Identifier
Created
Classification
Origin
06BAKU431
2006-03-21 13:13:00
CONFIDENTIAL
Embassy Baku
Cable title:  

EUR A/S FRIED DISCUSSES ENERGY SECURITY ISSUES IN

Tags:  ENRG ECON EPET AJ KZ GG TR TX 
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P 211313Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 9901
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 1547
RUEKJCS/SECDEF WASHDC PRIORITY
RUEKJCS/JOINT STAFF WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
RHMFISS/CDR USCENTCOM MACDILL AFB FL PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000431 

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/16/2016
TAGS: ENRG ECON EPET AJ KZ GG TR TX
SUBJECT: EUR A/S FRIED DISCUSSES ENERGY SECURITY ISSUES IN
BAKU

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 000431

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/16/2016
TAGS: ENRG ECON EPET AJ KZ GG TR TX
SUBJECT: EUR A/S FRIED DISCUSSES ENERGY SECURITY ISSUES IN
BAKU

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


1. (C) SUMMARY. EUR A/S Fried discussed the role of the
Caspian in European energy security with GOAJ, BP, TOTAL,
Statoil and ConocoPhillips officials in Baku on March 14.
The consensus opinion was that Caspian energy resources,
particularly natural gas, could play an important role in
meeting future European energy needs. While the lack of
final agreements on Caspian demarcation may not prevent
future projects, EU anti-competition laws could pose serious
obstacles to bringing Shah Deniz gas into Europe. The GOAJ
representative strongly argued for bringing Turkmenistan's
gas across the Caspian and into Europe. The GOAJ's
optimistic prediction of an early signature on an agreement
to bring Kazakhstan's oil into the BTC oil pipeline was
privately disputed by company representatives. Delays in
Turkey over the completion of the BTC oil and SCP gas
pipelines were also discussed. END SUMMARY.


2. (U) On March 14, Ambassador hosted a lunch for EUR A/S
Daniel Fried on the theme of energy security. Ambassador,
EUR/SNEC Special Negotiator Ambassador Mann, EUR/CARC
Director Rood, EUCOM J5 Eurasia chief COL Anderson and
Embassy Baku energy officer were also present. Attendees
were:

--David Woodward, BP Azerbaijan
--Thierry Normand, TOTAL
--John Dabbar, ConocoPhillips
--Jan Heiberg, Statoil
--Araz Azimov, Deputy Foreign Minister of Azerbaijan


3. (C) A/S Fried began the lunch by noting how energy
security and diversification of supply had become topical in
Europe and the United States following the Ukrainian gas
crisis. The United States government does not build
pipelines or choose their routes, Fried noted, but does want
to support projects that increase diversity of supply and
that make commercial sense. The United States discusses
energy security with the EU and would discuss it at NATO on

March 16. He asked the assembled guests how they see Caspian
energy resources fitting into this picture.

--------------
EU REGULATORY ISSUES
--------------


4. (C) David Woodward sketched a general picture of Europe's
gas needs in the future -- something like 800 bcma will be
required by 2025. Much of this will come from North Africa,
from imported LNG, from Russia and from Norway, but there is
a gap of about five to ten percent which Caspian resources
could fill. Azerbaijan would be a part of this, but so would
other Caspian states. Woodward estimates that Shah Deniz
could provide as much as 20 bcma to European markets, but the
EU's anti-monopoly regulations would make this difficult.
These regulations would prohibit the Shah Deniz partners from
selling their gas jointly. Jan Heiberg echoed this, stating
that breaking the Shah Deniz partnership into seven
individual gas streams to send all the way to Europe is
"crazy" and this may prevent Shah Deniz gas from getting into
Europe at all.


5. (C) Woodward noted that the regulations can theoretically
be waived if it can be demonstrated that there are "no
alternate means" to getting the gas into Europe, but that
this is a very arduous test to meet. Changing this
regulation would have "huge implications" and is not
something that would be done lightly. The regulation has
been applied in the past to derail or substantially rework
projects aiming at the import of Norwegian gas and of
Algerian gas. TOTAL's Thierry Normand said that this is
true, but pointed out that in a case of diminishing supply
and increasing need, perhaps the EU's attitude would change.

--------------
CASPIAN DELIMITATION ISSUES
--------------

BAKU 00000431 002 OF 003




6. (C) John Dabbar noted that accessing Central Asian gas
resources will require subsea pipelines in the Caspian, but
that runs into the issue of Caspian delimitation. The
absence of final agreement on same would prevent the
construction of such pipelines, he said. However, Central
Asian gas could be a substitute for Russian gas -- the
Russians could buy Central Asian gas cheap and then resell it
at a huge markup to European markets, saving themselves the
considerable expense of developing gas resources in the far
north of Russia.


7. (C) Ambassador Mann pointed out that Caspian delimitation
issues need not block projects -- the USG position is that
only the consent of the participating countries is necessary
to move a project forward. In 1998, the ultimately ill-fated
Turkmenistan-Azerbaijan gas pipeline project (TCP) was ready
to proceed with only Turkmenistani and Azerbaijani assent.
The Russians, Mann added, built Blue Stream after consulting
only with Turkey. The Caspian has been delimited, said Mann,
it's just that Turkmenistan and Iran refuse to acknowledge
this fact. Deputy Foreign Minister Azimov agreed and pointed
out that Turkmenistan came close to agreeing with Azerbaijan
on Caspian delimitation in 1996-1997, but while it never
signed the agreement, it never rejected it either.

