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