Identifier
Created
Classification
Origin
06BAKU769
2006-05-30 03:36:00
CONFIDENTIAL
Embassy Baku
Cable title:  

BP OFFICIALS ON FUTURE TRENDS IN THE EAST-WEST

Tags:  EPET ENRG PREL PGOV AJ KZ 
pdf how-to read a cable
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PP RUEHAG RUEHDBU
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ZNY CCCCC ZZH
P 300336Z MAY 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0419
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RUEKJCS/JOINT STAFF WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHDC PRIORITY
RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
RHMFISS/CDR USCENTCOM MACDILL AFB FL PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000769 

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 05/25/2016
TAGS: EPET ENRG PREL PGOV AJ KZ
SUBJECT: BP OFFICIALS ON FUTURE TRENDS IN THE EAST-WEST
ENERGY CORRIDOR

REF: BAKU 736

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

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000769

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 05/25/2016
TAGS: EPET ENRG PREL PGOV AJ KZ
SUBJECT: BP OFFICIALS ON FUTURE TRENDS IN THE EAST-WEST
ENERGY CORRIDOR

REF: BAKU 736

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


1. (C) SUMMARY. On May 17, BP Azerbaijan Associate President
David Woodward and BP Executive Vice President Andy Inglis
briefed Charge and British Ambassador on recent developments
in Caspian energy projects. BP has reached closure with
BOTAS on a deal for BTC completion. Woodward and Inglis feel
that labor relations are becoming more important, and may be
manipulated by a GOAJ eager to deflect criticism. Looking at
future projects, Woodward and Inglis advise an incremental,
piece-by-piece approach, as was done with BTC. While they
welcomed President Aliyev's recent move to put
Western-oriented, English-speaking officials into key
positions, Woodward and Inglis said that both SOCAR and the
GOAJ continue to suffer from an extreme capacity deficit,
particularly in the area of oil revenue management. Woodward
and Inglis feel this will ultimately affect the political
environment, perhaps producing new opposition movements
outside of the traditional opposition parties. END SUMMARY.

--------------
BTC AND SCP: NOT TROUBLE-FREE BUT WORLD CLASS
--------------


2. (C) Woodward began the meeting by reviewing the current
state of the BTC and SCP projects, noting that the work on
both has been truly "world-class." Although BTC itself has
been delayed, the drilling platforms at both Western Azeri
and Eastern Azeri (parts of the Azeri-Chirag-Gunashli, or
ACG, field which feeds BTC) arrived ahead of schedule.
Regarding BTC completion, following a "tough conversation"
with Turkish state pipeline company BOTAS, Woodward feels
confident enough to say that both sides have arrived at a
mutually acceptable agreement for completion. This will
include a payment by BP and increased BP control over aspects
of completion. Woodward believes that Azerbaijan will agree
to the deal and hopefully final approval by all partners will
be achieved by the end of May. While BP is not completely

happy with how things turned out, Woodward said that BP "has
to be big about this" and remember that it is looking at a
forty-year relationship with the host countries on this
project.


3. (C) This does not mean an end to problems with BTC, added
Woodward. In some cases, and especially with Georgia, BTC's
difficulties may be "only just starting." Woodward noted
that labor relations are beginning to emerge as an issue,
citing the recent strike at McDermott and the various
incidents revolving around alleged mistreatment of
Azerbaijani flags or commemorations of the Khojaly Massacre.
In the background, said Woodward, there is always rhetoric
about "expatriates sitting around the Hyatt swimming pool
giving away our money;" he said that GOAJ figures like
Finance Minister Sharifov are often the prime source of such
remarks. At this, Inglis remarked that while Sharifov sees
the big picture, he loves to haggle.


4. (C) Charge and British Ambassador agreed that labor
relations will assume greater and greater importance. Inglis
pointed out that while certainly there were real grievances
in recent labor disputes, it would be "simplistic" to assume
that the situation was not also being manipulated. Woodward
pointed out that recent labor actions had not occurred on
projects that were coming to an end where people are losing
their jobs, but on projects that are continuing. Charge
speculated that the GOAJ may try to channel and control these
currents of discontent. Inglis agreed: "The honeymoon is
over."

