PRESIDENT ALIYEV SAYS USG, AZERBAIJAN ALIGNED ON

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001007

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/08/2017
TAGS: PGOV PREL ENRG ETRN TX AJ RS
SUBJECT: PRESIDENT ALIYEV SAYS USG, AZERBAIJAN ALIGNED ON
ENEGY

Classified By: CDA Don Lu, Reasons 1.4 (b,d)


1. (C) SUMMARY: In an August 2 meeting with DS Bryza,
President Aliyev said that USG and GOAJenergy policies were
"perfectly aligned." Azerbajan had just that day signed an
Energy MOU with reece. The GOAJ was increasing gas
production, nd ready to negotiate with British Petroleum
(BP) about production service agreement extension and Azeri
Chirag Guneshli (ACG) deep gas, although the government would
warn BP that it had to "play fair." Aliyev was quite upset
at the recent Turkey-Greece-Italy (TGI) interconnector
signing, in that Turkey, Greece and Italy seemed to be
deciding the fate of Azerbaijani gas without involving
Azerbaijan in the deliberations. Concerning Chevron's
recently announced involvement in the Turkmen energy sector,
Aliyev said that joint Turkmen-Azerbaijan development of the
Serdar/Kyapaz field would greatly facilitate bilateral
demarcation issues and trans-Caspian exports of oil and gas.
Energy Minister Aliyev and State Oil Company of Azerbaijan
(SOCAR) Vice-President Nassirov would take the lead on gas
transit talks with Turkey, which will commence imminently.
On the Qabala radar station, the President supported the
Russian invitation to the U.S. side to visit, but emphasized
that Azerbaijan should also participate in the visit. Bryza
also shared USG concerns about Iran and media freedom with
President Aliyev. END SUMMARY.

QABALA AND MISSILE DEFENSE
--------------


2. (C) Giving President Aliyev a read-out of the recent USG
talks with Russian Deputy Foreign Minister Kisylak (reftel),
Bryza said that on July 30 there was the first of three
planned expert-level bilateral talks on the possibility of
joint use of Gabala. Bryza said that the USG realized that
Gabala was Azerbaijan's property and would keep Azerbaijan
fully aware of the talks as they continued, and would seek
Azerbaijan's permission for any agreement reached between the
USG and Russia. "There will be nothing about you without
you," Bryza assured President Aliyev.


3. (C) Bryza asked the President whether Azerbaijan would
support the Russian proposal for an American delegation to
visit the Qabala radar station. President Aliyev thanked
Bryza for the briefing, asking him to keep Foreign Minister
Mammadyarov apprised. He agreed to support the visit of an
American team to Qabala, but emphasized that Azerbaijan would
also need to participate in the visit. Bryza said one good
outcome of the Kisylak talks was the USG-Russian agreement
that an Iranian missile threat did exist. Bryza asked Aliyev
whether he had a preference as to Gabala being used merely to
monitor, or whether it should undergo upgrades to allow it to
play a fuller role in missile defense. President Aliyev said
he had no preference.

GREECE-AZERBAIJAN ENERGY MOU
--------------


4. (C) Bryza congratulated Aliyev on the just-signed
Greek-Azerbaijan Energy MOU. The USG had encouraged Greece to
reach out to Azerbaijan, especially after the Greek Prime
Minister's snub of President Aliyev at the Black Sea
Conference, when Greek PM Karamanlis instead signed a
declaration with Russian President Putin on a possible South
Stream gas pipeline under the Black Sea. President Aliyev
told Bryza that next year SOCAR would be increasing gas
production to approximately eight billion cubic meters
annually (bcm/a),in addition to freeing up another one bcm
for export from decreased domestic gas use due to price
hikes. As such, the GOAJ would have non-Shah Deniz gas for
export to Greece (which he had told Development Minister
Sioufas earlier that day) and also extra for Georgia.

GEORGIA
--------------


5. (C) Bryza asked if Georgia would need Russian gas for the
coming winter. Aliyev said that the GOAJ now provides
approximately 75 percent of Georgia's gas needs, and that he
had told Georgia that the GOAJ would be able to tell at some
point in August how much gas it would have for Georgia in the
coming winter. The GOAJ would give Georgia a "good price."

TGI MOU
--------------


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6. (C) President Aliyev expressed extreme pique at the July
26 MOU signed among Turkey, Greece and Italy, saying these
countries should not have come to an agreement about "our
gas," including gas from the second phase of Shah Deniz
development, without including Azerbaijan. He scoffed at the
mention of "Caspian gas" in press accounts of this MOU,
saying that this gas would have to be Azerbaijani gas. He
thanked Bryza for the explicit mention of Azerbaijan in the
State Department press release on this topic, with Bryza
responding that the USG realized that Azerbaijan was the
cornerstone of the Southern Corridor strategy.

