DAS BRYZA DISCUSSES TRANS-CASPIAN GAS PIPELINE IN

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000582

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/04/2016
TAGS: EPET ENRG PREL PGOV KZ TU TX AJ
SUBJECT: DAS BRYZA DISCUSSES TRANS-CASPIAN GAS PIPELINE IN
AZERBAIJAN


Classified By: RENO L. HARNISH III; REASONS 1.4 (B,D)


1. (C) SUMMARY: During an April 3 visit to Azerbaijan, EUR
DAS Bryza heard GOAJ interest in a possible "Southern
Corridor" of gas pipelines to export gas from Azerbaijan, and
perhaps Central Asia through a trans-Caspian gas pipeline
(TCP),via Georgia and Turkey to help Europe diversify its
gas supplies. Deputy Speaker of Parliament and former
Azerbaijani state oil company (SOCAR) executive Valeh
Alasgarov supported the idea including TCP, but lamented that
such an effort faced obstruction from many European
officials, who pursued their own narrow personal interests,
including corrupt relationships with Gazprom, rather than
their countries' national interests. Azerbaijan-based
international oil company representatives believed GOAJ
buy-in to expand Shah Deniz gas production and gas transit to
Turkey was crucial, and looked to the U.S. for support.
Separately, Minister of Energy and Industry Natiq Aliyev told
visiting TDA Regional Director Dan Stein March 29 that he
supported the TCP concept and believed Turkmenistan might be
ready to strike a deal on a TCP. END SUMMARY.


2. (U) During an April 3 visit to Azerbaijan, EUR DAS Matt
Bryza discussed Azerbaijan's possible role in helping Europe
diversify its gas supplies. Bryza met with President Aliyev,
political opposition leaders, Deputy Speaker of Parliament
and former SOCAR executive Valeh Alasgarov, Director of
Azerbaijan's State Oil Fund (SOFAZ) Samir Sharifov, and
representatives of international oil companies in Azerbaijan.
Bryza's meetings with President Aliyev, political opposition
leaders, and Samir Sharifov are reported septel. DAS Bryza's
visit followed a visit by TDA Regional Director Dan Stein
March 28-30 to discuss a feasibility study on trans-Caspian
pipeline issues.

Valeh Alasgarov
--------------


3. (C) DAS Bryza noted that Russia's recent gas cutoff in
Ukraine had reenergized European thinking about alternate gas
supplies for Europe. He recounted his recent discussions in
Rome and Athens in which the Europeans expressed their
concern over their growing reliance on Russian gas.
Alasgarov agreed that Russia was pushing hard to expand the
Black Sea Blue Stream pipeline (under the Black Sea) and
strengthen its monopoly power as a supplier to Europe.
Alasgarov spoke in favor of a Southern Corridor as perhaps
the only way to channel Gazprom away from an effort to stifle
competition by acquiring strategic energy assets in Europe,
and toward more market-based behavior. Alasgarov warned that
besides Russia and Gazprom, a Southern Corridor faced
opposition from officials in France, Italy, Germany, and
other European countries, who pursued their own narrow
personal interests rather than the national interests of
their countries. Many of these personal interests, he said,
included corrupt relationships with Gazprom. Alasgarov
agreed with Bryza that it would be worthwhile to pursue a TCP
to Azerbaijan from Kazakhstan or Turkmenistan, as this would
make cheap Central Asian gas less accessible to Gazprom,
thereby pressing Gazprom toward reforms required to attract
foreign investment to develop domestic Russian gas fields.
Alasgarov also believed that Phase II of development of
Azerbaijan's Shah Deniz gas field could be expanded to
provide an additional 10 to 20 BCM, but that the Italians and
Greeks needed to take the first step by offering Azerbaijan a
long-term gas sales/puchase contract.


