EUR DAS BRYZA AND AZERBAIJANI PRESIDENT ALIYEV

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000858

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/08/2021
TAGS: PGOV PREL PINR AJ AM
SUBJECT: EUR DAS BRYZA AND AZERBAIJANI PRESIDENT ALIYEV
DISCUSS ENERGY, REGIONAL COOPERATION AND NAGORNO-KARABAKH

Classified By: CHARGE D'AFFAIRES JASON P. HYLAND PER 1.4 (B,D).


1. (C) SUMMARY. EUR DAS Matt Bryza met with Azerbaijani
President Ilham Aliyev June 6 to discuss Azerbaijan's growing
role as energy supplier, its regional relations and
Nagorno-Karabakh. Aliyev expressed strong and unambiguous
support for the U.S. "Southern Corridor" Strategy to help
Europe diversify its energy supplies with Azerbaijan gas.
Aliyev told Bryza that he saw an emerging dynamic of regional
organizations, GUAM and the Black Sea Forum, as contributing
to positive regional development. Aliyev discussed
Azerbaijan's strong ties with Georgia and the importance to
engage with Turkey. DAS Bryza recognized progress in
Azerbaijan's May re-run parliamentary elections and
highlighted the need for Azerbaijan to strengthen its
democratic institutions and to build on its regional
cooperation efforts. President Aliyev briefed Bryza on the
GOAJ's discussions with BP on the ACG deep gas project and
outlined Azerbaijan's growing gas resources. Aliyev stated
that Azerbaijan and Kazakhstan would sign the IGA for
incorporating Kazakhstan's oil into BTC in June in
Kazakhstan. DAS Bryza briefed on the U.S. efforts to
facilitate Azerbaijani gas reaching Europe, noting that
Greece and Italy are interested. President Aliyev stated
that the GOAJ would send government energy representatives to
Greece and Italy to explore opportunities. Aliyev requested
that the U.S. provide strong political support to
Azerbaijan's efforts to send gas to Europe with a focus on
helping countries and companies achieve concrete results
rather than on public statements that might anger Russia.
Turning to N-K, Aliyev told Bryza that if Armenia agrees to
return five regions immediately to Azerbaijan and sets a
timetable to return two additional regions, Azerbaijan is
prepared to agree on all other outstanding issues. Aliyev
stated that at the Bucharest meeting Azerbaijan had offered
USD 100 million or more of economic and social development
assistance to the N-K region if a deal were reached. END
SUMMARY.


2. (C) Deputy Assistant Secretary for Europe and Eurasia Matt
Bryza, accompanied by Charge, S/P's Hellman, and notetaker,
met with President Ilham Aliyev June 6 to discuss
Azerbaijan's growing regional energy role, regional relations
and Nagorno-Karabakh. Commenting on Aliyev's recent trip to
Washington, Bryza said that the trip was a success and that
Aliyev had charmed his interlocutors, noting that Washington
had felt the warmth of Aliyev's friendship. Bryza noted some
progress in the recent re-run elections and Azerbaijan's
general trend toward political and economic modernization.
Aliyev told DAS Bryza that there had been a more open
atmosphere for the May parliamentary elections and not as
much "nervousness" compared with November elections, calling
them "better." He added that Azerbaijan's political
development was moving forward. Bryza replied that it was
crucial for these developments to continue and strengthen.

GOAJ, REGIONAL COOPERATION AND NEIGHBORS
--------------


3. (C) Aliyev told Bryza that the recent GUAM summit and the
June 5 Black Sea Forum for Dialogue and Partnership Summit in
Bucharest signaled a "new stage" in regional political,
economic and energy cooperation. Aliyev noted that from
these two events there was a regional development theme
emerging that created a useful dynamic between GUAM and the
Black Sea meetings, noting that the groups' goal coincide.
Aliyev stated that he saw the Black Sea and Caspian Sea
regions as one broad region. Noting the region's "positive
teamwork" with the U.S. on regional cooperation, Aliyev said
this teamwork should continue with the Baku-Tbilisi-Ceyhan
and Shah Deniz gas projects.


4. (C) Bryza noted the importance of Azerbaijan's strategic
alliance with Georgia and the solidifying of the East-West
Energy Corridor. Aliyev agreed and added that initially
Georgian President Saakashvili had balked at such an
arrangement feeling that it was a remnant of former President
Shevardnadze's government. Recently, however, Saakashvili
had come to realize that relations with Azerbaijan were key,
noting that Azerbaijan had assisted Georgia in January when
its supply of natural gas from Russia had been interrupted by
a pipeline explosion. Aliyev said Turkey needed to provide
Georgia with its excess natural gas, adding that Turkey had
plenty of additional gas supplies. Aliyev indicated that

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Azerbaijan and Georgia's close relations mean that other
regional allies, such as Turkey, will also benefit.


5. (C) Aliyev told Bryza that Turkey is trying to leverage
its regional economic and political importance with its
accession dialogue with the European Union. In addition, he
said that Kazakhstan is looking for alternative routes to
export its oil and gas and Russia is looking to improve its
relations with the G-8. Aliyev opined that as the political,
economic and social infrastructure between the regional
countries grow, more countries will look to join. He added
that Azerbaijan is working to create this environment of
regional cooperation.