GAS TRANSIT TALKS W/TURKEY
--------------


7. (C) President Aliyev said Energy Minister Aliyev and SOCAR
Vice-President Elshad Nassirov would be the lead negotiators
in gas transit talks with Turkey (NOTE: Embassy subsequently
learned that Energy Minister Aliyev, SOCAR V-P Nassirov and
MFA Ambassador at large for Energy Shamil Aleskerov flew to
Ankara on August 7 to begin gas transit negotiations, and
that they are expected back in Baku August tenth. We had
urged Turkey and Azerbaijan to commence these talks for over
a year.) Bryza explained the MOU's stipulation that Turkey
get 15 percent of transit gas reserved for itself at the
netback price paid by Italy, adding that Guler wanted to
establish a precedent. The key to any gas transit
arrangement is fair and transparent netback pricing.
President Aliyev said that Turkish Energy Minister Guler had
offered a twenty percent gas reservation clause to Energy
Minister Aliyev during the recent Black Sea Conference.
President Aliyev said the GOAJ would insist on direct deals
with the consumers downstream of Turkey, and that Turkey not
be allowed to re-sell the 15 percent gas that it would get.
Bryza said that the Turkish position had "softened" over time
to their current position of wanting to do only some "modest"
gas marketing, rather than becoming a "mini-Gazprom" as
investors feared.


8. (C) Bryza relayed part of a conversation he had had
earlier in the day with Majlis Deputy Speaker Valeh
Alasgarov. Alasgarov had said that European Nabucco
consumers should sign "delivery or pay" contracts with SOCAR
for gas delivery at the border, with SOCAR being responsible
for ensuring adequate gas provision. This would spur
progress on the Nabucco pipeline. President Aliyev agreed.

TURKMENISTAN
--------------


9. (C) Bryza said in general the news about Turkmenistan was
good. In his most recent trip to Ashgabat, he had seen more
interest from the GOTX in the concept of Block One gas moving
west. Competent Body Chairman Myradov told Steve Mann and
Bryza that the GOTX would decide where Block One gas
(produced by Petronas) would be sold. In Bryza's talks with
the local Petronas managing director and the Georgian
Ambassador, all agreed that the idea of an MOU among
Azerbaijan, Georgia and Turkey on transparent tariffs and
netback pricing would allow the GOTX to see how they could
gain additional revenues by shipping gas west, vice north.
Aliyev expressed support for this idea.


10. (C) Bryza told Aliyev that BP Group Managing Director
and Chief Executive of Exploration and Production Andy Inglis
was currently in Malaysia for discussions with Petronas.
Bryza said he had good discussions with President of Chevron
NeftGaz Russia Ian McDonald, who briefed him on Chevron's
goal of developing, in conjunction with Azerbaijan, the
offshore Serdar/Kyapaz field and exporting the oil to global
markets via Azerbiajan. President Aliyev pointed out that
joint Serdar/Kyapaz development would perforce do away with
the issue of GOTX partial ownership of the ACG field, leaving
Iran alone concerning Caspian delimitation and facilitating
trans-Caspian shipments of oil and natural gas.

KAZAKHSTAN
--------------


11. (C) Aliyev mentioned his upcoming trip to Astana, saying
that one of the main topics would be oil transportation.
Bonds between the two countries' energy sectors were
expanding, with contemplated joint SOCAR-Kazakh National Oil
Company Kazmunaigas(KMG) ownership of a refinery in Ceyhan.
Given the large volumes of Kazakh oil that could be flowing
westward, the GOAJ was contemplating a new oil pipeline

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through Georgia to the Black Sea. The President said that
he did not necessarily trust the Kazakh Government, in that
it could well be using negotiations with Azerbaijan as
leverage for extracting a commitment of CPC expansion from
Russia. Bryza agreed that an agreement on CPC expansion
looked possible. During his conversation with Bryza earlier
in the week in Moscow, Transneft President Semyon Vaynshtok
suggested Transneft and western oil companies were nearing a
deal according to which the foreigners would accept a lower
rate of return on their investment and agree to the
Burgas-Alexandropolis pipeline in exchange for CPC expansion.

TURKEY-IRAN MOU
--------------


12. (C) President Aliyev expressed surprise at the recently
announced Turkey-Iran Energy MOU, saying that he doubted that
Iran had 30 bcm for export to Turkey, or that the
infrastructure was sufficient to ship the required amounts
from Turkmenistan through Iran to Turkey. If Turkish
Petroleum (TPAO) engaged in South Pars development, the USG
should sanction Turkey. Bryza said that GOT officials had
told the USG "not to worry," that the project would take many
years to implement, presumably by which time there would have
been a new situation in Iran. He suspected that politics
played a role in this announcement, given its proximity to
the election and the strong anti-U.S. sentiment in Turkey.
Bryza reiterated the USG,s opposition to energy investment
in Iran.

