Identifier
Created
Classification
Origin
06BAKU996
2006-07-11 12:10:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AMBASSADOR'S INTRODUCTORY MEETINGS WITH

Tags:  ECON EFIN EPET ENRG PREL PINR RU AJ 
pdf how-to read a cable
VZCZCXRO5384
RR RUEHAG
DE RUEHKB #0996/01 1921210
ZNY CCCCC ZZH
R 111210Z JUL 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 0728
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1648
RUEHIT/AMCONSUL ISTANBUL 0433
RHEBAAA/DEPT OF ENERGY WASHDC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000996 

SIPDIS

CORRECTED COPY - ADDED ADDRESS EU MEMBER STATES

SIPDIS

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

E.O. 12958: DECL: 07/11/2016
TAGS: ECON EFIN EPET ENRG PREL PINR RU AJ
SUBJECT: AMBASSADOR'S INTRODUCTORY MEETINGS WITH
INTERNATIONAL ENERGY EXECUTIVES


BAKU 00000996 001.2 OF 004


Classified By: DCM JASON P. HYLAND, REASONS 1.4 (B,D).

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000996

SIPDIS

CORRECTED COPY - ADDED ADDRESS EU MEMBER STATES

SIPDIS

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

E.O. 12958: DECL: 07/11/2016
TAGS: ECON EFIN EPET ENRG PREL PINR RU AJ
SUBJECT: AMBASSADOR'S INTRODUCTORY MEETINGS WITH
INTERNATIONAL ENERGY EXECUTIVES


BAKU 00000996 001.2 OF 004


Classified By: DCM JASON P. HYLAND, REASONS 1.4 (B,D).


1. (C) SUMMARY: In the Ambassador's introductory calls,
executives from BP and other international energy companies
operating in Azerbaijan painted a complex picture of
fragmented leadership within Azerbaijan's energy sector,
indecision within the GOAJ over whether to move forward on
new energy projects and a toughening of SOCAR's stance toward
international companies, due largely to the onslaught of
energy revenue. The companies also rued Azerbaijan's
inability to export its growing, "world-class" abilities in
the energy industry, due to Caspian states' "local content"
provisions and the lack of an appropriate duty-free zone in
Azerbaijan. BP and Statoil separately commented that
Azerbaijan's ability to export gas to Europe will depend on
Turkey's willingness to forego already agreed volumes from
Azerbaijan, and Azerbaijan's ability to withstand possible
changes in Gazprom's supplies to Azerbaijan. In a separate
meeting, AIOC President David Woodward speculated that
Azerbaijan "certainly" would seek USG support if Iran moves
its "Alov" oil rig to the disputed Alov field. END SUMMARY.

FIRST MEETING WITH AIOC PRESIDENT WOODWARD
--------------


2. (C) In a July 6 meeting, AIOC President David Woodward
provided the Ambassador with brief background regarding BP,
AIOC, and BTC focusing on several key issues. Woodward
stressed that BTC was successful because the venture was
commercially viable and a single large operator, BP, was
ready to take control. In addition, he highlighted that all
the countries involved in the venture, Georgia, Turkey and
Azerbaijan, were able to agree on pipeline principles and

logistics. Finally, he noted that strong U.S. support for
the pipeline made it an international reality.

DYNAMIC POLITICAL AND ECONOMIC ENVIRONMENT
--------------


3. (C) Woodward told the Ambassador that in recent years,
principally since the death of former President Heydar
Aliyev, the political and economic environment for the
international energy companies had changed. Woodward said
that current President Ilham Aliyev did not wield the same
level of control and leadership over the various government
entities, such as SOCAR. Woodward opined that with current
projects winding down individual government actors are
looking to expand their interests, noting that the President
has not set a clear agenda or direction. Woodward added that
President Aliyev appears less focused on the energy sector
now that most projects have moved towards the operating stage
and characterized him as not as "tough" as his father.
Woodward concluded that this political environment is making
operating in Azerbaijan more complex and complicated.


4. (C) Woodward noted that the appointments of Heydar Babayev
as Minister of Economic Development, Samir Sharifov as
Minister of Finance and Shahmar Movsumov as Director of the
State Oil Fund were positive moves that have led to greater
inter-ministerial coordination and cooperation. In addition,
Woodward warned that while these ministers had a more
long-term economic vision for the country, they may actually
be taking on too many issues, calling it an "initiative
overload." Woodward believes Minister of Finance Sharifov
has good access to the President. Overall, Woodward lamented
that the GOAJ lacked the technical capacity to handle the
multiple key economic and political issues that it will face
in the near-term.