-------------- --------------
FUTURE PROJECTS: WILL AZERBAIJAN REST ON ITS LAURELS?
-------------- --------------


5. (C) Inglis said that there are several questions to think
about when considering what comes next in Caspian energy.
What does Azerbaijan's resource base really hold? How much

BAKU 00000769 002 OF 003


of this does Azerbaijan want to commit to projects now, and
how much does it want to save for later? How will
unemployment be dealt with during the lull between projects?
The issue of sustainability, and the issue of transitioning
to a workforce composed of a larger and larger percentage of
local employees, also need to be considered. With regards to
gas export projects specifically, Inglis said that Azerbaijan
has yet to fully understand that it does not face a trade-off
between satisfying domestic demand for gas and being a major
gas exporter to Europe. It is possible for Azerbaijan to
achieve both goals, he argued.


6. (C) Woodward opined that things might be better for BP if
it were not for the "wall of money" about to hit Azerbaijan
as a consequence of BTC and SCP. Elements of the GOAJ,
pleased with high oil and gas prices, seem ready to rest on
their laurels and less likely to seize opportunities to press
ahead with new projects. Additionally, Woodward said that
state oil company SOCAR will want to play a larger and more
active role in future projects. BP does not object to this,
said Woodward, but there are serious questions about SOCAR's
capabilities. In Woodward's opinion, SOCAR does not have the
capacity to take the leading role on future projects.

--------------
STEP-BY-STEP: THE LESSON OF BTC
--------------


7. (C) When considering future projects, such as Caspian gas
export, Woodward feels the experience of BTC is instructive.
Woodward recalled four factors that had to come together to
make BTC happen:

--A commercial imperative (a product to be sold and a market
for it).
--A finite number of host countries for the project that are
serious about it.
--The strong backing of the United States and allied
governments.
--Breaking the project down into "bite-sized chunks."


8. (C) Woodward stressed the fourth point: Caspian energy
has succeeded because its associated projects have been
accomplished incrementally. BTC itself, involving three
countries, was a fairly large piece - but Woodward noted that
it was manageable. If the BTC project had originally
included Kazakhstan as well, he pointed out, it likely would
have been too ambitious to accomplish. Instead, the project
first focused on bringing Azerbaijan's oil through Georgia to
Turkey. Then, as that was accomplished, a new project of
bringing Kazakhstan's oil across the Caspian by ship to BTC
could be considered. Inglis strongly agreed - an incremental
approach vice a "big bang" is the best way to proceed.
COMMENT: This echoed the approach recommended by SOCAR Vice
President Elshad Nasirov in reftel, although Nasirov's view
was driven more by concerns about Russia.

--------------
CAPACITY-BUILDING CRITICAL
--------------


9. (C) On politics, both Woodward and Inglis spoke positively
of recent changes in the GOAJ and how Ilham Aliyev is
bringing Western-oriented, English-speaking officials to the
fore. The next question, said Woodward, is to what extent
Ilham Aliyev can take on the remaining members of the old
elite. Inglis pointed out that Azerbaijan is in better shape
than many other countries where BP has projects, such as
Angola, but capacity issues are still of profound importance.
Charge noted that the GOAJ's poor performance on avian flu
is a good example. British Ambassador pointed out that there
are countries, such as Belarus or Uzbekistan, where the West
has essentially given up on the possibility of progress.
Azerbaijan is not in that category yet, he said.


10. (C) The fate of the BP-funded, Oxford-designed
macroeconomic policy model for oil revenue management is an
example of Azerbaijan's "thanks, we'll do it ourselves"
attitude, says Woodward - the GOAJ is dragging its feet on

BAKU 00000769 003 OF 003


implementation. Inglis pointed out that Azerbaijan will have
no capacity to plan how to spend its oil revenues most
effectively without such a model.

--------------
POLITICS POST-BTC COMPLETION
--------------


11. (C) Woodward said that the inability to manage oil
revenues will have implications as the general public sees
certain individuals getting richer and richer while elsewhere
in society there is no progress. Opposition to the ruling
party may emerge, but Woodward does not believe this will
come from the existing opposition parties. It is more likely
to arise anew from the grassroots, from the Islamic sector of
society, or from disaffected members of the ruling elite.
HYLAND