ODESSA-BRODY
--------------


13. (C) President Aliyev sought Bryza,s advice on
Odessa-Brody. Referring to the May 11 Energy Summit in
Krakow, Aliyev said the EU should have sent a representative
to participate, adding that an "EU umbrella" was needed for
the cooperation among Azerbaijan, Georgia, Ukraine, Poland
and Lithuania. He said that the GOAJ was being offered
partial ownership of the Sarmatia joint company formed by
Ukraine's UkrTrransNafta and Poland's PERN project (for
extending Odessa-Brody to Plock),and that this partial
ownership if accepted would commit the GOAJ to Odessa-Brody.
As it stands now, it was not clear whether Odessa-Brody would
be a priority for the GOAJ. Aliyev pointed out that this
issue will doubtless re-surface at the follow-on meeting to
Krakow, during the October summit in Lithuania.


14. (C) Bryza said the USG supports Odessa-Brody, and is
working with the Polish government in this regard, though the
U.S. also supported other commercially viable Bosporus bypass
pipelines, like Samsun-Ceyhan, AMBO, and PEOP. Poland wants
Caspian oil for transit, and the U.S. would like to help
Poland "stave off" Gazprom's potential hostile takeover bid
of Poland,s PKN/Orlen oil company. Hungary also sought help
to forestall a hostile takeover bid by OMV, which MOL,s CEO
believed was really driven by Gazprom. In this regard, Bryza
requested help from President Aliyev to alert SOCAR to the
desirability of increasing its investment profile in Hungary
and Poland. Aliyev said he would do so, as such cooperation
with the U.S. in Central and Eastern Europe was in
Azerbaijan,s interest.


15. (C) Aliyev said that SOCAR had opened an office in
Romania to pursue refining opportunities, which was going to
be its regional office for Eastern Europe. The GOAJ was
looking to participate in the broader Eastern European
market, and in this regard SOCAR needed guidance from its
U.S. partner. MOL has been a frequent visitor to Baku, and
the GOAJ has good political relations with Hungary. Bryza
confirmed this point, saying that the Hungarian FM had been
very impressed after her meeting with President Aliyev.

BP
--


16. (C) President Aliyev said that the GOAJ was waiting for
a proposal from BP about PSA extension and ACG Deep Gas
(note: BP's Bill Schrader told Bryza earlier that day that
after months of back and forth, all eight Azerbaijan
International Oil Consortium (AIOC) partners had finally
agreed to the proposal, which would be submitted to the GOAJ
shortly. Production from ACG deep gas can provide a
significant boost in gas exports to Europe via the
Turkey-Greece-Italy and Nabucco pipelines). However, the
GOAJ was "concerned with BP tactics," as it was reducing

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production and increasing capital expenditures in an effort
to forestall the date at which more profit oil would go to
the GOAJ vice BP (from last quarter 2008, as currently
scheduled, to 2010). BP was also trying to recalculate the
BTC's Total Transportation Costs to the detriment of GOAJ
revenue. The GOAJ, who had to approve BP's annual work
projections, would not allow this to happen. The GOAJ seeks
agreement with BP, but it will insist on "fair play." (NOTE:
On August 9, BP Azerbaijan President Schrader told Embassy
that he will be meeting President Aliyev the week of August
14th).


17. (C) In summing up the energy part of the discussion,
President Aliyev said that USG and GOAJ interests are fully
aligned, perhaps more than ever before. Aliyev expressed
gratitude for U.S. support over the past year in
jump-starting the Southern Corridor. "Without that support,
nothing would have happened," Aliyev said. The GOAJ is
strengthening its energy alliances with Greece, Poland,
Hungary, Kazakhstan and Turkmenistan, among others. It is
increasing gas production, both within and outside the Shah
Deniz consortium, and will be sending gas to Greece and
Georgia.

IRAN
--------------


18. (C) Bryza told President Aliyev that now was no time for
"business as usual" with Iran. Aliyev said he could no
longer postpone the upcoming visit of President Ahmadinejad.
Bryza said that if such a visit is unavoidable, the USG hoped
that no substantive agreements would come from such a visit.

MEDIA FREEDOM
--------------


19. (C) Bryza shared USG concerns about media freedom in
Azerbaijan with President Aliyev, suggesting that alternative
dispute resolution might be a good substitute for the current
practice of criminal libel prosecutions. Aliyev said that
the USG should talk to journalists about improving their
professionalism, since "they listen to the Embassy."


20. (C) COMMENT: As President Aliyev said, U.S. and GOAJ
energy strategies have grown into full alignment during the
past 18 months. The major pending issues now are seeking to
bring Turkmen gas westwards, and facilitating a Turkish-Azeri
agreement on a fair and transparent gas transit regime. END
COMMENT.


21. (U) DAS Bryza has cleared on this cable
LU