4. (C) Turning to the Baku-Tbilisi-Ceyhan (BTC) pipeline and
discussions on the Kazakhstan-BTC Inter-governmental
Agreement (IGA) aimed at incorporating oil produced in
Kazakhstan into BTC, Alasgarov said that all parties now
seemed to agree on the relationshp of the IFA to the host
government agreements (HGA's) governing the project in each
country. The IGA would form the legal framework outlining
the parties' rights and responsibilities for expanding the
BTC project to include cross-Caspian shipping of crude from
Kazakhstan. The HGAs would define these rights and
responsibilities with specificity in each country to prevent
investors from demarnding unlimited rights and access to
Azerbaijani facilities. As in the case of the original BTC
IGA and HGAs (from 1999) the Kzakhstand-BTC IGA would be
agreed and initialed; HGAs would then be negotiated; when
completed, the IGA would be signed, with the HGAs attached as
appendices. Alasgarov argued that Azerbaijan was ready to

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sign the IGA during last May's dedication ceremony for the
Azerbaijani portion of BTC, even though it would have
preferred to continue negotiations on several key elements.
When Kazakhstani President Nazarbayev refused to sign at that
time, Azerbaijani President Aliyev decided to negotiate
improvements in the IGA from Azerbaijan's perspective.
Negotiations seemed to be approaching endgame, according to
Alasgarov. The key outstanding issues involved Azerbaijan's
desire to ensure that Kazakhstani producers shipped their oil
exclusively to Baku, rather than to Iran.

International Oil Company Representatives
--------------


5. (SBU) Statoil Azerbaijan President Georg Gundersen noted
that the focus of Statoil, which like BP enjoys a 25 percent
stake in the Shah Deniz consortium, was on marketing Shah
Deniz gas. Shah Deniz Phase II looked promising, with
"significant additional production" possible in theory by
late 2011 or 2012. To achieve this goal, the commercial
foundation for Phase II needed to be finalized by the end of

2007. GOAJ buy-in would be essential, he added. EU
competition policy could hinder exports to Europe of
Kazakhstani gas, and thereby provide a disincentive to expand
Phase II production, Gundersen believed. In practice, a
joint marketing agreement allowing the Shah Deniz consortium
to export its gas to Europe as a single consortium provided
the most commercial attractive marketing option. But EU
competition regulations prohibited such an arrangement,
requiring instead that each company in a consortium market
its gas individually. Ironically, Gundersen continued, this
EU policy cleared the way for Gazprom, a state monopoly, to
sew up much of the European market.


6. (SBU) Bryza said he had heard similar worries about EU
competition policy from BP, but noted that the European
Commission and Council strongly supported development of a
Southern Corridor to import Azerbaijani gas - along with
Central Asian gas exported via TCP - to Europe. Gundersen
noted that there were two camps within the EU Commission.
The energy camp understood the need to diversify supplies, as
well as the technical and business realities of getting the
gas to market. The anti-trust camp pursued their mission
with something "close to religious fervor." He worried that
the pressing investment decisions required for Shah Deniz
Phase II and a trans-Caspian pipeline would be made much more
difficult if the EU required gas to be marketed separately.


7. (C) In a separate meeting, BP Azerbaijan President David
Woodward and BTC and Shah Deniz Pipeline Director Michael
Townsend expressed strong support for development of a
Southern Corridor and a TCP for gas exports to Europe. They
argued such projects would be commercially attractive to BP
and the Shah Deniz consortium, and would help constrain
Gazprom's monopolistic tendencies. But they worried such
projects were unlikely to succeed absent U.S. support.
President Aliyev, Woodward explained, is focused on securing
domestically produced gas for consumption in Azerbaijan to
shield Azerbaijan against Gazprom's threats to raise gas
prices precipitously. Woodward lamented that Aliyev often
lacks strategic vision, and seems unaware that Azerbaijan
enjoys an opportunity to secure market share for its gas in
Greece and Italy, but will lose that chance to Gazprom if he
does not move quickly. Woodward and Townsend suggested the
U.S. could play a key role in realizing a Southern Corridor
by helping Aliyev expand his strategic vision and think
beyond Azerbaijan, Georgia, and Turkey as markets for
Azerbaijan's gas. Woodward confirmed Alasgaraov's claim that
if Greece, Italy, and Turkey would put in place necessary
infrastructure, the Shah Deniz consortium could more than
double Phase II production from 8.6 BCM to 17 or even 20 BCM
by 2012. Woodward and Townsend also suggested that the U.S.
encourage President Aliyev to open the Azeri-Chirag-Guneshli
oil field to exploration for "deep gas" by international
companies, which could result in at least as much additional
gas production as an expanded Phase II of Shah Deniz.
Woodward worried that Aliyev may weighing whether to save
this additional gas for the future to provide a strategic
reserve and mitigate the approaching problem of managing
windfall oil and gas revenues as BTC and the Shah Deniz gas
pipeline come on stream later this year. On gas marketing,
Woodward said BP had adjusted its strategy, and no longer
worried about exporting Shah Deniz gas to Europe as a single
consortium. As a result, BP was no longer as concerned as

