of the subsequent
two wells would in all probability be pushed back by at least
two to three weeks, making talk of Turkey redistributing its
share of Shah Deniz gas more hypothetical (upcoming septel).


2. (C) SUMMARY (CONTINED) On December 18 the Georgian
Ambassador to Azerbaijan said that while Georgia was willing
to pay USD 120 per thousand cubic meters for the
redistributed, Shah Deniz gas that it was getting due to
Turkish agreement, it would not be willing to compensate
Turkey so that Turkey could buy these same redistributed,
amounts in 2008 and beyond at the same low price it was
forgoing by agreeing to redistribute in 2007. He said that
the Georgian President would be seeking to reach an agreement
on this subject when he visited Turkey starting December 19.
Gumberidze also said that Georgia would be looking for BP to
give increased amounts of associated ACG gas to Georgia to
help it through the winter. AGSC, the marketing arm of the
Shah Deniz Consortium, has told the GOAJ that efforts to keep
the Shah Deniz partners whole in the matter of redistributing
2007 gas earmarked for Turkey can best be achieved by a new
intergovernmental agreement with Turkey, vice amending its
contract with AGSC. END SUMMARY.


3. (C) In a December 18 conversations among President Aliyev,
the Ambassador and visiting A/S Lowenkron, President Aliyev
said the Turkish desire to be compensated for redistributing
its gas was understandable, and that in 2008 or 2009
Azerbaijan will "give back" to Turkey the 1.3 bcm it expects
to receive from Turkey's share in 2007. Aliyev said that the
GOAJ will get the gas to give back to Turkey from the 8 bcm
it expects Shah Deniz to be producing by then, or from SOCAR
production. In this regard, Azerbaijan intends to invest USD
100-200 million in SOCAR production, and they also expect BP
to be producing more by then.


4. (C) With respect to Georgia and Turkey, President Aliyev
said the sole remaining sticking point on the issue of
redistributed Shah Deniz gas was how Georgia would be able to
compensate Turkey for the redistributed gas that it will
receive from Turkey's share this year. Georgia does not have
gas of its own to give back to Turkey, but Aliyev said the
Georgians might be able to pay BP for re-injection, to
compensate what they get in 2007, and that "BP, the US or the
EU" can help Georgia with the problem of paying back Turkey.


5. (C) President Aliyev said that the Georgian Energy
Minister had asked BP if BP could give Georgia more ACG
associated gas (note: BP Azerbaijan has expressed its
preference to deal with the Georgian gas situation by
increasing its delivries to Azerbaijan, vice making
arrangements dirctly with Georgia). President Aliyev shared
the ssessment that Botas viewed the matter and attendat
negotiations as primarily commercial, vice poltical.

First Gas - Then Not
--------------


6. (C) On December 16 EnergyOff met wih Statoil Azerbaijan
Government and Public Affair Manager Sverre Olden Mala and
Vice President for Gas Jan Heiberg to discuss the December
14-15 gas discussions (see appendix for participants)


7. (C) Heiberg said that 'first gas' began flowing from the
first Shah Deniz well at 1400 hours local time that day, and
that the target rate would be approximately 6 million cubic
meters per day (mcm/d),equal to approximately 200 million
standard cubic feet/day (scf/d). (Comment: Embassy has
subsequently learned that technical problems have caused the
first Shah Deniz well to be shut down, and that the start-up
dates for the second and third Shah Deniz wells will likely

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be later than anticipated - upcoming septel).


8. (C) Heiberg said that any Turkish claims that it is
'ready' to receive Shah Deniz gas are immaterial; what will
indicate Turkish readiness is when it starts nominating daily
volumes of gas to receive - until and unless it does that
AGSC deems Turkey not ready.

Dec 14-16 Baku Negotiations
--------------


9. (C) Heiberg said that after the first day of negotiations
in Baku on December 14 it seemed that Turkey was 'not in
alignment' with Baku and Georgia as to what was agreed in
Tbilisi (reflected by the fact that Azerbaijan and Georgia
signed the Tbilisi meeting notes; Turkey did not). According
to Heiberg, the two key sticking points were 1) the Turkish
request to postpone the trigger date for a price review by
one year; and 2) the Georgian unwillingness to pay a premium
for any amounts of 2007 Shah Deniz gas it receives over the
amounts currently scheduled. Heiberg said that on the second
day of discussions (December 15) the Georgians accepted that
they would have to pay a premium for additional Shah Deniz
gas, but that there was no movement on the issue of
compensation for Turkey. Heiberg said that Botas was
approaching these talks as commercial negotiations, whereas
the Azerbaijani and Georgian participants saw it more as a
political problem to be solved. Heiberg also decried
Georgia's proclivities to negotiate via public announcements,
and in this regard he said that the Georgian team had shown
up for the negotiations in Baku on December 14 with its own
TV crew.


