Identifier
Created
Classification
Origin
06BAKU368
2006-03-07 12:36:00
CONFIDENTIAL
Embassy Baku
Cable title:  

STATUS OF THE KASHAGAN-BTC IGA -- THE VIEW FROM

Tags:  EPET ENRG PREL AJ KZ 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000368 

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/CARC AND EB/ESC
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 03/07/2016
TAGS: EPET ENRG PREL AJ KZ
SUBJECT: STATUS OF THE KASHAGAN-BTC IGA -- THE VIEW FROM
AZERBAIJAN

REF: A. A. 05 BAKU 1960


B. B. 05 BAKU 1823

C. C. 05 BAKU 1059

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

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000368

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/CARC AND EB/ESC
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 03/07/2016
TAGS: EPET ENRG PREL AJ KZ
SUBJECT: STATUS OF THE KASHAGAN-BTC IGA -- THE VIEW FROM
AZERBAIJAN

REF: A. A. 05 BAKU 1960


B. B. 05 BAKU 1823

C. C. 05 BAKU 1059

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


1. (C) SUMMARY. International energy companies in Baku
believe Azerbaijan is holding out for better terms in the
draft Inter-Governmental Agreement (IGA) with Kazakhstan over
trans-Caspian oil transport. Parliament Deputy Speaker
Valekh Alasgarov appears to be leading the charge for
President Aliyev, arguing that the IGA and the associated
Host Government Agreements (HGAs) need to be negotiated
simultaneously and that Azerbaijan deserves more from the
project. The IGA in its current form will not be approved by
Azerbaijan's Parliament, says Alasgarov. The GOAJ appears
willing to exploit Azerbaijan's role as a transit country to
the project in order to get the IGA language it wants.
Industry sources confirm that an IGA is necessary for a
project of this scale to proceed. END SUMMARY.

--------------
COMPANIES: AZERBAIJAN WANTS A BETTER DEAL
--------------


2. (C) Sources in the international energy community in Baku
believe that the reason an IGA has not yet been signed for
the Kashagan-BTC project is because Azerbaijan wants better
terms. Reportedly, President Aliyev feels that Azerbaijan
deserves more because of its emerging role as a vital transit
country. Additionally, there are supposedly still bitter
feelings over what is seen as President Nazarbayev's
last-minute decision not to sign the draft IGA during the BTC
First Oil Ceremonies in May 2005. Finally, the recent
changes in Azerbaijan's energy establishment (Ref A) have
slowed Baku's energy decision-making process in general.


3. (C) The persistent failure to come to closure on the IGA
is beginning to cause some concern among Baku-based
international oil companies. The chairman of TOTAL, which
has the lead on transportation issues for the north Caspian
producers, met with President Aliyev on the margins of the

latter's recent meetings in Paris. In this meeting, which
was conducted with a minimum of publicity, TOTAL urged that
the IGA be concluded soon. Perceptively, both TOTAL and
Chevron executives in Baku have characterized Azerbaijan as
attempting to behave in the context of the Kashagan-BTC
project similarly to the way Georgia is accused of having
behaved during the BTC project itself -- using its status as
a transit country to extract concessions from producing
countries. Representatives of international energy companies
in Baku agree that the main force behind the Azerbaijani side
in the negotiations is Valekh Alasgarov, formerly the head of
SOCAR's Foreign Investments Division, now a deputy speaker of
parliament and chairman of parliament's energy committee.
Alasgarov is supposedly getting his instructions directly
from President Aliyev and will present proposed changes to
the IGA in the near future.

--------------
VALEKH ALASGAROV ON POINT
--------------


4. (C) For his part, Alasgarov denies any role in the IGA
negotiations and claims to know nothing about them. When
asked if he has any opinions on the matter, however, he
responds with detailed and emphatic ones. Alasgarov firmly
rejects the term "Kasghagan-BTC IGA" for the document, even
informally. The IGA, he says, is about transporting any oil
from Kazakhstan through any infrastructure in Azerbaijan --
not limited to Kashagan oil and not exclusive to BTC either.
This is reflected in the current draft of the IGA. Alasgarov
supports this, apparently wanting to preserve the option of
sending Kazakhstan's oil via other routes like Baku-Supsa,
Baku-Novorossiysk, or even rail. This point, however, is the
only aspect of the current draft IGA that he likes.