5. (C) Woodward noted that a new negative sentiment had
emerged in the past six months against the international
energy companies. He explained that certain people in the
GOAJ now criticize the energy companies for taking too much
of Azerbaijan's resources. Leading this campaign, according
to Woodward, was the State Oil Company, SOCAR. Woodward
characterized Abdullayev Rovnaq, the president of SOCAR, as
not capable of handling SOCAR's large operations and not a
"big picture thinker." Woodward lamented that he painted a
"gloomy" picture of SOCAR, adding that Rovnaq and SOCAR were
making work for the international companies in Azerbaijan
extremely difficult. Woodward continued by saying that SOCAR

BAKU 00000996 002.2 OF 004


was attempting to restrict oil companies' activities, putting
up barriers and slowing down decision making.


6. (C) Regarding future energy projects, Woodward told the
Ambassador that the GOAJ is looking to decrease the number of
projects. Woodward believed that the GOAJ may be interesting
in taking on future projects independently after the
expiration of the production sharing agreements with the
international companies. Woodward also added that the GOAJ
may be wary of the increasing energy wealth and revenue and
the political risks it brought. Woodward explained that he
had shown President Aliyev a graph that indicated that in
2009 alone Azerbaijan will receive USD 20 billion in oil
revenue. The President, according to Woodward, was not happy
and explained that in such a case the pressures from the
population would increase, possibly leading to political
problems.


7. (C) On the macroeconomic side, Woodward highlighted that
Azerbaijan's economy and financial sector were unprepared for
the coming "tsunami of money" and the GOAJ did not have an
energy revenue plan. In addition, he noted government
spending was not going to slow down in the near-term and
would lead to disproportionate profits and higher inflation.
In order to assist the GOAJ increase its revenue management
plans, BP planned to house a macroeconomic quantitative
forecasting unit, led by Oxford Economic Forecasting, at the
Oil Fund. The memorandum of understanding for this new
quantitative unit, however, has not yet been signed but the
BP-led group was well received by the GOAJ.


8. (C) Turning to the political landscape, Woodward thought
that in the next five to seven years there was a real
possibility for political upheaval and turmoil. Woodward
thought that as the gap between rich and poor grows, pressure
would grow in the population to improve living standards
leading to problems. Woodward recognized that so far the
GOAJ has done a good job controlling the political situation,
adding that the opposition was not viewed as a viable option
by the population.

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


9. (C) Turning to Azerbaijan's future plans of selling
natural gas to Europe, Woodward told the Ambassador that
Azerbaijan wants to develop further its gas production,
eyeing the possibility of exporting small quantities to
Greece in the near-term. To facilitate these plans, Turkey
would need to refuse to receive an initial part of its gas
share as part of Shah Deniz, allowing this amount to be sold
to Greece. While Turkey did not need this gas for domestic
supplies, according to Woodward, it was unclear whether
Turkey, Georgia, and Azerbaijan could agree to move forward.
Woodward told the Ambassador that Azerbaijan will most likely
be reliant on Russian natural gas supplies until 2012 when
Shah Deniz Phase II is completed. Woodward noted that BP,
while not a major stakeholder in the Shah Deniz project, was
providing the GOAJ with advice and guidance on moving gas
supplies to Europe.

IRAN AND THE ALOV FIELD
--------------


10. (C) Responding to the Ambassador's question on Iran and
its Caspian operations, Woodward noted that the Iranian
"Alov" oil rig was finished and could be moved into position
in the Caspian as early as the fall. Woodward speculated
that the Government of Iran would not move the rig to the
disputed Alov field, noting that this would be seen as an
aggressive and provocative move. President Aliyev reportedly
told Woodward that Azerbaijan would "react strongly," without
being specific, if the Iranians moved the platform to the
Alov field. Woodward said that the GOAJ is not pushing BP to
continue its exploration efforts in the disputed area but
that if the Iranians moved to tap the field he felt the GOAJ
would most certainly approach the U.S. and U.K. governments,
as well as the international community, for support.

AMBASSADOR HOSTS ENERGY FORUM
--------------

BAKU 00000996 003.2 OF 004




11. (C) On July 6 the Ambassador hosted an energy forum with
the major U.S. and international energy companies to discuss
the overall operating environment and inquire about
individual company activities. BP's executive briefed on
BP's efforts to improve its security and good corporate
governance initiative. Chevron's lcoal president told the
Ambassador that the attitudes and mentality of many key GOAJ
energy officials appear to be shifting as Azerbaijan's energy
revenues increase. (NOTE: AIOC President David Woodward,in
an earlier meeting with the Ambassador, echoed the same
sentiment tha the key individuals in the GOAJ appear to be
taing a harder line with the international energy companies.)


12. (C) The Chevron president added that the GOAJ appeared to
be not interested in implementing additional exploration
plans, preferring to delay any future projects. Regarding
SOCAR, he indicated that the state-owned company lacked
"ownership and accountability" over the energy sector and
also did not want to move forward on future exploration
plans. He also noted that GOAJ lacks the technological
capacity to expand and that the GOAJ had more money than it
could handle. He indicated that one of the major challenges
was keeping GOAJ interested in future endeavors, adding that
as projects come to completion, international energy
companies would look to move to different regions.


