AZERBAIJAN SCRAMBLING FOR A SOLUTION WITHOUT SHAH

C O N F I D E N T I A L BAKU 001843

SIPDIS

SIPDIS

DEPARTMENT FOR EUR DAS BRYZA

E.O. 12958: DECL: 12/20/2016
TAGS: ENRG PREL PGOV TU AJ GA ECON
SUBJECT: AZERBAIJAN SCRAMBLING FOR A SOLUTION WITHOUT SHAH
DENIZ GAS

Classified By: CDA Jason P. Hyland, reasons 1.4 (b,d)


1. (C) SUMMARY. Deputy Prime Minister Yagub Eyyubov said on
December 21 that BP had informed the GOAJ that there would be
"at least a three month delay" in Shah Deniz production. He
said that BP 's "poor work" on Shah Deniz was
"unacceptable," and had greatly worsened the regional gas
situation. Eyyubov said BP must compensate Turkey, Georgia
and Azerbaijan for the situation in which it has put them.
Given these new developments, he said Azerbaijan will have to
put limits on consumer gas use and stop oil export to
Novorossiisk, using that oil for increased mazut production.
However, even with this increased mazut production,
Azerbaijan will be facing an energy shortage for the coming
winter. Eyyubov downplayed the importance of trilateral
energy talks about Shah Deniz gas, saying "Since there is no
gas, why talk?" We are continuing to try to ascertain the
GOAJ's real capacity for mazut production. END SUMMARY.

BP Must Be Punished
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2. (C) In a December 21 meeting with the Charge and
EnergyOff, DPM Eyyubov said that Azerbaijan's energy balance
for the 2007 winter depended on Shah Deniz gas. However,
Eyyubov said that BP's "poor workmanship" has caused repeated
production delays, the most recent of which is a leak on SD01
(the first Shah Deniz well) at 981 meters depth.
Consequently BP had informed the GOAJ that there would be "at
least a three-month delay" in Shah Deniz production. These
Shah Deniz production delays have greatly worsened the
situation, and as such BP has dealt a "political, economic
and spiritual blow" to Azerbaijan. Eyyubov continued that BP
is responsible for these delays, and so must in some way
compensate Azerbaijan, Turkey and Georgia for the
"unacceptable" situation it has created.

Gas Rationing, Mazut
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3. (C) As to the current state of trilateral negotiations
among Turkey, Azerbaijan and Georgia for Shah Deniz gas
redistribution, Eyyubov quoted a Russian proverb about the
futility of arguing over dividing a bearskin when the bear
has not yet been caught. "Since there is no gas, why talk?"
he asked. He said that the GOAJ needs to clarify the
situation in terms of available resources, and then will
probably have to put consumer limits on gas usage.


4. (C) Eyyubov also said that the GOAJ would have to stop
exports of oil via the Baku-Novorossiisk pipeline and use
this oil for increased mazut production. However, he said
that for various infrastructure reasons, to include
transportation, increased mazut use would not be sufficient
to make up the gas shortfall.


5. (C) As for Gazprom, DPM Eyyubov decried the "political"
price that Russia was asking for its gas. He pointed out
that Azerbaijan and Georgia were being charged USD 235 per
thousand cubic meters (tcm),whereas Armenia was charged USD
110, Ukraine 130, Belarus 140 and Moldova 160. (Note:
Azerbaijan press reported December 21 that DPM Eyyubov will
head a delegation traveling to Moscow today to continue
negotiations on gas supplies).

TIME FOR PLAN B
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6. (C) COMMENT: It looks increasingly likely that Shah Deniz
gas will not play any significant role in alleviating either
Azerbaijan or Georgia's winter gas woes, and the GOAJ is now
just starting to scramble for an alternate solution in the
face of the latest bad news from BP. As Eyyubov mentioned, a
combination of gas rationing and increased mazut production
will play a key role in any possible GOAJ response. Embassy
is currently seeking to ascertain GOAJ capabilities for mazut
production. END COMMENT.
HYLAND