EB/CBA SPECIAL REP FRANK MERMOUD ATTENDS FORUM FOR

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000828

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SNEC AND EB/ESC
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON

E.O. 12958: DECL: 06/06/2016
TAGS: ENRG ECON EPET PGOV PINR AJ KZ
SUBJECT: EB/CBA SPECIAL REP FRANK MERMOUD ATTENDS FORUM FOR
WESTERN ENERGY COMPANIES IN AZERBAIJAN


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


1. (C) SUMMARY. Representatives from McDermott Caspian
Construction, ExxonMobil, ConocoPhillips, Statoil and BP
participated in the Charge's Energy Forum with Frank Mermoud
on May 4. Many pointed out that while they want to do
further projects in Azerbaijan, working levels of the GOAJ
and SOCAR seem to want to stand pat. They also noted that
the Barmek experience is a vivid example of problems with the
business climate. While company representatives recognize
that some of this is natural, as Azerbaijan shifts from
construction to operations and becomes more like other oil
and gas states, they feel the decision-making structure is
unclear and SOCAR's planning capacity limited. Company reps
feel that while President Aliyev is enthusiastic about new
gas export projects, that enthusiasm has not quite reached
the bureaucracy yet, and the GOAJ has not quite understood
that it can both meet domestic needs and play a significant
export role. Interestingly, several representatives pointed
out the paradox of how unemployment is actually rising in
Azerbaijan even as the country is about to experience an
influx of revenue. END SUMMARY.

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MCDERMOTT
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2. (C) During a May 4 energy forum with visiting EB/CBA
Special Representative Frank Mermoud, the McDermott rep noted
that McDermott is being forced to let many employees go as
the pipeline construction projects wind down. The company is
looking at a two-year lull in operations. Although the
Kashagan-BTC project will require a lot of construction work,
the McDermott rep noted that it will be at least a year
before any contracts for that project would be put out for
bid. That said, the McDermott rep stressed that his company
wants to stay engaged in the Caspian. If Azerbaijan would
grant a tax-free zone similar to what McDermott enjoys in the
Persian Gulf and in Indonesia, the McDermott rep said that
the company would happily make Azerbaijan the hub of all its
operations in the region. The McDermott rep believes that
the way to maximize the use of qualified workers in
Azerbaijan and Kazakhstan would be for both countries to
establish free-trade zones as part of a wider regional
initiative in the Caspian.
However, he added, this would require a real commitment to
broad, multi-sector liberalization on behalf of both
governments.

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STATOIL
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3. (C) The Statoil representatives raised the issue of
Turkish electrical-distribution company Barmek, now the
subject of a very public investigation that many feel came
about because of the company's connection to jailed former
Economic Development Minister Farhad Aliyev. Barmek's
experience "will put a chill" on all foreign investments in
Azerbaijan, said the Statoil reps, especially in sectors of
the economy not protected by Production Sharing Arrangements
(PSAs) such as those enjoyed by Statoil and other oil and gas
majors. As a result, the Statoil reps argued, "the only
non-energy investor in Azerbaijan will be Russia," whose
companies are concerned more with presence and control than
with investment and profit.


4. (C) The Statoil reps said that their company wants to do
more in Azerbaijan - to fully develop the Shah Deniz gas
field, for example, and to explore further the ACG oil field.
However, they sense a seeming reluctance on the part of
state oil company SOCAR and the GOAJ to do more. Recent
changes in Azerbaijan's energy leadership have made it
difficult to create momentum, they said. Natik Aliyev has
apparently been sidelined by being moved to the relatively
inactive Ministry of Energy and Industry. SOCAR is still
important, said the Statoil reps, but its powerful former
foreign investments chief, Valekh Alasgarov, is now in
parliament and current president Rovnag Abdullayev has very

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little experience in "upstream" work. The Statoil reps said
that President Aliyev expressed strong interest in further
projects with the Shah Deniz gas field during the visit of
Statoil President and CEO Helge Lund, but that enthusiasm has
not percolated through the SOCAR bureaucracy yet. The GOAJ
needs to realize that it is not faced with a choice between
satisfying domestic gas needs or being a major gas exporter,
said the Statoil reps. Azerbaijan has enough gas to do both,
they argued, but the GOAJ working level does not seem to
understand that yet.

--
BP
--


5. (C) The BP representative made several interesting points.
Rhetorically speaking, she asked, is Barmek's experience
that unique? In comparison to other oil and gas countries,
like Venezuela or Bolivia, Azerbaijan's investment climate is
actually quite friendly, she pointed out. Azerbaijan may
simply be "normalizing" and becoming more like other oil and
gas states, now that the desperate years of the early 1990s
are past. The BP rep pointed out that the major projects in
Azerbaijan are moving out of the construction phase and into
the operational phase - this means that new interest groups
are emerging. Decision centers are multiplying and many
decisions are no longer being made by SOCAR.


6. (C) That said, the BP rep wen on to say that there are
worrisome trends. Agreing with the Statoil reps, she said
that the attitude among many in Azerbaijan's energy
leadership is that "the gas and oil isn't going anywhere" and
can be exploited at leisure. This is the kind of attitude
that leads to missed opportunities, she noted. SOCAR's
capacity for strategic planning is questionable, as is its
ability to market its resources, particularly gas. The
intentions and behavior of the GOAJ are also critical. The
BP rep noted that the GOAJ is already expressing concern
about the loss of jobs mentioned by the McDermott
representative. A strange picture may emerge, she noted, of
oil revenues growing while at the same time unemployment
grows. A large portion of the workforce is mobile, she
added, and many Azerbaijanis are leaving the country and
working on new projects in Siberia or the Persian Gulf.

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EXXONMOBIL AND CONOCOPHILLIPS
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8. (C) The ExxonMobil rep and the ConocoPhillips rep
commented briefly on the progress of the
Azerbaijan-Kazakhstan Inter-Governmental Agreement (IGA) for
cross-Caspian oil transport. Both identified the issue of
the "Marine Transporter" - how it is selected, who is allowed
to own the ships, et cetera - as the major issue of concern
to the international investors.


9. (C) EB/CBA Special Representative Mermoud thanked the
participants for their views and said the issue of growing
unemployment is of special concern. He encouraged the
companies to speak with one voice on the issue, perhaps
through a joint communique. He also said it is important for
the companies to consider ways that projects like Shah Deniz
could be accelerated.


10. (U) EB/CBA Special Representative Frank Mermoud has
cleared this cable.
HYLAND