EXPORTING GAS: EB/CBA SPECIAL REPRESENTATIVE

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000736 SIPDIS SIPDIS DEPARTMENT FOR EUR/SNEC AND EB/ESC USDOE FOR FE - SWIFT AND OS - WILLIAMSON E.O. 12958: DECL: 05/19/2016 TAGS: ENRG ECON EPET AJ KZ RU TR SUBJECT: EXPORTING GAS: EB/CBA SPECIAL REPRESENTATIVE MERMOUD MEETS WITH AZERBAIJAN STATE OIL COMPANY Classified By: Charge d,Affaires Jason P. Hyland, reasons 1.4 (b),(d) and (e). ¶1. (C) SUMMARY. Charge and EB/CBA Special Representative Frank Mermoud met May 5 with Elshad Nasirov, Vice President of Azerbaijan's State Oil Company (SOCAR). Nasirov argued that Kazakhstan is unhappy with Gazprom and is looking at alternate methods to get its gas to world markets. Nasirov outlined a plan under which Kazakhstan would send its gas via subsea pipeline to Azerbaijan, there to be combined with Azerbaijani resources for onward sale to Europe. Turkmenistan, he said, might or might not join such a system later on. Nasirov said that SOCAR had discussed this plan informally with Kasakhstan. He admitted that Russia would put pressure on Kazakhstan not to participate in any such project, so it would have to be established in a low-key fashion. Nasirov also alleged that Turkey is considering adopting a Gazprom-like model of buying Azerbaijan gas at low rates and then reselling it at world market rates. He asked for U.S. help in convincing Turkey to charge Azerbaijan a transit fee and to allow Azerbaijan to be paid directly by end-users, in accordance with the liberalization of the European gas market. END SUMMARY. -------------- -------------- POSSIBLE KAZAKHSTAN-AZERBAIJAN SUBSEA GAS PIPELINE -------------- -------------- ¶2. (C) In a May 5 meeting, SOCAR Vice President Elshad Nasirov told visiting EB/CBA Special Representative Frank Mermoud that he believes that necessary agreements for a gas export project to Europe could be signed this year. Nasirov envisions Azerbaijan joining its gas resources to volumes from Central Asia, specifically Kazakhstan but potentially also Turkmenistan. Nasirov advocates the construction of a sub-sea pipeline across the Caspian from Kazakhstan to Azerbaijan. Kazakhstan, Azerbaijan and Russia have signed a trilateral delimitation agreement for the north Caspian, he noted. However, as it would be "difficult" to get agreement from the Russians for such a project, the proposed pipeline would pass through the Azerbaijani and Kazakhstani sectors only. There have been no formal talks on this project, said Nasirov, just "telephone calls" on the subject between the two countries. Azerbaijan is willing to assist in subsidizing the construction of a Kazakhstan-Azerbaijan gas pipeline and would provide political support for the project, says Nasirov. ¶3. (C) Mermoud asked if the Inter-Governmental Agreement (IGA) currently being negotiated between Azerbaijan and Kazakhstan might have a clause that would cover gas shipments as well as oil. Nasirov said that it does not, but that SOCAR sees this IGA as a "prototype" for future such agreements. Once this IGA is completed and signed, a similar one covering gas transport will be much easier, he said. ¶4. (C) Nasirov believes that Kazakhstan is interested in trans-Caspian gas projects because of difficulties with Gazprom, currently their only avenue for gas export. Gazprom is buying Kazakhstan's gas at a cheap rate, he said, and then reselling it at world market prices. Nasirov said that Kazakhstan has recently given Gazprom an "ultimatum," demanding access to world markets for half of the gas it sells them - in other words, for Gazprom to let the Kazakhstani gas transit its pipeline network and for the end-user to pay Kazakhstan directly at the world market rate. Gazprom has not yet replied to Kazakhstan, said Nasirov. -------------- TURKMENISTAN'S POSSIBLE ROLE -------------- ¶5. (C) Turkmenistan, Nasirov noted, does not support the trilateral delimitation agreement, and indeed both Azerbaijan and Turkmenistan claim the Kyapaz-Serdar field in the central Caspian. If Turkmenistan wants to join this gas export project, said Nasirov, it can send its gas over land pipelines to Kazakhstan, where it can then join Kazakhstan's gas and the pipeline to Azerbaijan. The lack of overall Caspian delimitation is not an obstacle to this project, asserted Nasirov. It is Azerbaijan's position that only the approval of Caspian states participating in a project is necessary, said Nasirov, and nonparticipating Caspian states BAKU 00000736 002 OF 002 do not have a veto. -------------- "GAZPROM CANNOT BE TRUSTED" -------------- ¶6. (C) Echoing the view of many in Azerbaijan, Nasirov said that "Russia has a lot of leverage over Kazakhstan." Pointing at a map, he noted that Kazakhstan currently has a joint venture with Russia, KazRozNeft, to sell some quantities of gas to Ukraine via a land pipeline across Russian territory. If the Russians see Kazakhstan and Azerbaijan beginning to build a pipeline together, said Nasirov, they will put two and two together and pressure Kazakhstan through the KazRozNeft project. For this reason, he said, a good idea would be for a consortium of international investors to build the proposed Kazakhstan-Azerbaijan line on a speculative basis, and that it be built initially for small volumes. Nasirov seemed to believe this would mitigate the inevitable negative reaction to the project by Russia. Mermoud pointed out that the international investors would need assurances from both countries before beginning such a project. ¶7. (C) "Gazprom cannot be trusted," said Nasirov. He told the story of how, in 2005, SOCAR representatives had been invited to Moscow where Gazprom officials summarily informed them that Russia was unilaterally altering its negotiated gas sale agreement with Azerbaijan from charging USD 60 per cubic meter to charging USD 110 per cubic meter. "International agreements with Gazprom mean nothing," Nasirov said. Frankly, he added, with its dogged efforts on Caspian delimitation and the IGA, "Azerbaijan is the only country in the region bound by international agreements." -------------- CONCERNS ABOUT TURKISH GAS SALES MODEL -------------- ¶8. (C) Nasirov expressed concern about recent developments with Turkey in regards to onward sales of gas from Azerbaijan's Shah Deniz field. There are indications that Turkey will move to a Gazprom-style model, said Nasirov. In other words, Turkey will buy Azerbaijan's gas at the negotiated rate and then resell it to Europe at the market rate. Nasirov says that Azerbaijan wants its gas to transit Turkey, with customers paying Azerbaijan market rates directly and with Azerbaijan then paying Turkey a transit fee. Nasirov pointed out that such a system would be in accord with the lieralization of the European gas market, and the reselling" arrangement Turkey seems interested in i a step backwards. Nasirov asked for U.S. support on this issue. -------------- -------------- SUCCESSFUL ALIYEV VISIT TO DC; NON-ENERGY SECTOR IMPORTANT -------------- -------------- ¶9. (C) On other matters, Nasirov (who accompanied President Aliyev to Washington) told Mermoud and Charge that Aliyev's visit to Washington had "exceeded expectations." Mermoud and Nasirov agreed on the importance of developing the non-energy sectors of Azerbaijan's economy, and Mermoud recalled that President Aliyev had made this point during one of his official lunches in Washington. They also both agreed on the importance of oil revenue management. "Everyone is talking about oil revenues," said Nasirov. ¶10. (U) EB/CBA Frank Mermoud has cleared this cable. HYLAND