13. (C) Representatives of TOTAL, Devon Energy and Statoil
also briefed the Ambassador on their respective operations
and future plans. The Devon representative indicated that
the company was looking to begin additional on-shore
exploration projects. The Statoil executive also indicated
that the GOAJ was not as interested in accelerating future
exploration and investment plans. He noted that Statoil was
interesting in maintaining "the plateau of natural gas
production" while the GOAJ did not see this as a priority.


14. (C) A McDermott company representative explained to the
Ambassador that major energy fabrication projects had begun
to wind down and that his company would most likely halve its
workforce by early 2007. The McDermott representative noted
that there could be a lull in energy projects during the next
two years. He added that the company was looking for
additional projects to retain the employees but the lack of
diversity in the Azerbaijani economy and other barriers in
the Caspian region made it difficult to use the company's
operations in Baku as a platform to work in Kazakhstan. For
this reason, McDermott is planning to set up operations in
Kazakhstan to meet the growing demand for oil and energy
services companies.


15. (C) The McDermott representative said that developing a
duty free trade zone in Azerbaijan and creating a "Caspian
open market" for the region would facilitate the
concentration of expertise in one country for use in all the
countries of the Caspian. On a positive note, the McDermott
representative noted that the GOAJ had taken some positive
steps to improve the business-operating climate, such as
removing all VAT on export work. He added, however, that
corruption and labor issues remain two of the biggest
problems for energy services companies operating in
Azerbaijan.


16. (C) One of the major challenges to this, noted the
Chevron President, was the desire of individual countries to
demand "local content" in all facets of projects, prohibiting
the use of Azerbaijani-made oil platforms for use in other
countries. The ExxonMobil representative agreed and noted
that it had commissioned a platform built in Azerbaijan and
sailed it to Turkmenistan waters only to have Turkmen
authorities bar all Azerbaijani employees on the platform and
require Turkmen employees, causing massive delays and cost
overruns.


17. (C) All of the energy participants agreed that Azerbaijan
had a nascent oil-services capacity that is hindered by
"local content" provisions in other Caspian countries. For
example, all of the executives praised Azerbaijan's ability
to develop deep water jackets for oil rig platforms, noting
that the production was world-class and that it was done with
80 percent Azerbaijani labor. The McDermott executive noted

BAKU 00000996 004 OF 004


that Azerbaijani has four energy production fabrication
facilities that are most likely some of the best in the world.

AIOC BRIEFING
--------------


18. (C) At the regular monthly AIOC meeting with the U.S. and
U.K. ambassadors on July 7, AIOC President David Woodward
briefed on the group's energy operations and the latest GOAJ
efforts to increase natural gas exports. Woodward indicated
that BTC is pumping 500,000 barrels a day and that there have
been already six tanker loadings of Azerbaijani crude at
Ceyhan. Woodward said that the pipeline is almost 100
percent complete while Turkish authorities have found five
illegal taps on the pipeline. Woodward told the Ambassadors
that the east Azeri platform is complete and is set to sail
in the near-term with good weather.


19. (C) Woodward noted that as the Shah Deniz gas project is
nearing completion the GOAJ is reviewing whether to begin
negotiations with the Government of Turkey on its gas
commitments. Azerbaijan wants Turkey to refuse some of its
natural gas commitments, leaving the excess amounts available
for domestic consumption or for export to Europe. Woodward
was not confident that Turkey would refuse the gas,
characterizing Azerbaijan's approach to this issue as
"naive." Woodward explained that at a recent cabinet
meeting, President Aliyev told his key energy aides to
prepare information for meetings with Turkey on the gas
contracts.


20. (C) Driving this request, according to Woodward, is the
feeling within the GOAJ that Gazprom plans to renegotiate its
gas contracts with Azerbaijan and increase prices. In
addition, the GOAJ apparently fears that Russia could stop
natural gas exports to Azerbaijan, leaving it to find
additional supplies on short notice. The GOAJ has requested
BP provide information on its ability to divert Shah Deniz
gas to different locations within Azerbaijan. BP has told
the GOAJ that it can divert approximately 50 to 75 percent of
production based on current pipeline infrastructure.


21. (C) Woodward highlighted a recent problem of profit oil
entitlement calculations with the State Oil Company (SOCAR).
Woodward explained that in this early stage of the ACG
Production Sharing Agreement, the international energy
consortium receives 70 percent of the profit oil and SOCAR
receives 30 percent. This arrangement will quickly shift to
80 percent for SOCAR and 20 percent for the oil companies as
soon as the energy infrastructure costs has been repaid to
the energy companies. Woodward stated that due to unexpected
circumstances related to the grade of the Azerbaijan crude,
the oil companies were entitled to five percent of SOCAR's
current 30 percent share of the profit oil. This amount had
a net present value of USD 1 billion. Woodward recognized
that SOCAR and GOAJ would not immediately accept the
"penalty" and had told AIOC that the government wanted to
work the issue out without arbitration.
DERSE