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. -------------- OIL/GAS EXPORT PROJECTS -------------- ¶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. -------------- DOMESTIC ELECTRICITY ISSUES -------------- ¶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. -------------- ROLE FOR U.S. COMPANIES -------------- ¶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. -------------- COMMENT -------------- ¶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