BP BUILDS PICTURE OF SPLIT GOAJ ON OIL TRANSPORT

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000333

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SNEC AND EB/ESC
USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 03/02/2016
TAGS: ENRG ECON EPET AJ KZ GG TR
SUBJECT: BP BUILDS PICTURE OF SPLIT GOAJ ON OIL TRANSPORT
AGREEMENT WITH KAZAKHSTAN

REF: BAKU 305

Classified By: Ambassador Reno L. Harnish, III, reasons 1.4 (b),(d) an
d (e).


1. (C) SUMMARY. In his February 28 meeting with Ambassador
and the British Ambassador, BP Azerbaijan senior executive
David Woodward reported that the South Caucasus gas pipeline
project (SCP) is continuing on schedule and the
Baku-Tblisi-Ceyhan oil pipeline (BTC) should remain on
schedule as well if a cost-overrun agreement is achieved with
Turkish pipeline company BOTAS later this month. BTC has
experienced its first hot-tap (in Turkey),but BP was pleased
by the first successful prosecution of a hot-tap in Georgia.
Woodward also discussed the recent labor unrest at the Baku
maritime construction yards operated by BP's contractor
McDermott and described his recent meeting with State Oil
Fund chief Samir Sharifov, whom he characterized as
Azerbaijan's leading strategic thinker on energy. Sharifov
seems to be in favor of a version of the proposed
Inter-Governmental Agreement for the transportation of
Kazakhstan's oil through Azerbaijan that would designate BTC
as the exclusive route. This is the complete opposite of the
current text, backed by others in the GOAJ, such as Valekh
Alasgarov, that would include but not be limited to BTC. END
SUMMARY.

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PROGRESS IN FIGHTING HOT-TAPS, BUT NOT IN SELLING GAS
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2. (C) In BTC news, David Woodward said that the first
lifting of BTC oil from Ceyhan still looks set for the end of
May, again assuming that the USD 400 million claim of BOTAS
is settled in March (reftel). BOTAS has given BP a deadline
of March 20 to settle the claim. The next stage of line-fill
begins on March 6, Woodward noted. In SCP matters, the TPG
platform is set to be floated out to the Shah Deniz field in
March and the project is on track to deliver gas by the third
quarter of this year.


3. (C) BTC has experienced its first hot-tap, said Woodward.
The hot-tap occurred in northeastern Turkey. On a related
subject, BP was pleased to see the first successful
prosecution of a hot-tap case in Georgia -- previously,
Woodward said, persons arrested in connection with hot-taps
had been allowed to plea bargain and pay fines instead of
serving jail sentences.


4. (C) On gas, Woodward reported that SOCAR continues to not
respond to BP's project proposal to provide more ACG
associated gas to Azerbaijan in exchange for drilling rights
to the deep gas reservoir there (reftel). Woodward said that
Georgian Prime Minister Noghaideli has requested a meeting in
March with the Shah Deniz partners, presumably to discuss
getting more Phase I gas for Georgia or to discuss
accelerating Phase II.

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LABOR TROUBLES AT MCDERMOTT
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5. (C) Woodward briefly commented on the recent "strike" at
McDermott Caspian Construction Inc. (an American maritime
construction company operating on contract to BP in
Azerbaijan),which followed an incident when two expatriate
managers removed grisly photographs of the Khojaly massacre
from a company bulletin board. There was a brief strike by
employees, with plenty of press coverage, which ended when
McDermott's country manager apologized. The two managers
were reassigned and have left Azerbaijan, one of them
escorted to the airport by security forces.


6. (C) Woodward and many others feel the incident to have
been orchestrated, as the news media seemed to know it was
coming. Yet, he asked rhetorically, what is the motivation?
Who would benefit from such an incident? One goal may be to

BAKU 00000333 002 OF 002


create a new union for the work force. There may be other,
more nationalistic goals as well, said Woodward. There are
three major construction yards in Baku -- Bosshelf, ATA and
McDermott. McDermott is the only one that has non-Western,
third-country nationals -- Indians, Pakistanis, Philippinos
-- supervising locals. ATA uses primarily Turkish
supervisors and Bosshelf uses locals in supervisory positions
as much as possible.

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SAMIR SHARIFOV: NO PROGRESS ON ECONOMIC MODELING...
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7. (C) Woodward met recently with Samir Sharifov of the State
Oil Fund. Woodward considers Sharifov to be the primary
strategic thinker on energy in the GOAJ today, and President
Aliyev's closest energy advisor. Sharifov, for example, will
attend the next BTC Periodic Review Board meeting in Ankara.
Woodward raised with Sharifov the issue of SOCAR's
non-responsiveness on the proposed ACG associated gas project
and other initiatives. Woodward also brought up the question
of economic modeling. One year ago BP offered assistance in
the creation of an economic modeling unit for oil revenue
management, but the GOAJ has never given a final response
(other than to say that any such unit would be housed in the
State Oil Fund). Sharifov told Woodward that he is concerned
that the Asian Development Bank may be working on a
duplicative modeling project with the Ministry of Economic
Development. Woodward said that BP's Oxford partners on this
issue would soon travel to Azerbaijan and make sure that
unnecessary duplication is not taking place.

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...BUT WANTS KAZAKH OIL TRANSITING AZERBAIJAN ONLY IN BTC
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8. (C) Sharifov told Woodward in the same meeting that he
does not support the current draft of the Inter-Governmental
Agreement for bringing Kazakhstan's oil to world markets
through Azerbaijan. Sharifov says that he wants the IGA to
specify that this oil will be transported only via BTC.
Ambassador noted that the influential Valekh Alasgarov, a
deputy speaker of parliament and chair of the parliament's
energy committee, has expressed exactly the opposite view --
that the IGA should permit the movement of Kazakhstan oil by
any transportation system, including but not limited to BTC
(reported septel). The current text of the IGA reflects
Alasgarov's view. Woodward also said that Kazakhstan has
expressed a willingness to sign the IGA during the
first-lifting ceremonies at Ceyhan in June.
HARNISH