EB/CBA SPECIAL REP FRANK MERMOUD MEETS WITH

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000829

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
SUBJECT: EB/CBA SPECIAL REP FRANK MERMOUD MEETS WITH
AZERBAIJAN ENERGY MINISTER


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


1. (C) SUMMARY. On May 4, EB/CBA Special Representative
Frank Mermoud and Charge met with Natik Aliyev, Minister of
Energy and Industry. Aliyev discussed the importance of BTC
expansion and progress on the BTC and SCP energy export
projects. On the domestic side, he said that Turkish energy
distributor Barmek had been a bad choice but that
nevertheless Azerbaijan's domestic electric power sector
needs liberalization, independent regulation, and
market-based rates that customers actually have to pay and
which encourage conservation. When Mermoud pointed out the
potential of American companies to help Azerbaijan revitalize
its industrial sector, Aliyev agreed and said that Azerbaijan
had to develop incentives for investment in the industrial
sector similar to what it had developed for the energy
sector. Aliyev spoke in general terms with few specifics and
sounded like an outside commentator more than a top
policymaker, adding some credence to the rumors that he no
longer enjoys the influence he once held. END SUMMARY.

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OIL/GAS EXPORT PROJECTS
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2. (C) At the start of his May 4 meeting with EB/CBA Special
Representative Frank Mermoud, Minister of Energy and Industry
Natik Aliyev briefly reviewed the status of the
Baku-Tblisi-Ceyhan oil pipeline project (BTC) and the
Southern Caspian gas pipeline project (SCP). Aliyev also
expressed his hope that an Inter-Governmental Agreement for
cross-Caspian oil transport would soon be concluded between
Kazakhstan and Azerbaijan. BTC needs to be expanded, he
added, and opened to its maximum capacity of 1.8 million
barrels-per-day from its current capacity of one million
barrels-per-day.

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DOMESTIC ELECTRICITY ISSUES
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3. (C) On domestic electricity, Aliyev said that Barmek, the
embattled Turkish company now under investigation which holds
the distribution contract, was supposed to have upgraded
Azerbaijan's grid but had not done so. Barmek had been a bad
choice, said Aliyev, but just replacing Barmek with a new
contractor would not change things. Aliyev said that his
position is that Azerbaijan should adopt a new concept for
energy production and distribution. The GOAJ should
establish independent regulatory agencies, allow private
power stations, and liberalize the operation of state
companies. AzerEnergy needs to reform the energy
transmission system and move to high-speed transmission
lines, he added.


4. (C) Aliyev identified fee-collection as the key problem.
People are not accustomed to paying fees, said Aliyev
ruefully, and are not used to real-world, market prices.
Azerbaijan's penal code does not even cover non-payment of
electrical fees, he noted. What Azerbaijan needs to do, said
Aliyev, is to fix a reasonable rate for a reasonable amount
of electrical usage, then charge a huge mark-up for usage
above that level. Aliyev also said that prices should vary
from morning to evening to encourage conservation.

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ROLE FOR U.S. COMPANIES
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5. (C) Mermoud pointed out that several U.S. companies, like
AES, are available to come and work on electricity
distribution in Azerbaijan. Also, he added, there are many
American petrochemical companies, chemical companies like Dow
and metallurgical companies that could rehabilitate old
plants and obsolete factories in Azerbaijan's industrial
sector. Aliyev agreed, and commented that Azerbaijan needs
to do in its industrial sector what it has already done in
its energy sector: create incentives for international
companies to come to Azerbaijan, bringing with them new and

BAKU 00000829 002 OF 002


better technology.

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COMMENT
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6. (C) Natik Aliyev was low-key in this meeting and the
Energy Ministry building was as quiet as ever. Aliyev
indicated that he had not yet reorganized the Ministry on the
lines he wanted and said that it remains understaffed. His
arguments were well-put but do not reflect current directions
in state policy, especially regarding the issue of domestic
electric power regulation. Throughout the meeting, Aliyev
often sounded more like an informed outside analyst than an
individual responsible for making state policy. As Mermoud
and Charge departed, Aliyev thanked them for coming to see
him. Since Aliyev left the presidency of state oil company
SOCAR for this job, the weight of opinion in the
international energy community has been that he has lost
influence, either put out to pasture or demoted. His
performance in this meeting and the continuing lightweight
status of the Ministry of Energy and Industry would tend to
reinforce this view.


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