AZERBAIJAN PERTURBED BY TGI ANNOUNCEMENT, TURKISH

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001049

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/09/2017
TAGS: PGOV PREL AJ ENRG
SUBJECT: AZERBAIJAN PERTURBED BY TGI ANNOUNCEMENT, TURKISH
NETBACK PRICING PROPOSAL


Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d)


1. (C) SUMMARY: In an August 3 meeting with EUR DAS Bryza,
SOCAR Vice-President Elshad Nassirov expressed displeasure 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. (President Aliyev
and FM Mammadyarov also expressed their displeasure with the
TGI agreement, septel.) Additionally, the GOAJ alleges that
the netback pricing scheme for Turkey mentioned in this
intergovernmental agreement would result in Azerbaijan being
forced to sell a portion of its gas to Turkey at sub-market
prices, which the GOAJ is unwilling to do. In a separate
conversation with Bryza, Italian Energy Company ENI's Project
Leader for the TGI Project Development Team Elio Ruggeri
confirmed Nassirov's interpretation of the agreement, but
said that the economic losses to Azerabaijan would be
"sustainable," and that the GOAJ would have no other options
for gas export. A GOAJ negotiating team headed by Energy
Minister Aliyev and staffed with Nassirov and MFA Ambassador
at large (for Energy) Shamil Aleskerov departed for Ankara on
August 7 to negotiate gas transit with the GOT; President
Aliyev and other senior GOAJ officials subsequently provided
a readout to visiting EEB A/S Sullivan and the Ambassador
(septels). END SUMMARY.


2. (C) In an August 3 meeting with EUR DAS Bryza, SOCAR
Vice-President Elshad Nassirov, reflecting sentiments heard
both from President Aliyev and FM Mammadyarov, expressed GOAJ
displeasure 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. As for the agreement itself,
Nassirov said the MOU's stipulation that Turkey get 15
percent of transit gas reserved for itself at the netback
price paid by Italy was unacceptable for Azerbaijan, as it
would result in Azerbaijan having to sell a portion of its
export gas at below-market prices, resulting in losses of at
least USD 130 million annually for the minimum thirty years
of gas export to Europe. Nassirov said he had discussed the
Turkish-Greece-Italy Intergovenmental
agreement (IGA) with ENI's Project Leader for the IGI Project
Development Team Elio Ruggeri, who had confirmed
Nassirov's understanding of the mechanisms of how the netback
arrangement would work


3. (C) Nassirov said that instead of this proposed scheme,
which he termed a Turkish "concealed purchase and sales
agreement," the GOAJ favored Turkey adopting a transparent
tariff regime where the transit charges consisted of Capital
expenditure (capex),operating expenditure (opex),and an
explicit profit for Turkey. With such a transparent transit
regime through Turkey, the GOAJ (and other potential Caspian
gas sellers) would be able to make the commercial
calculations necessary to determine as to where to sell its
gas. Nassirov said that the better the transit terms were
for Azerbaijan, the more gas it would be encouraged to ship
through Turkey. Alternatively, if transit conditions offered
by Turkey were economically undesirable, Azerbaijan could
always reducing gas production, or even shipping GOAJ gas to
Europe via Russia.


4. (C) Speaking of the GOAJ's gas export options from Turkey,
Nassirov said that Azerbaijan could move its gas
into either the Trans-Adriatic Pipeline, TGI, Nabucco, or to
Haifa, Israel via Ceyhan, although the GOAJ is taking
pains to ensure this last option is not bruited publicly, and
is working toward a situation where Turkey would build the
pipeline to Haifa and Azerbaijan would sell the gas.
Nassirov confided that the GOAJ has already signed a (secret)
long-term oil supply agreement with Turkey, and was hoping to
do the same with gas.


5. (C) Nassirov said that the EU should be putting more
pressure on Turkey to "act more like Europeans" in adopting a
fair and transparent transit regime, even suggesting that the
proposed IGA violates EU principles. Any transit regime
discussion between Turkey and Azerbaijan should focus only on
the amount of Turkish profit per kilometer.


6. (C) In this regard, in an August 4 conversation between
Ruggeri and Bryza, Ruggeri explained that the IGA netback
formula does indeed set a new precedent, but that it also
specifies that the transit price must be able to be reflected

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in a transparent "capex plus opex plus profit" formula, and
must amount to a "reasonable" tariff based on transit tariffs
in Greece and Italy. He also said that :

- the Intergovernmental Agreement (IGA) already foresees the
obligation to Botas to provide transparent transit
tariffs based on Capex plus Opex plus reasonable profit.
Such transparent tariffs will be an incentive for future
transit projects (from Azerbaijan or Turkmenistan) through
Turkey.

- for security of supply at competitive terms for the Turkish
market (the first two priorities of the Turkish
government, the third being profits from transit services),
the IGA foresees that anyone transiting Turkey shall sell to
Botas a certain percentage of the gas transited (exclusively
for the initial 8 bcm/a of the ITGI project
such percentage has been fixed at 15 percent) at the final
destination marketnetback price (e.g. price to Italy minus
transportation cost between Turkey and Italy). Such price
would be lower than the international Turkish price. This
provision drives the following considerations:

--- for the ITGI project, Azerbaijani producers will sell to
Edison and Depa, in addition to the 8 bcm/a destined to
Italy, 1.2 bcm/a (i.e. 15 percent of the 8 bcm/a) for the
Turkish market at a price lower the Turkish International
price, generating an economic loss that in ENI's
understanding could be sustainable. ENI will share the
details of this calculation with SOCAR as soon as there is a
confidentiality agreement with SOCAR.

SIPDIS

---this provision will act as a precedent for future transit
projects through Turkey, but it will not prevent Azerbaijan
from selling additional volumes to Turkey at the
international price. Indeed, if by 2015 the TGI and Nabucco
projects are realized, the gas volumes transiting Turkey will
be approximately 40 bcm/a and the gas amount sold to Botas at
European market netback prices will be approximately six
bcm/a (i.e. 15 percent of volumes transited) against an
overall demand in Turkey that is expected to reach levels in
excess of 50 bcm/a. Therefore, the additional Turkish gas
requirements could be sold at the international price.

- Ruggeri believes that SOCAR will have a difficult job
finding better solutions for transiting Turkey, and that
the IGA is a good compromise, in that it provides the
commitment of Turkey to provide transit through its network
in a transparent way and at market conditions, opening the
route for Caspian gas to Europe and asking the shippers
(producers and buyers) to contribute to the security and
competitiveness of Turkish gas supply.


7. (C) Ruggeri also told Bryza that the Italian government
plans to approach the GOAJ in order to look into the
possibility of a four-party IGA with Turkey, Greece,
Azerbaijan and Italy.


8. (C) COMMENT: A GOAJ negotiating team headed by Energy
Minister Aliyev and staffed with Nassirov and MFA
Ambassador at large (for Energy) Shamil Aleskerov departed
for Ankara on August 7 to negotiate gas transit with the GOT.
Senior GOAJ officials, including President Aliyev, SOCAR
President Abdullayev, Finance Minister Sharifov and Minister
of Economic Development Babayev, subsequently provided a
readout to visiting EEB A/S Sullivan and the Ambassador
(septels).


9. (U) DAS Bryza did not have the opportunity to clear this
message.
DERSE