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 BAKU 00001841 002 OF 003 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 BAKU 00001841 003 OF 003 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