BP UPDATE ON EAST-WEST ENERGY CORRIDOR

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000650

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 05/01/2016
TAGS: EPET ENRG PREL AJ TX KZ
SUBJECT: BP UPDATE ON EAST-WEST ENERGY CORRIDOR


Classified By: acting DCM Joan A. Polaschik, reasons 1.4 (b),(d) and (
e).


1. (C) SUMMARY. During his regular briefing for U.S. and UK
Embassy officers on April 25, AIOC President David Woodward
gave a downbeat assessment of talks with BOTAS on BTC
completion and predicted further delays. SCP is largely on
schedule although Woodward continues to argue that it will be
impossible to supply Shah Deniz gas to Georgia any earlier
than the start of Phase II in 2010-2011. While Azerbaijan
still desires more associated gas from ACG, BP's plan to
exploit deep gas at that field has been vetoed. Woodward
also indicated that the BP-designed macroeconomic modeling
mechanism for oil revenue management will follow Samir
Sharifov from the State Oil Fund to the Ministry of Finance.
END SUMMARY.

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DIFFICULTIES CONTINUE WITH BOTAS...
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2. (C) Woodward gave a gloomy assessment of recent
discussions with Turkish state pipeline company BOTAS on BTC
completion. He said that BP is taking the approach of "how
do we pay in order to get this project done." Woodward
portrayed BOTAS as unresponsive to ideas and simply demanding
money. Woodward said he would see the BOTAS board on the
afternoon of April 26 (we do not know if this meeting
occurred) and plans to meet with the Turkish Energy Minister
on May 2. Woodward feels BOTAS is pushing the issue onto the
Energy Ministry. At the moment, says Woodward, oil has
reached station PT4 in Turkey, meaning that the line is 80%
full. The next step is the final push to Ceyhan, and the oil
must flow from PT4 before mid-May if the first tanker
carrying ACG oil is to leave Ceyhan by May 27 as planned.
According to Woodward, BOTAS has threatened to hold the oil
at PT4 if an agreement is not reached, and has also
threatened to turn off the oil after the actual first lifting
as they will still have some minor work to do on other parts
of the line. In any event, the current holdup will delay
completion by at least one week, and Woodward feels it is
likely first lifting will slip to mid-June.


3. (C) Woodward said that BP has little leverage at this
point but that BP is telling BOTAS and anyone who will listen
that this experience will "color our thinking on any future
projects." BTC commissioning ceremonies are still set
tentatively for July 13, however while the Turkish MFA seems
to be working with this date the Turkish Energy Ministry has
not given BP its formal assent for this date. President
Aliyev is likely to raise BTC progress in Washington and
again in Turkey.

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...BUT PROGRESS CONTINUES ON SHAH DENIZ
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4. (C) Woodward said the new Shah Deniz drilling platform is
in place and the "first flow" of gas into SCP is still on
schedule for September. The question was asked if BOTAS,
which is behind schedule, will complete the SCP connector in
time. Woodward believes that SCP is a different situation
than BTC -- BOTAS is building the SCP connector to its own
standards and for its own use, as opposed to BTC, which it is
building under BP rules and for BP's use. Additionally, the
Shah Deniz gas will be used in Turkey, Woodward pointed out,
and since it comes in at half the price of Blue Stream gas,
the Turks want to get access to it as soon as possible. Some
compressor stations on the Turkish side of SCP will not be
completed by September, says Woodward. This will result in
slightly smaller volumes of gas transiting SCP initially, he
explained, until those stations come on-line.

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EARLY SHAH DENIZ GAS TO GEORGIA UNLIKELY
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5. (C) Woodward said there have been no further meetings of
the Turkey-Georgia-Azerbaijan group to discuss Georgia's
request for "more gas sooner" from Shah Deniz (in other
words, before Shah Deniz Phase II begins in 2010-2011). BP

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is involved with this process only to provide technical
advice. In Woodward's long-held view, it is physically
impossible to increase the amount of gas produced by Shah
Deniz Phase I, so Georgia would have to buy gas already
obligated to Turkey and/or Azerbaijan. Given that Shah Deniz
gas is half the price of Blue Stream gas, Woodward finds it
unlikely that Turkey would give any up. As for Azerbaijan,
Woodward believes while it could theoretically supply some
more gas to Georgia, even from non-Shah Deniz sources,
exporting any significant quantities would force Azerbaijan
to importing more gas from Russia for domestic use. The
Russians would probably figure this out, noted Woodward, and
raise their prices, perhaps to prohibitive levels.

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PLANS FOR EXPLOITING ACG ASSOCIATED GAS CONTINUE...
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6. (C) A new pipeline has been commissioned from the ACG oil
field to bring more associated gas to shore per Azerbaijan's
request. The associated gas (gas mixed in with the oil) is
largely reinjected into the field to create pressure and make
the oil flow easier. Azerbaijan gets to keep the associated
gas not used for this purpose -about 1.4 bcma - but wants to
raise this amount to 3 bcma. Since this will leave less gas
for reinjection and thus impact oil production, BP needs
compensation and discussions are now underway to determine
how much Azerbaijan will pay for this gas.

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...BUT PLANS FOR EXPLOITING DEEP GAS AT ACG ARE SCRUBBED
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7. (C) BP had originally hoped to swap greater Azerbaijani
access to ACG associated gas in exchange for the right to
develop the large gas field at ACG that is not covered by the
PSA and that lies far below the mixed oil and gas field
currently being exploited. The outlines of a deal for BP to
exploit deep gas at ACG had been agreed upon with both Samir
Sharifov, then head of SOFAZ, the state oil fund, and Rovnag
Abdullayev, head of SOCAR, but after Sharifov became Finance
Minister he disengaged from the issue, leaving behind
Abdullayev, who vetoed the deal. There are no further
discussions taking place on BP access to deep gas at ACG.

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MACROECONOMIC MODEL TO FOLLOW SHARIFOV
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8. (C) Speaking of Sharifov, Woodward said that he expected
the macroeconomic modeling system BP created (to assist the
GOAJ with oil revenue management) would be housed in the
Finance Ministry. Originally it was to be housed in SOFAZ
but apparently will follow Sharifov to his new job.
HYLAND