1. (C) SUMMARY. Japanese multinational Itochu is seriously
interested in the proposed Baku-Tbilisi-Kars rail link. Both
Itochu and SOCAR feel the rail link will be necessary to deal
with large Caspian oil volumes coming in the future. BP and
British Embassy representatives disagree and do not see such
a rail link as necessary. Itochu, seeking financial support
from the Japanese Government for a feasibility study, was
told the Government of Armenia has requested that Japan not
assist with the railroad. According to the Japanese Embassy
in Baku, the Japanese Government has indicated that it will
not support the project. The GOAJ has been seeking support
for this project from a variety of sources and clearly is
committed to making it happen one way or another. END
SUMMARY.



2. (C) Toshihiru Sugiura, head of Itochu's operations in
Azerbaijan, and Katsumi Kutamoto, from the Itochu head office
in Tokyo, met with Energy Officer April 28 to discuss
Itochu's serious interest in the proposed Baku-Tbilisi-Kars
rail link (sometimes referred to as the
Baku-Akhalkalakhi-Kars rail link or the
Baku-Tbilisi-Akhalkalakhi-Kars rail link). Itochu is a
partner in both the Azeri-Chirag-Gunashli (ACG) oil field and
in the Baku-Tblisi-Ceyhan (BTC) pipeline. Itochu officials
said they were interested in doing a feasibility study of the
railroad project and that they had asked Japan's
international development agency for support. However,
Japanese Government officials apparently told Itochu that the
Armenian Government had approached Tokyo and asked that Japan
not support the project.



3. (C) The Itochu representatives asked about U.S. policy
towards the railroad project. Energy Officer drew on talking
points prepared for EUR A/S Fried's Congressional testimony
and said that the USG has no plans to support the project.
Sugiura and Katamoto then asked if the United States might
support part of the project - for example, the refurbishment
of the Azerbaijan-Georgia rail link. They also expressed
interest as to whether the United States was merely "not
supporting" the project or was actively against it - for
example, if the GOAJ were to seek funding from international
financial institutions, would the United States block it?
Energy Officer said he did not have instructions on this
point. The Itochu representatives argued that this proposed
rail link would not only transport oil but also dry cargo.
Sugiura and Katamoto were not aware of pending legislation
(H.R. 3363 and S2461) that would block U.S. financial support
for the project.



4. (C) Elshad Nasirov, vice president of State Oil Company
SOCAR, expressed a slightly different view when Energy
Officer brought up the railroad issue on May 5. With a
smile, he said that dry cargo might find its way onto the
railroad "in twenty or thirty years" - but right now, in
SOCAR's view, the railroad is overwhelmingly about oil
transport. Both SOCAR and Itochu argue that future Caspian
volumes will be so great that the rail link will be a
necessity - BTC, the Baku-Supsa pipeline, the
Baku-Novorossiysk pipeline and the existing rail corridor to
Batumi will not be enough.



5. (C) The view of Itochu and SOCAR contradicts the viewpoint
expressed by BP Azerbaijan Associate President David Woodward
and by the British Ambassador, both of whom do not believe
that the railroad is justifiable on grounds of future
volumes. Both have also questioned the ability of Turkish
transportation infrastructure to move large oil volumes
onward from Kars, located in an underdeveloped region of
Turkey. In their view Turkey would either have to improve
eastern Turkey's connectivity to world markets, or build a
network of refineries there, or both, to make Kars a
reasonable destination for large quantities of Caspian oil.



6. (C) On May 11, Energy Officer met with Seisuke Shimizu,
First Secretary of the Japanese Embassy in Baku. Shimizu
said that the Japanese Government does not support the

BAKU 00000720 002 OF 002


railway project. Shimizu said that Japan does not want to
get involved in disputes between Azerbaijan and Armenia.
Shimizu admitted that he did not know whether Japan would
block financing of the project by international financial
institutions. Shimizu added that Azerbaijani President
Aliyev had raised the issue during his March trip to Tokyo,
and that the GOAJ had insisted on including a reference to
the railroad in the joint statement issued by President
Aliyev and Prime Minister Koizumi. The final language read:
"The Azerbaijani side stressed that the
Kars-Akhalkalaki-Tblisi-Baku railway project will contribute
to the economic development of countries of the region. The
Japanese side took note of the importance of the improvement
of regional transportation networks connecting Azerbaijan and
neighboring countries."



7. (C) COMMENT: Itochu's approach to Embassy Baku paralleled
its recent approach to Embassy Ankara and its planned
approach to Embassy Tblisi (Ref A). Although some have
dismissed the rail project as nothing more than a poke in
Armenia's eye, Itochu apparently believes SOCAR's argument
that the project is necessary for oil transport and sees it
as a project worthy of investment. Itochu is clearly feeling
out the political landscape before going further. The GOAJ,
for its part, is actively seeking international backing for
the project, having raised it with Japan, with the United
States, and at the Economic Cooperation Organization summit
in Baku (Ref B). The GOAJ seems committed to making the
project happen, and its next step may well be international
financial institutions. END COMMENT.
HYLAND