Identifier
Created
Classification
Origin
06BAKU450
2006-03-23 10:48:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AZERBAIJAN ENERGY OUTLOOK

Tags:  EPET ECON ENRG AJ RU KZ 
pdf how-to read a cable
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RR RUEHDBU
DE RUEHKB #0450/01 0821048
ZNY CCCCC ZZH
R 231048Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 9937
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1560
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000450 

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/ESC
ENERGY FOR FE - SWIFT AND OS - WILLIAMSON
ANKARA FOR FCS

E.O. 12958: DECL: 03/23/2016
TAGS: EPET ECON ENRG AJ RU KZ
SUBJECT: AZERBAIJAN ENERGY OUTLOOK

REF: BAKU 370

Classified By: Ambassador Reno L. Harnish III, Reasons 1.4(b,d).

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000450

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/ESC
ENERGY FOR FE - SWIFT AND OS - WILLIAMSON
ANKARA FOR FCS

E.O. 12958: DECL: 03/23/2016
TAGS: EPET ECON ENRG AJ RU KZ
SUBJECT: AZERBAIJAN ENERGY OUTLOOK

REF: BAKU 370

Classified By: Ambassador Reno L. Harnish III, Reasons 1.4(b,d).


1. (C) SUMMARY. Representatives from energy sector companies
operating in Azerbaijan discussed the Barmek crisis, Caucasus
gas needs, changes in pipeline security agencies,
trans-Caspian oil transport and offshore gas development at
the Ambassador,s March Energy Forum. Participants reported
that businesses linked to deposed Minister of Economic
Development Farhad Aliyev continue to face severe
difficulties. They also said that Azerbaijan is beginning to
redefine itself as a transit country. For this reason
Azerbaijan seeks changes in the Inter-Governmental Agreement
(IGA) required for a trans-Caspian oil transport deal with
Kazakhstan, which may be difficult to get. A duty-free port
would help Azerbaijan enormously in terms of maritime
construction, but if the GOAJ does not grant one the GOKZ
might. Although the companies believe that commercial
negotiations should go ahead for full-field development of
the Shah Deniz gas field, they caution that the amount of
recoverable gas remains uncertain, and will not be known
until current appraisal wells are completed. If current
projections hold true, and Azerbaijan really can become a
major supplier to European markets, new transportation
infrastructure and perhaps new EU regulations, will be
necessary. END SUMMARY.


2. (SBU) The Ambassador,s monthly energy forum took place on
March 6. In attendance were representatives from:

--Chevron
--Devon Energy
--Statoil
--McDermott Caspian Construction
--ConocoPhillips
--TOTAL
--BP
--Amerada Hess

Opinions expressed by corporate representatives are not
necessarily the official positions of their companies.

--------------
DIFFERENT VIEWS OF BARMEK CRISIS
--------------


3. (C) The Chevron representative said that the recent case
of Barmek is similar to those of Fondel or Alumina.
Businesses connected to former Minister of Economic

Development Farhad Aliyev are being attacked and Russian
businesses are taking over chunks of the non-energy industry.
The GOAJ, the Chevron rep believes, is now focused on
Azerbaijan,s role as a transit corridor and believes it can
demand better deals from those, like Kazakhstan, who want to
use that corridor. The Chevron rep feels that Natik Aliyev,
despite his public statements, still wants to be involved
with energy, views himself as having been sidelined, and is
not happy about it.


4. (C) The Devon representative pointed out that there is
more to the Barmek story - after all, he noted, in 2000,
Barmek was a virtually unknown Turkish company that
mysteriously managed to beat Siemens for the electricity
tender, and which was somehow granted some legal concessions
that the GOAJ was unwilling to grant to Siemens. "What goes
around comes around," he said. The Devon representative
feels it unlikely that UES will move into the market as in
his view UES chief executive Anatoliy Chubays does not get
along well with President Putin. The Devon representative
also believes that Russia will block the construction of
large tankers in the Caspian by refusing access to the Don
Volga canal, and pointed out that giant tankers carry a
serious environmental risk. Natik Aliyev, in the view of the
Devon rep, won,t be able to make a comeback. In the Devon
rep,s opinion, President Aliyev is trying to replace his
father,s team with his own team, but he has to do this
slowly so that it does not look like criticism of his father.