--------------
ACCESSING TURKMENISTAN'S GAS
--------------


8. (C) Woodward noted that Turkmenistan could ship its gas
eastward as easily as westward, and that no foreign companies
are currently engaged in developing Turkmenistan's gas. Most
of Turkmenistan's gas volumes appear committed to Russia now,
but, Woodward noted, these kind of contracts with
Turkmenistan often don't last. Ambassador Mann noted that
Turkmenistan tends to write thirty-year contracts that
involve renegotiations of price every eighteen months.


9. (C) Deputy Foreign Minister Azimov argued that there is a
strong strategic case for bringing Turkmenistan's gas into
Europe. While Turkmenistan may want to send its eastern gas
to Asian markets, this will not prevent efforts to bring its
western gas to Europe. Using the Azerbaijan-Georgia
corridor, said Azimov, several routes are possible. Through
Turkey and Greece to Italy, for example, or across the Black
Sea to Romania and Bulgaria. Most interesting, said Azimov,
is the idea to get Turkmenistan's gas into Ukraine, and
thence onward to Poland and Germany. As Russia's gas policy
is not likely to change, said Azimov, it is vital to bring
Turkmenistan back into the game.

--------------
ACCESSING KAZAKHSTAN'S GAS AND OIL
--------------


10. (C) The issue of bringing Kazakhstan's gas across the
Caspian was also raised, but the quick consensus from
industry representatives was that this is unlikely in the
near-term. David Woodward noted that Kazakhstan's gas
reserves are mainly associated gas linked to large oil or
oil-and-gas fields with high levels of hydrogen sulfide.
Much of this gas is planned to be reinjected to boost oil
production, he added, although it is possible that as the oil
fields reach the ends of their operational lifetimes, someone
will think about exporting the gas. However, this would
require Kazakhstan to "shift from seeing gas as a nuisance to
seeing it as a commodity."


11. (C) The question of cross-Caspian transport of
Kazakhstan's oil is of much greater saliency. Deputy Foreign
Minister Azimov asserted that Kazakhstan had brought its
final version of the Inter-Governmental Agreement (IGA) for
this project to Baku and that differences between the two
sides are very slight. Azimov added that Kazakhstan was
showing interest in the GUAM organization as a way to bring
its energy resources westward. John Dabbar asked Azimov if
Azerbaijan has changes of its own to propose to the IGA.
Azimov replied that Azerbaijan's Ministry of Energy has

BAKU 00000431 003 OF 003


already responded to Kazakhstan and that there are only a few
changes. Thierry Normand said that he hopes this is a sign
that the IGA will be signed soon. When asked, Dabbar said
that the north Caspian producers expect Kazakhstan's Kashagan
field to begin producing by the end of 2008 or early 2009.
If the legal and physical infrastructure for transport of
this oil to BTC is not ready by then, the north Caspian
producers will either send the oil through CPC or through the
Aterau-Samarra line, with a final backup plan of sending the
oil by rail to the Black Sea. NOTE: Immediately following
the lunch, both Dabbar and Normand pulled energy officer
aside and told him with great urgency that they feel Azimov
is extremely optimistic in his assessment of progress on the
IGA. In their view, Azerbaijan and Kazakhstan are still very
far apart on key issues and a signature in the near future is
very unlikely.

-------------- ---
PROGRESS AND PROBLEMS WITH BTC AND SCP IN TURKEY
-------------- ---


12. (C) A/S Fried asked about progress and problems with the
BTC and SCP projects. Woodward was extremely critical of
Turkey and said that BTC has suffered a 400-day delay in
completion. The key factor, said Woodward, is that when the
BTC project was negotiated, Turkey asked for a very low cost
ceiling, and when BP demurred, the lump-sum turn-key
agreement was created under which the Turkish state pipeline
concern BOTAS would complete the BTC line for that amount,
with completion guarantees issued by the Government of
Turkey. However, says Woodward, BOTAS has now taken the
position that these guarantees were issued by a previous
government and are no longer valid, therefore BP must pay for
the cost overruns. Woodward says there have been huge and
repeated changes in the senior management of BOTAS, serious
questions of managerial competence, and criminal charges
against executives appointed by earlier governments. The
result has been what Woodward terms a hypercautious attitude
by current management that
contributes to further delays.


13. (C) The picture, according to Woodward, is unfortunately
not much better with regards to completion of the SCP gas
pipeline. SCP was structured differently from the way BTC
was, in that the Shah Deniz partners sell the gas to Turkey
at the Turkish-Georgian border. It is up to Turkey to
construct its own pipeline to Erzerum and construct a
compression station there, said Woodward. There have been
serious delays with both these projects as well, prompting
both Azerbaijan and Georgia to propose taking the gas
themselves for domestic use. This is not realistic, says
Woodward, as the gas was sold to Turkey at extremely
competitive rates. It is difficult for BP to know where the
decisions are really being made in Turkey. Energy Minister
Guler has been supportive as an individual but this has
rarely translated to progress, Woodward says, as the BOTAS
project director often does not follow the direction of the
Minister. Woodward opined that the BOTAS project director
fears liability and does not trust the
Ministry to protect him in the event of future legal action.
Woodward says that Turkey should be using these projects to
demonstrate its reliability as a energy-transit country, but
so far this perspective has not been enough to motivate
change.


14. (C) In concluding the lunch, A/S Fried thanked the
participants for attending and for their thoughts. The
United States wants to see multiple, competitive routes for
energy into Europe in order to assure diversity of supply, he
said. The United States will continue to work with Europe to
bring this about.


15. (U) A/S Fried has cleared this cable.
HARNISH