AZERBAIJANI VIEWS OF THE KAZAKHSTAN-AZERBAIJAN

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000651 SIPDIS SIPDIS USDOE FOR FE - SWIFT AND OS - WILLIAMSON E.O. 12958: DECL: 05/01/2016 TAGS: EPET ENRG PREL AJ TX KZ SUBJECT: AZERBAIJANI VIEWS OF THE KAZAKHSTAN-AZERBAIJAN OIL-TRANSPORT NEGOTIATIONS REF: BAKU 368 Classified By: acting DCM Joan A. Polaschik, reasons 1.4 (b),(d) and ( e). ¶1. (C) SUMMARY. Conversations with senior Azerbaijani official Samir Sharifov and SOCAR Vice President Elshad Nasirov reveal that the GOAJ is pushing for a focused and non-ambiguous Inter-Governmental Agreement for oil transport from Kazakhstan. Sharifov, somewhat mistrustful of Kazakhstan, wants the agreement to spell matters out as much as possible -- specifying Kashagan as the source field and BTC as the route, and dedicating new maritime infrastructure exclusively to the project. Nasirov agreed, adding that taxation issues still had to be worked out and that international investors would be allowed to own only the vessels dedicated excusively to the project. Both Sharifov and Nasirov emphasized that they saw no need to sign an agreement hastily and that they were willing to take the time necessary to get what they want. They also believe that while final agreement will not be achieved during the talks with Kazakhstan this month, final agreement is not very far away as the two sides are fairly close. END SUMMARY. -------------- SHARIFOV: NO AMBIGUITY -------------- ¶2. (C) Energy Officer met with Samir Sharifov on April 17. Sharifov at that time was director of the State Oil Fund; he very shortly thereafter became Minister of Finance. Sharifov has been playing a more and more influential role on energy policy issues over time. Overall, Sharifov is wary of Kazakhstan as a partner and wants the IGA to contain clear and unambiguous positions. "We need to know how serious our partner is," said Sharifov with a shrug. Commitments need to be clear, he argued. The emerging IGA is much more specific than the draft from last year, he noted, and for that reason will be a much better deal for Azerbaijan and presumably Kazakhstan as well. ¶3. (C) Sharifov identified three areas still under discussion between the two countries in the current draft IGA. Echoing reftel, Sharifov said that he wants the IGA to specify BTC as the transport route for the Kazakhstan oil to be transported to Azerbaijan. This is now the GOAJ position, said Sharifov, and he feels Kazakhstan will agree to it. Sharifov points out that BTC is really the only route for this oil anyway -- the Baku-Novorossisk pipeline is restricted to Azerbaijani oil and Baku-Supsa is restricted to ACG producers. The only transporter left other than BTC is railway transportation, and Sharifov asserts that giving Kazakhstan a privileged position in the rail corridor would violate the Energy Charter. For these reasons, Sharifov feels this point of contention will quickly pass. ¶4. (C) Sharifov also wants the IGA to specify the Kashagan field as the source for the oil. Sharifov noted that under the current draft, the IGA applies to the port of Kurik in Kazakhstan only in regards to its shipping oil to Azerbaijan, leaving open the possibility that this new port could engage in other activities. Sharifov wants the port to be dedicated exclusively to the trans-Caspian project. Both issues relate to a larger point -- Sharifov wants to make the IGA as focused and as specific as possible. "We need to know how serious our partner is," he repeated. Many argue that the IGA must be completed very soon in order to give enough time for the necessary infrastructure to be put in place before Kashagan production begins in 2008. Sharifov does not feel this is a hard deadline and believes it is important to take the time to ensure this deal is done right. Sharifov added that he did not necessarily expect final agreement with Kazakhstan to come out of the talks taking place in April, but he fee ls the process is moving towards closure. -------------- -------------- NASIROV: DON'T FORGET TAXES, AND NO NEED TO HURRY BAKU 00000651 002 OF 002 -------------- -------------- ¶5. (C) Energy officer met with Elshad Nasirov, SOCAR Vice President for Marketing and Investment, on April 18. Nasirov essentially agreed with Sharifov on the major outstanding issues. In his view, whether the IGA designates BTC as the exclusive route for trans-shipped Kazakhstani oil is no longer an issue. He added, however, that the tax structure for the project is still under discussion and will ultimately be settled through expert-level discussions. When asked about who would actually own the ships built to transport the oil, Nasirov said that it is his understanding that the international partners will be allowed to own only those vessels "dedicated" to Kashagan transport. ¶6. (C) Nasirov also echoed Sharifov's view that there is no need to "hurry" to complete the IGA and even spoke disparagingly of the "so-called delay" in the negotiations. Nasirov reaffirmed that the volume of oil expected from Kashagan will require new ships, and that the current infrastructure of state shipping monopoly CASPAR is not at a high enough standard for the job. He also affirmed that the project will require new ports. A slightly later signing of the IGA will indeed delay investment in new maritime infrastructure, but in Nasirov's view this won't really be an issue. Nasirov argued that in 2008 there will only be 75,000 tons of oil produced from Kashagan, rising to 175,000 only in ¶2009. Therefore, he said, the terminals and ships do not have to be 100 percent ready the day that Kashagan production begins. If necessary, the oil can initially be transported via existing infrastructure. -------------- COMMENT -------------- ¶7. (C) Shortly after these conversations, the delegation from Kazakhstan arrived in Baku for the next round of negotiations, which are still underway at the time of this writing. Nasirov is deeply involved in the talks. Sharifov was as well, and despite his sudden promotion to the Finance Ministry is still playing an important role. In contrast to 2005, it is clear that this time the Azerbaijani side is not in a hurry to get an agreement. On the other hand, the Azerbaijani side seems to feel that the two sides are close enough to reach final agreement relatively soon. HYLAND