AZERBAIJAN-KAZAKHSTAN IGA
--------------


6. (C) Aliyev told DAS Bryza that Kazakhstan is ready to sign
the Inter-Government Agreement (IGA) with Azerbaijan possibly
as early as June in Kazakhstan. According to Aliyev, the
Kazakh negotiator is calling the GOAJ daily to push the
agreement and negotiations along faster. Noting that the two
governments had been unable to finalize and sign the IGA in
2005, Aliyev said that events, projects and environment had
changed and that the setting was ready for finalization.
Aliyev stated that since both Azerbaijan and Kazakhstan's
negotiating team had changed the negotiations had taken
longer than expected. Bryza told Aliyev that Azerbaijan
needed to ensure that the IGA was not so streamlined that it
lacked key elements required to provide investor confidence.
Aliyev told Bryza that Minister of Energy and Industry Natik
Aliyev and Finance Minister Samir Sharifov were the GOAJ's
key energy decision-makers, and pledged to look into whether
the IGA retained necessary commercial elements.

AZERBAIJAN'S GROWING ENERGY ROLE
--------------


7. (C) Aliyev told Bryza that Azerbaijan is looking to expand
Shah Deniz full field production by 2012 to ensure Azerbaijan
can fulfill its domestic gas demand, as well as that of
Georgia, and still fill the Turkey-Greece-Italy
interconnector. DAS Bryza asked Aliyev about the ACG deep
gas project and the possibilities of accelerating the
project. Aliyev noted that Azerbaijan is ready to focus on
the deep gas project, but that it needed "fair conditions"
from BP and a "new model" for joint Azerbaijan-energy company
relations. According to Aliyev, unlike previous Production
Sharing Agreements between Azerbaijan's state oil company,
SOCAR, and BP, the deep gas project required that SOCAR take
a larger share of the joint agreement. Aliyev stated that
SOCAR should have a 50 percent stake rather than 10 percent
stake as in other previous PSAs with international energy
companies.


8. (C) In addition, Aliyev told Bryza that BP was reneging on
its original commitment to provide Azerbaijan with 3 bcm from
the deep gas project now that the GOAJ wanted to obtain a
better production sharing agreement. BP now planned to
re-inject the gas into the field, angering the GOAJ. Aliyev
stated that without the deep gas Azerbaijan would have a
deficit of gas in this coming winter and may have to purchase
additional supplies from Russia or create it from oil stocks
to make up the difference. Aliyev also stated that BP needed
to act like a "good partner," adding cryptically that
Azerbaijan could invite other companies to work the deep gas
field.


9. (C) Aliyev told Bryza that Azerbaijan does not need to
exhaust its natural gas reserves since with its Shah Deniz
field production it will have sufficient for domestic
consumption. Aliyev recognized the sensitive political
dynamic of this approach and added that Azerbaijan needed
greater cooperation and engagement with the U.S. and EU.
Beyond the deep gas issue, Aliyev noted that the agreed upon
natural gas price with BP was too low with a maximum price
ceiling of USD 120 and that the GOAJ would need to
renegotiate the price with BP.

AZERBAIJANI GAS TO EUROPE
--------------


10. (C) DAS Bryza told Aliyev that the U.S. is actively
working with the European Union to create market access for

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Azerbaijani natural gas, noting that this issue will be part
of the U.S.-EU summit. Bryza briefed on his numerous trips
to Europe, including to Greece, to discuss the energy issue.
He noted that both Greece and Italy are under tremendous
pressure to sign long-term gas agreements with Gazprom,
although both countries have indicated that they want
Azerbaijani gas.


11. (C) Bryza noted that some of the difficulties in Greece
of accepting Azerbaijani gas may be due to the Azerbaijan
flight to Northern Cyprus in 2005. Bryza explained that this
flight has annoyed many in the Greek government and may be
contributing to Azerbaijan's difficulties in meeting with the
government to discuss possible gas sales. Aliyev indicated
that Azerbaijan and Greece maintain good relations and that
he was unaware that the Azerbaijani Embassy in Athens was
having difficulty arranging meeting with Greek energy
officials. Aliyev characterized any Greek anti-Azerbaijan
reaction to the Cyprus flight as an "overreaction" and "a
silly issue." Bryza suggested that Aliyev or Forign
Minister Mammadyarov meet with the Greek Ambassador to
Azerbaijan to resolve the issue and engage in additional
dialogue.


12. (C) Aliyev stated that Greece needs Azerbaijani gas and
that by 2007 Azerbaijan will produce enough additional gas to
bring supplies to Greece through Turkey. Aliyev noted that
the U.S. needed to talk with Turkey about its natural gas
quota, noting that Turkey could refuse to accept some of its
Azerbaijani gas that could then go to Georgia or Greece.
Aliyev told Bryza that Russia would "punish" Azerbaijan for
selling gas to Europe, a large Gazprom market, adding that
Azerbaijan still purchases some gas from Russia which could
be cutoff.


