AMBASSADOR AND STATOIL DISCUSS SHAH DENIZ PHASE II

C O N F I D E N T I A L BAKU 000511

SIPDIS

SIPDIS

DEPT FOR EUR DAS BRYZA

E.O. 12958: DECL: 04/04/2016
TAGS: EPET ECON ENRG PREL PGOV KZ AJ
SUBJECT: AMBASSADOR AND STATOIL DISCUSS SHAH DENIZ PHASE II
DEVELOPMENTS AND CHALLENGES

Classified By: AMBASSADOR RENO L. HARNISH III PER 1.4 (B,D).


1. (C) SUMMARY: Statoil executives briefed the Ambassador
March 29 on the challenges facing the international energy
companies and the GOAJ as Shah Deniz Phase II (Phase II will
increase annual gas production by 18-20 bcma) moves forward.
International companies want to pool their gas with the GOAJ
gas in order to obtain profitable long-term supply contracts
in international markets. The GOAJ, however, may be looking
to use its share of the gas for domestic consumption. The
executives also said EU anti-monopoly rules could threaten
Shah Deniz sales to Europe. Statoil's CEO raised this issue
with EU leader Javier Solana. Statoil is supportive of a
trans-Caspian gas pipeline, although the company's primary
focus is making Shah Deniz Phase II a success. END SUMMARY.


2. (C) In a meeting on March 29, Statoil Azerbaijan President
Georg Gundersen and VP for Gas Jan Heiberg told Ambassador
that Shah Deniz Phase II, scheduled for completion in 2011 or
2012 (Phase II will increase annual gas production by 18-20
bcma),still faces several logistical issues that could
threaten to stall or slow the project. Statoil executives
explained that the GOAJ and international companies had to
reach an agreement, similar to Shah Deniz Phase I, in which
the companies and the government would combine their
respective gas reserves in order to obtain profitable
long-term supply contracts in international markets. The
international companies need the GOAJ to commit to combining
the reserves or risk obtaining a lower price for future gas
deliveries or not having enough gas to supply contracts. The
GOAJ has evidently discussed using its share of the Shah
Deniz Phase II gas for domestic consumption. The companies
feel that the project may not be as commercially successful
if they are not able to convince the GOAJ to join them.


3. (C) Statoil executive also said that current European
Union anti-monopoly rules would threaten the proposed sale of
Shah Deniz gas to Europe. Statoil's CEO recently raised this
point with EU representative Javier Solana. Solana,
according to Gundersen, was particularly interested in
discussing diversification of gas supplies. Despite this
interest, however, Statoil believes that the EU will move
slowly to make any exemptions or changes to current
legislation. (This is not the first time that an
international energy company has raised with us the EU's
anti-monopoly and its effect on joint marketing of gas and
oil to Europe.)


4. (C) Statoil executives told the Ambassador that they feel
Azerbaijan fits Norway's gas model in which it gradually
increases capacity in small increments. As Norway did during
the 1980s, Statoil envisions Azerbaijan beginning with small
gas quantities used for domestic needs (6-8 bcma) and slowly
adding to this amount an additional 20 bcma that will allow
it to export gas to Europe.


5. (C) Regarding the idea of building a trans-Caspian
pipeline to bring gas from Kazakhstan and or Turkmenistan
through Azerbaijan to Europe, the Statoil executives
expressed interest in additional details. The Ambassador
told them that EUR DAS Matthew Bryza planned to visit Baku
April 3 and they indicated they would raise it with him and
discuss the idea further. Without saying so, it appeared
that the Statoil executives focus was certainly more on the
medium-term and getting Shah Deniz Phase II working. They
noted that once Azerbaijan begin exports of gas to Europe,
other countries and energy companies will take notice and
want to use its gas network, generating greater interest and
support in a TransCaspian pipeline.
HARNISH