LATEST ROUND OF AZERBAIJAN-KAZAKHSTAN IGA TALKS

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000722

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON
USTDA FOR DAN STEIN

E.O. 12958: DECL: 05/17/2016
TAGS: EPET ENRG PREL EWWT EINV AJ KZ
SUBJECT: LATEST ROUND OF AZERBAIJAN-KAZAKHSTAN IGA TALKS
CONCLUDES, MARINE TRANSPORT ONLY REMAINING MAJOR ISSUE

REF: A. BAKU 663

B. BAKU 704

C. BAKU 685

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


1. (C) SUMMARY. ConocoPhillips Russia/Caspian Transportation
Manager John Dabbar and executive Steven Beck briefed Energy
Officer May 6 on the just-concluded round of negotiations
over the Azerbaijan-Kazakhstan Inter-Governmental Agreement
(IGA) for trans-Caspian oil transport. While "double
taxation" is no longer an issue, Azerbaijan seems to want to
defer discussion of marine transportation from the IGA to
follow-on Host Government Agrements (HGAs). In response, the
north Caspian producers argue that an IGA that does not
address marine transportation is worthless, as that is the
only aspect of the project that is truly "intergovernmental."
Beck voiced misgivings about the idea of Kazakhstan as a gas
exporter, pointing out that much of the country's gas is
already spoken for. Beyond this remaining issue, there seems
to be little else standing in the way of a final agreement,
and both GOAJ and GOKZ officials have publicly stated that
they believe the IGA will be finalized and signed very soon.
END SUMMARY.


2. (C) According to Dabbar and Beck, the "double-taxation"
issue discussed in Ref A, under which Azerbaijani Finance
Minister Sharifov wanted to assess both a transit fee and a
profit-tax on the oil entering BTC, seems to be
"evaporating." The Azerbaijani and Kazakhstani sides have
decided to refer the issue to their respective tax experts
and the Azerbaijani side is no longer pushing Sharifov's idea.


3. (C) The issue of the "Marine Transporter" continues to be
central to investor concerns about the IGA. Four weeks or so
ago, said Dabbar, Azerbaijan specifically wanted the IGA to
name state shipping company CASPAR as the exclusive Marine
Transporter for the project. The international investors
have taken a different position, saying that they must have
the right to own the ships. The investors also want the
right to select the Marine Transporter, based on open
criteria acceptable to both Azerbaijan and Kazakhstan.


4. (C) Dabbar and Beck noted that while the IGA no longer
enshrines CASPAR as the Marine Transporter, it does not
include the language of the investors either - in fact, the
current draft no longer addresses the issue of the Marine
Transporter. Azerbaijan seems to want to defer the issue to
the follow-on Host Government Agreements (HGAs). The
international investors are not happy with this position.
Beck pointed out that the only "international" part of the
project is the transportation of oil from Kazakhstan to
Azerbaijan by the Marine Transporter. If the IGA does not
address the Marine Transporter issue, he said, there is no
point in having an IGA in the first place.


5. (C) Dabbar and Beck said that the above point had been
made clear to the Azerbaijani side before the talks
adjourned. The talks are expected to resume in about two
weeks or so - perhaps in Almaty, perhaps in London or Paris,
or on "neutral ground" in Istanbul. Dabbar noted that the
Kazakhstani side is led by Kairgeldy Kabyldin of KazMunaiGaz
(KMG),and Kabyldin seems to be a fully-empowered
negotiatior. SOCAR Vice President Elshad Nasirov leads the
Azerbaijani side, but Dabbar says he seems "more like a
mediator than a negotiatior" - he appears not to be empowered
to make final decisions, but only to carry them back to some
higher lever. Dabbar and Beck emphasized that they see
Nasirov as a good interlocutor, and that he is by far the
best member of the Azerbaijani team - "when he leaves the
room, it all falls apart" as various SOCAR lawyers and others
"spout off without knowing what they are talking about."


6. (C) Nasirov alluded to industry concerns about the Marine
Transporter issue in a separate meeting with Energy Officer.
Nasirov said that the Azerbaijani side wants to move the
issue to the HGA in the interest of completing the IGA
sooner, but that industry representatives want the Marine

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Transporter discussed in the IGA. Nasirov noted that while
the international investors want the right to own the ships,
SOCAR's understanding is that the investors will definitely
have the right to operate the ships. Nasirov hinted at a
possible compromise when he said SOCAR's central concern is
that there be an "equal standard" applied to all possible
owner-operators. SOCAR does not want to see possible
owner-operators unfairly advantaged or disadvantaged.


7. (C) As an interesting coda, Beck mentioned his discomfort
with talk about exporting gas from Kazakhstan. Beck said
that what gas exists in Kazakhstan is being used for
reinjection, the petrochemical industry, domestic use and
sale to Gazprom. After all that, he said, there is little
left to sell on new routes unless new discoveries are made.


8. (C) COMMENT: The Marine Transporter issue seems to be the
last major issue blocking the IGA. Other issues appear to
have been resolved. Azerbaijani Foreign Minister Elmar
Mammadyarov gave an optimistic assessment of the negotiations
following talks on the margins of the Economic Cooperation
Organization summit in Baku (Ref B),and President Aliyev
told us it will be signed in June (Ref C). END COMMENT.
HYLAND