10. (C) Heiberg said that Azerbaijani Energy Minister Natiq
Aliyev himself joined the negotiations on the second day, in
an effort to move matters along, although Heiberg implied
that much of Aliyev's energies were spent on speechifying,
vice helping find common ground. Heiberg said that Aliyev
kept assuring AGSC that GOAJ would 'keep them whole' in terms
of selling Turkey in later years the same amount of cheap
(USD 120) gas that Turkey was willing to redistribute to
Azerbaijan and Turkey for the 2007 winter. Heiberg said the
AGSC position was that the GOAJ should focus on a new
intergovernmental agreement in which these assurances could
be reflected by Azerbaijan's agreeing to compensate Turkey
for whatever increased amount Turkey has to pay to buy in
2008 or later years the amount of gas it allowed to be
redistributed in 2007. Given a price difference of
approximately USD 80 between the 2007 price of USD 120 and a
probable 2008 year market price (possibly around USD 200,
Heiberg averred),Heiberg said this amount could be "hundreds
of millions of dollars," and he doubted whether Aliyev had
the authority to commit the GOAJ to this course of action.


11. (C) Heiberg said that what AGSC would not accept is a
renewed agreement between GOAJ and AGSC, as AGSC feared that
GOAJ would use its sovereign status to get out of paying AGSC
the full amount it would be owed. Heiberg said that it was
his understanding that the Botas team had returned to Turkey
on the morning of December 16. AGSC's next move would be to
brief its board members.


12. (C) When asked what he thought would happen next, Heiberg
said there was a 'second option,' in case the trilateral
negotiations failed. Heiberg said that from the negotiations
it was clear that Turkey was "betting we don't put them in a
'take or pay' situation, but he added that it was also
possible to "wait Turkey out." In this scenario, given
Turkey's probable continued inability to nominate volumes
throughout the 2007 winter, Azerbaijan and Georgia could come
to a bilateral agreement as to how to divide the 6 mcm/d that
Turkey would be unable to receive. If the three states could
not come to a new agreement, Heiberg felt that this scenario
would perforce be the most likely.

Georgia: Stand Down on Talks?
--------------


13. (C) On the afternoon of December 16 the Ambassador
received a phone call from the Georgian Ambassador to
Azerbaijan Zurab Gumberidze, who said that he had just talked
with the Georgian PM Noghaideli. Gumberidze said that
Noghaideli told him that BP had agreed to give Azerbaijan and
Georgia 4 bcm/a of associated ACG gas, 1.5 bcm for Georgia
and 2.5 bcm for Azerbaijan. If true, Gumberidze said that
"this would be enough for Georgia," and as such it would not

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pursue redistributed ACG gas.

GA Balks at TU Compensation
--------------


14. (C) EnergyOff talked to Ambassador Gumberidze on December

18. Gumberidze said that for the coming winter Georgia
needed 8 mcm/d, but that it expected to get 3.7 from
Azerbaijan and 0.8 from Armenian transit gas, which would add
up to 4.5 mcm/d, less than half of what Georgia needed. He
said that the Georgian President was traveling to Turkey the
following day, where he hoped to get Turkey to forego the
issue of Georgia compensating Turkey for the extra Shah Deniz
gas it would be receiving in 2007.


15. (C) Gumberidze explained that Georgia was willing to pay
USD 120 for the extra Shah Deniz gas it was to receive due to
Turkey's largesse, but was not willing to pay to Turkey the
difference between USD 120 and what it would cost Turkey to
buy these same amounts in 2008 or later (USD 200 or more) -
"We might as well be buying gas from the Russians!"
Gumberidze said that the decision in Turkey couldn't be made
at the Botas level, as it was seeing the matter as a
commercial transaction: the Turkish government had to make a
political decision to help Georgia. He also continued to
hold out that hope that Georgia could get increased ACG gas,
either directly from BP or through Azerbaijan.


16. (C) COMMENT: Although no final agreement was reached
during the Baku talks, initial feedback indicates that
progress was made. Based on the Azerbaijani President's
statements to the Ambassador, the GOAJ is willing to
compensate Turkey for its 'redistributing' 2007 Shah Deniz
gas, this compensation to be in the form of Azerbaijani gas.
However, based on President Aliyev's comments to the
Ambassador and Ambassador Gumberidze's comments, the Georgian
government is unable to compensate Turkey with additional gas
in later years, and unwilling to compensate Turkey for this
gas with money. Recent news of yet another delay in Shah
Deniz production (upcoming septel) might make talks of
Turkey's willingness to redistribute its share of gas for
winter 2007 slightly more hypothetical. Regardless, the next
step in these trilateral discussions will doubtless occur
with the Georgian President's December 19-21 visit to Ankara.


APPENDIX:
--------------

PARTICIPANTS IN BAKU ENERGY DISCUSSIONS

To the best of Embassy's understanding, the following
participated in the Baku December 14-16 negotiations:

Georgia:

- Alexander Khetaguri: General Director, Georgian
International Oil and Gas Corporation (GIOG)
- Levan Gododze: GIOG
- Bondo Alasania: GIOG
- David Onlani: GIOG
- Irakli Baramidze: GIOG
- Alexander Akhvlediani: Envoy, Georgian Embassy in Azerbaijan
- FNU Zurab Gumberidze: Ambassador, Georgian Embassy in
Azerbaijan

Azerbaijan:

- Kamal Abbasov: Head of Gas Department, SOCAR
- Natiq Aliyev: Energy Minister (participated 12/15)

AGSC:

General Manager Geir Kvael
Commercial Manager Arne Halnes
HYLAND