AMBASSADOR'S FAREWELL CALL ON ENERGY MINISTER

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000624

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 04/24/2016
TAGS: AJ PGOV EPET KZ PINR PREL TX
SUBJECT: AMBASSADOR'S FAREWELL CALL ON ENERGY MINISTER
NATIK ALIYEV


Classified By: DCM Jason P. Hyland, reasons 1.4 (b),(d) and (e).


1. (C) SUMMARY. In a wide-ranging discussion on the eve of
Ambassador's departure from post, Azerbaijan Energy Minister
Natik Aliyev argued for a trans-Caspian gas pipeline bringing
natural gas from both Kazakhstan and Turkmenistan through
Azerbaijan to European markets. Aliyev also expressed mild
irritation with the ongoing negotiations to establish an
Inter-Governmental Agreement (IGA) for the transport of
Kazakhstani oil through BTC, arguing that ministries need to
be stopped from endlessly revising the agreement so the
project can move forward. Aliyev stressed the need for a
peaceful solution to the Nagorno-Karabakh dispute and stated
that he felt Azerbaijan still needed to work with foreign
energy companies for successful energy exploration and
development projects. Lastly, in discussing BTC, Aliyev said
that while the Turkish state pipeline company had demanded
USD 333 million to cover alleged overruns, BP had countered
with an offer of a guaranteed USD 250 million and a clean
slate, eliminating any future claims or arbitrage. END
SUMMARY.


2. (C) Ambassador paid a farewell call on Natik Aliyev (no
relation to President Ilham Aliyev),Minister of Energy and
Industry, on April 14. Aliyev expressed his gratitude for
U.S.-Azerbaijan cooperation on energy issues and said that
without U.S. support projects like BTC would have been
impossible to achieve. Aliyev added that he had just
attended the Black Sea energy conference in Bucharest where
he had sensed a new European interest in Caspian energy
resources. Aliyev said that he felt Caspian energy resources
could move in two directions -- either to Europe through
Azerbaijan and Turkey as pioneered by the SCP pipeline, or
perhaps towards eastern markets such as India.

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GETTING CASPIAN GAS TO EUROPE
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3. (C) Aliyev argued that a Trans-Caspian Pipeline (TCP)
could play a very important role in meeting Europe's energy
needs. A Trans-Caspian pipeline could link Central Asian gas
to the proposed Nabucco infrastructure, bringing gas from the
Caspian through Turkey, Bulgaria, Romania and Hungary,
culminating in Austria where the gas would be distributed to
France, Germany and other EU countries. Ambassador asked
about the one trillion cubic meters of gas that may lie at
Shah Deniz and the role it could play in meeting Europe's
energy needs. Aliyev agreed that this is a significant
amount, potentially 20 bcma. However, Aliyev said,
Azerbaijan's gas resources alone will not be enough to export
meaningful quantities to Europe. The best solution, he
argued, would be to bring gas from both Turkmenistan and
Kazakhstan across the Caspian to join with Azerbaijan's gas
resources for export.


4. (C) The Ambassador asked if there are other potential
export routes besides Nabucco. Aliyev said that other routes
are being discussed, such as one culminating in the Balkans
and another running across the Black Sea to Ukraine and
ultimately Poland. The Turkish-Greek-Italian connection is
another active concept, he said. Aliyev voiced mild
criticism of Turkey's recent approach to gas, saying that the
Turks are trying to buy gas at one price and then resell it
at a higher price. Aliyev said that Europe is moving towards
a freer market and that Turkey should follow this example,
letting gas transit its country and collecting a single fee.
There is a lot of movement in the European gas market now,
Aliyev noted, driven primarily by fear of Russia. The
Ambassador brought up the idea of President Aliyev's making a
statement about Azerbaijan's willingness and ability to play
a role in bringing gas to Europe during his upcoming visit to
Washington. Natik Aliyev agreed the idea should be
considered.

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GETTING KAZAKHSTANI OIL INTO BTC
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5. (C) Ambassador asked about Natik Aliyev's view of the slow
pace of the negotiations over the draft Inter-Govermental

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Agreement (IGA) to bring Kazakhstan's oil to Azerbaijan.
Aliyev said the IGA is taking a long time because the
documents are being circulated again and again among the
ministries for revisions -- a process, he said sardonically,
which could theoretically go on forever. "If we had done
this with the BTC agreements," Aliyev declared, "we never
would have achieved anything." In what was perhaps a
backhanded swipe at President Aliyev, the minister recalled
the days of the BTC negotiations and then-President Heydar
Aliyev, who at a certain point made a decision and told the
inter-ministerial process that the document was finished.
Kazakhstan representatives will arrive in Baku shortly and
another round of talks will begin. (NOTE: Kazakhstan
representatives arrived the week of April 17 and negotiations
are currently in progress.)

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VIEWS ON NAGORNO-KARABAKH
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6. (C) Ambassador asked about the Nagorno-Karabakh (N-K)
conflict, adding that he worries about the future when he
hears bellicose rhetoric on the subject. Aliyev agreed,
opining that it is a bad idea to constantly talk about war.
Aliyev said he feels the GOAJ must take every possible chance
for a peaceful resolution of N-K. "War destroys everything,"
he said, pointing out that Azerbaijan has made much progress
over the past few years that would be put at risk by renewed
hostilities.

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AZERBAIJAN: OPEN FOR BUSINESS?
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7. (C) The Ambassador shared the perspective of some
international companies that the GOAJ is discouraging new
projects by foreign firms in the energy sector. Aliyev
denied that this is the case and said that his philosophy is
to invite international investors into projects in order to
share risk. In his view, the risk is still considerable and
for the next few years Azerbaijan will have to continue
partnerships with foreign companies on most ventures.


8. (C) The Ambassador pointed out that many American
companies are looking to grow their presence in Azerbaijan,
noting the maritime construction company McDermott as an
example. McDermott would like to make Azerbaijan the hub for
all its Caspian projects, similar to its operations in the
UAE and Indonesia, but needs a duty-free zone if this is to
make commercial sense. Aliyev said that in order to
establish a duty-free zone, the parliament has to pass a law,
based on advice from SOCAR, the Energy Ministry and the
Presidential Administration. Ambassador urged Aliyev to look
seriously at such proposals, which would benefit Azerbaijan
as well as American investors.

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COMPLETING BTC
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9. (C) Ambassador asked for Aliyev's take on the current
state of BTC. Aliyev said that BP is still in negotiations
with BOTAS, the Turkish state pipeline company, and that the
May 27 deadline to finish all work still stands. A six-day
delay between pump stations 3 and 4 has just ended. As
Aliyev described it, BOTAS has claimed USD 333 million from
BP. BP, says Aliyev, has made a counteroffer of a guaranteed
USD 250 million that would settle all outstanding debts and
eliminate any need for arbitrage.
HARNISH