BAKU 00000368 002 OF 003




5. (C) Alasgarov points out that negotiations over this IGA
have taken three years. By contrast, he says, in seventeen
months the BTC project signed one IGA, three Host Government
Agreements (HGAs),and the lump-sum turn-key construction
agreement with BOTAS. The HGAs associated with this project
must be negotiated simultaneously with the IGA, says
Alasgarov, as the BTC HGAs were negotiated simultaneously
with the BTC IGA. Otherwise, he says, Azerbaijan is
undertaking commitments in the IGA that are not defined. For
example, the IGA calls for granting "any necessary privileges
to investors." What does this mean, asks Alasgarov
rhetorically. We won't know, he says, until the HGA is
negotiated. At an earlier meeting with Ambassador, Alasgarov
argued that the IGA is essentially deciding the shape of the
follow-on HGAs. If Azerbaijan agrees to vaguely-worded or
unclear terms in the IGA, he said, the HGA may end up
defining those terms in ways that force Azerbaijan to
surrender certain rights. Then, Alasgarov continued,
Azerbaijan will be unable to object, because it will have
already conceded the point in principle in the IGA, which
will have the status of an international treaty. For this
reason, Alasgarov concluded, the IGA and HGA must be
concluded simultaneously.


6. (C) Alasgarov points to a provision in the IGA which says
that "all necessary conditions" will be granted to investors
"without discrimination". Alasgarov says that investors in
the new project will cite AIOC's rent-free occupation of the
Sangachal terminal for the BTC project, for example, and
demand similar rent-free access to ports in Azerbaijan. But
this is inappropriate, Alasgarov says. Azerbaijan foregoes
transit fees, rentals et cetera in BTC because Azerbaijan
makes its profit from the oil itself. But now, he says,
Azerbaijan is a transit country, and Azerbaijan has to be
able to make money from transit costs, ports and the like, or
it will make no profit at all on the project. Alasgarov also
asked caustically why the Eskine-Kurik line, which will bring
the Kazakh oil to port for shipment to Azerbaijan, is outside
the IGA-HGA framework. By contrast, he noted, every single
Azerbaijani element of the transportation system is within
the IGA-HGA framework (NOTE: ConocoPhillips characterized the
e
xclusion of Eskine-Kurik from the IGA-HGA framework as a key
concession to get Kazakhstan on board with the project -- Ref
B). Given these issues, Alasgarov says with finality, there
is no chance that his energy committee and Azerbaijan's
parliament will pass the IGA in its current form.


7. (C) In his earlier meeting with Ambassador, Alasgarov said
he has met with SOCAR and with the GOAJ's ministerial-level
commission negotiating the IGA to discuss his concerns. He
said he has also offered the views of other members of
parliament who have experience with oil contracts. Alasgarov
said that he wants to cooperate with the negotiators up front
to prevent problems later.

--------------
IS AN IGA NECESSARY?
--------------


8. (C) TOTAL executives in Baku continue to believe that the
Kashagan-BTC project cannot go forward absent an IGA.
Chevron's Tengiz-BTC project is of smaller scale and involves
existing infrastructure (albeit with upgrades). The
Kashagan-BTC project, by contrast, will require as much as
USD 4 billion of investment in infrastructure. Much of this
will be used for tankers and port facilites that, because of
the geography of the Caspian, cannot be repossessed and
relocated if the project fails. Without an IGA (and
follow-on HGAs),investors will not have a comfort level
sufficient to participate. Some way, therefore, has to be
found to come to closure on the IGA if large-scale
cross-Caspian oil transport is going to happen.

--------------
COMMENT

BAKU 00000368 003 OF 003


--------------


9. (C) Regardless of the merits of his well-articulated
arguments, Alasgarov seems determined to wield a veto over
the IGA, and since informed opinion has it that he is acting
for President Aliyev, that veto is likely to stick.
Alasgarov, in his new capacity as an MP and one of the Deputy
Speakers of Parliament, is also playing a role in giving
parliament some teeth in its dealings on this very important
issue. Beyond simply getting a better deal for Azerbaijan in
terms of transit fees, Alasgarov is firm that HGAs must be
negotiated alongside the IGA. He may feel this is the only
way to keep the IGA negotiators from simply deferring every
difficult issue to hypothetical later HGAs, which
characterized the negotiations in May 2005 (Ref C). It is
also in accordance with what has been a steadily hardening
attitude of Azerbaijan towards the project since the failure
of the May 2005 talks. There are some indicators that
Azerbaijan may be moderating its stance slightly. Whether it
does or not, it still seems that if negotiators can't come up
with what Valekh Alasgarov defines as a good deal, Alasgarov
-- and Azerbaijan -- seems willing to shrug and say "no deal."
HARNISH