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was Statoil about EU competition regulations pertaining to
gas mrketing.


8. (C) On BTC, Conoco-Philips representtive John Dabbar
agreed with Deputy Speaker Alasarov's assessment that
negotiations on the BTC-Kazakhstan IGA were approaching
endgame. The three key outstanding issues were commercial in
nature, namely, Azerbaijan's demands that:

-- BTC enjoy exclusive rights to export all cross-Caspian oil
shipments from Kazakhstan;

-- The IGA currently under negotiation pertain only to BTC,
thereby requiring Kazakhstani producers to negotiate a new
IGA for each additional field from which they may waish to
export oil via BTC, which in turn affords the GOAJ repeated
opportunities to negotiate more preferential contractual
terms; and

-- The governments of Azerbaijan and Kazakhstan form a
monopoly shipping company for cross-Caspian tanker shipments.

Dabbar did not seek U.S. intervention on these issues, and
believed they would soon be worked out through commercial
negotiations.

Minister of Energy
--------------


9. (C) While unavailable to meet DAS Bryza April 3, former
SOCAR head Natiq Aliyev previously expressed his interest in
a possible trans-Caspian gas pipeline during a meeting with
TDA Regional Director Dan Stein March 29. Aliyev focused
initially on Turkmenistan, and believed President Niyazov was
ready to strike a deal after the February visit by the
Turkish energy minister to Ashgabat. In Aliyev's view, a
Turkmenistan-Azerbaijan gas pipeline was a realistic
possibility. Turkmen gas would then be shipped onward to
market using roughly 14 billion cubic meters of excess South
Caucasus Gas Pipeline (SCP) capacity. Aliyev stressed that
such a link could be constructed very soon.


10. (C) Shifting focus, Stein recounted past problems with
negotiating a TCP with Turkmenbashi. He asked whether a
separate pipeline from Kazakhstan to Baku might prove more
realistic politically and commercially. Aliyev agreed,
noting Kazakhstan's good relations with Russia and the
relative lack of Caspian delimitation issues between Russia
and Kazakhstan as positive factors. In addition, Aliyev
believed that Turkmenistan would have no choice but to join
the TCP network through a link to Kazakhstan once an
agreement between Azerbaijan and Kazakhstan was struck.
Turkmenistan, he argued, had only one safe, secure route for
its gas: West.

Comment
--------------


11. (C) Azerbaijani interest in Southern Corridor and
possible trans-Caspian gas pipeline is high, but further
engagement with the GOAJ will be necessary to turn this
support into concrete action. International oil companies
are likewise interested, but point to regulatory issues in
the EU market, and the need for leadership and vision by the
GOAJ. With long lead times before any pipeline comes to
fruition, cementing the political and commercial basis now
for a project of this magnitude is a necessary, and urgent,
next step. Clearly, much work remains, but Post welcomes the
efforts of the Department and TDA to begin exploring the next
stage in energy development on the Caspian.


12. (U) DAS Bryza has cleared this message.
HARNISH