--------------
GAS ISSUES
--------------

BAKU 00000450 002 OF 003




5. (SBU) In discussing Shah Deniz, the Statoil representative
said that Azerbaijan will insist on satisfying its domestic
needs before looking at further export deals. Any look at
full-field development must keep this in mind. The EU is
getting more pragmatic regarding its laws on competition that
complicate the importation of Azerbaijani gas into Europe and
is "waking up" to the possibilities. Critical is the test
well at Shah Deniz, the results of which will be known in
September. In the meantime, Statoil has appointed a new VP
for downstream gas issues. On the issue of exploitation of
the non-associated deep gas at ACG, SOCAR,s Yusufzade has
said that on the one hand he would like to see a new PSA, but
that on the other hand he would like AIOC to be the
consortium that exploits the field. The Amerada Hess
representative said that Amerada Hess is very interested in
exploitation of the deep gas well at ACG. The BP
representative said that BP is still working on the issue of
satisfying Georgian gas demands.

--------------
SECURITY ISSUES
--------------


6. (C) The BP rep noted that the first hot-tap on BTC has
been discovered. The tap was in Turkey, at a point that the
oil had not yet reached. Reportedly, changes are taking
place in pipeline security. In Georgia, the BP rep said that
some of the SPSS units involved in pipeline security have
been transferred to the Interior Ministry. On the Azerbaijan
side, the new Ministry of Emergency Situations has said that
it is taking over pipeline security, which is demoralizing to
the Pipeline Protection Division of Azerbaijan,s SPSS, with
which BP has had a good relationship.

--------------
TRANS-CASPIAN PROJECTS
--------------


7. (C) The McDermott representative said that McDermott is
very interested in the potential full-field development of
Shah Deniz, and that they have been working closely with the
new SOCAR leadership. In terms of recent labor unrest (over
managers removing graphic pictures of the Khojaly massacre
from a company bulletin board),the McDermott rep speculated
that the situation could have been a setup as the press
seemed to know everything before it happened. McDermott is
looking for opportunities to keep its yards working.
Elsewhere in the world, McDermott yards are located in
duty-free ports and McDermott hopes for a similar arrangement
here. If Azerbaijan doesn,t establish duty-free ports, the
McDermott rep pointed out, Kazakhstan will, and Azerbaijan
will lose out. Meanwhile, there seems to be movement on the
long-dormant Trans-Caspian gas pipeline project (TCP) to
bring Turkmenistan,s gas to Azerbaijan - the McDermott rep
reports that a company called Prime Engineering (based in
Atlanta) has done preliminary work on construction
feasibility. However, the McDermott rep added that the
Russians are apparently now raising the issue of whether the
Caspian is a lake or a sea again, arguing that it is a lake
and thus TCP can,t proceed without their clearance. This,
as many attendees noted, contradicts the basis of Russia,s
acceptance of the trilateral agreement with Kazakhstan and
Azerbaijan delimiting the north Caspian, an agreement which
accepted ocean formulas for delimitation.


8. (SBU) The ConocoPhillips representative said that
ConocoPhillips is still interested in exploration projects.
On trans-Caspian shipping, the ConocoPhillips representative
reported that there are rumors that SOCAR Financial Affairs
VP Shahin Mustafayev is seeking to establish a relationship
with a new company to handle shipping, to outflank state
shipping monopoly CASPAR. Meanwhile, AzerTrans, the
transportation unit of the former Azpetrol, has lost its
senior management and a new, SOCAR-linked chief has been
installed.


9. (C) The TOTAL representative pointed out that the shifting
Russian view on the Caspian being a lake or a sea is one
major reason why the KCTS (Kashagan-BTC) project is
proceeding with tankers and not a pipeline. On the question
of tanker risk, the TOTAL rep noted that risk is not based
only on size, but on training, maintenance, and frequency of

BAKU 00000450 003 OF 003


sailing - giant tankers sail less often than smaller ones.
CASPAR would prefer smaller tankers so their existing
infrastructure would be used, but the new Maritime Authority
is chipping away at CASPAR,s authority. With regard to the
Kashagan-BTC IGA issues, the TOTAL rep feels that many of
these relate to internal disputes in Azerbaijan. Two weeks
ago, the IGA was to be substantially modified - now it looks
like the modifications will be less. The difficulty is that
Kazakhstan,s draft is the product of painstaking internal
deliberations within the GOKZ - altering even "a single
comma" will prove difficult. The TOTAL rep feels that the
Farhad Aliyev affair was all about destroying Azpetrol,
perhaps so that Middle East Petroleum could move in.


10. (SBU) On Shah Deniz, TOTAL advises caution. Full-field
development of Shah Deniz will involve tapping into a
high-pressure structure deeper than the source for Phase II
gas. It may well be that the high pressure will make it too
difficult to extract the gas economically. When the first
appraisal well is completed in September there will be some
news, and in 2007, after the second appraisal well is
complete, the picture will be clear. TOTAL and Statoil both
agree that the commercial process has to be set in train now,
however. Also, assuming full-field development will yield
the volumes we hope, new infrastructure (new pipelines) will
be necessary to properly exploit it.
HARNISH