13. (C) In order to protect Azerbaijan's energy supplies,
Aliyev told Bryza that he ordered SOCAR to increase its gas
production by 1 bcm by 2007. He explained that Azerbaijan
currently imports 4.5 bcm of gas from Russia and obtains an
addition 2.5 bcm from the Shah Deniz field. The additional 1
bcm from SOCAR's domestic production could give Azerbaijan an
additional energy cushion. Aliyev added that if Turkey
refused some of its gas shipments, additional gas quantities
in 2007 could be sent to Georgia (approximately 1 bcm),
Azerbaijan (700 mcm) and possibly to Greece. Continuing on
this theme, Aliyev stated once Azerbaijan begins sending gas
to other regions, including Europe, Kazakhstan will become
interested and want to join also. Aliyev indicated that by
2008 Shah Deniz gas production should reach 8.5 bcm. Aliyev
affirmed that production at Shah Deniz could expand to as
much as 20 bcm by 2012-13 and to 50 bcm in 2015.


14. (C) Aliyev asked DAS Bryza to talk with the Turks to
encourage them to allow commercially attractive transit
arrangements and not try to transform State pipeline company
BOTAS into a monopoly like Gazprom. Bryza noted that he
would talk with the Turkish officials stressing the
U.S.-Turkey strategic partnership. He urged Aliyev, however,
to reach out and engage with PM Erdogan or President Sezer.
Aliyev indicated that Sezer was not the best point of contact
on this issue and that he would talk with Erdogan. Aliyev
also said the Turks were attempting to please many partners,
including Russia, the EU and domestic interests. Bryza also
noted that he would be meeting with the Turkish official
during his visit in Baku and would also raise these issues.


15. (C) In order to improve Azerbaijan's presence in the
European energy market, Bryza presented Aliyev with the
concept of SOCAR investing in mid and downstream operations
in Greece and Italy. This investment could solidify the
Greece-Azerbaijan link and improve the chances of a long-term
sales and purchase agreement. Aliyev agreed with the idea
and told Bryza that we would dispatch two teams from the GOAJ
to travel to Greece and Italy to explore these and all
aspects of concluding necessary agreements to send Azeri gas
to Europe. Aliyev also stated that it was a good opportunity
since Azerbaijan had extra money that it could invest in
different ventures.

AZERBAIJAN-RUSSIA ENERGY RELATIONS
--------------


16. (C) DAS Bryza told President Aliyev that the U.S. wants
Azerbaijan to be deeply embedded in the West and the

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Euroatlantic family. On regional energy issues, Bryza noted
that the U.S. and Azerbaijan were pulling in the same
direction. To this, Aliyev noted that time was critical and
that it was not wise to irritate Russia. Aliyev noted that
the Government of Russia did a poor job of interagency
coordination and that by the time it realizes that Azerbaijan
is sending gas to Europe, it will be too late. He told Bryza
that initially Russia had complained about BTC but that once
it was completed the Russians dropped the issue, insinuating
that the same would occur with Azerbaijan's efforts to send
gas to Europe. For this reason, Aliyev requested that the
U.S. help achieve facts on the ground rather than rhetoric
that might tip off and anger Russia.

Nagorno-Karabakh
--------------


17. (C) Bryza told Aliyev that in the coming weeks he will
assume OSCE Minsk Group Co-Chair responsibilities from
Ambassador Mann. Aliyev welcomed the move (though he highly
valued Mann's contributions) and told Bryza that the meetings
with the Armenians in Bucharest had been more productive that
Rambouillet. Despite the fact that the negotiations had been
more flexible, the outcome was the same. Aliyev told Bryza
that if five regions are returned immediately to Azerbaijan
and two additional regions are returned on a set timetable,
Azerbaijan is prepared to agree on all other outstanding
issues. He noted that the Armenian president stated that he
could not sell this kind of peace deal. Aliyev said that he
was in the same situation if he did not obtain all the
occupied territories.


18. (C) Aliyev stated that at the Bucharest meeting
Azerbaijan had offered USD 100 million or more of economic
and social development assistance to the N-K region if a deal
was reached with Armenia. Aliyev continued that Azerbaijan
will always have money and that Karabakh is the number one
issue for the country. He said that Armenia received no
benefit from N-K and that Azerbaijan would use its money to
assist the region or buy more weapons. He added that
Azerbaijan wanted to assist the region economically. Aliyev
said using money to obtain the territory would be difficult
but that he could sell it to the public. Aliyev speculated
that Armenian President Kocharian was interested in pushing
back any agreement on N-K until the elections in 2008 so he
could benefit politically. He stated that after Rambouillet,
Azerbaijan had made concessions and Armenia had made none.
Finally he stated that the parties will find a solution to
the N-K problem and that Azerbaijan was not in a rush.


19. (C) COMMENT: In this meeting, President Aliyev made the
clearest and most emphatic statement of support for our
"Southern Corridor" Strategy to date. This is a very
encouraging development.


20. (U) EUR DAS Bryza cleared this cable.
HYLAND