PRESIDENT ALIYEV REVIEWS REGIONAL ENERGY WITH EEB

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 001062

SIPDIS

SIPDIS

DEPT FOR EEB A/S SULLIVAN, EUR/CARC

E.O. 12958: DECL: 08/16/2017
TAGS: PREL ENRG ECON RU TU TX KZ AJ
SUBJECT: PRESIDENT ALIYEV REVIEWS REGIONAL ENERGY WITH EEB
A/S SULLIVAN

REF: BAKU 1007

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


1. (C) Summary: In an August 15 meeting with visiting EEB
A/S Sullivan and the Ambassador, President Aliyev affirmed
his support for U.S. energy security goals and said continued
bilateral cooperation was essential. Characterizing his
recent trip to Kazakhstan as "successful," Aliyev said the
two countries had agreed to united their efforts on the
development of Caspian infrastructure (with Kazakhstan
insisting on compressor stations rather than a new
Trans-Caspian gas pipeline) and had agreed to cooperate on
energy initiatives in Georgia. Aliyev said Azerbaijan will
work with Kazakhstan to ensure "practical implementation" of
bilateral energy agreements signed in 2006 and 2007;
Azerbaijan also will begin "practical talks" with
Turkmenistan on the development of energy cooperation. While
Azerbaijan is moving ahead on negotiating a gas transit
agreement with Turkey, Aliyev expressed frustration with
Turkey's recent TGI deal and again asked for U.S. help in
dealing with Turkey. Aliyev also sought U.S. support for a
possible Azerbaijan-Kazakhstan-Turkmenistan energy summit,
characterizing it as a "serious political step." End summary.


2. (C) During a relaxed, 90-minute meeting on August 15 with
visiting EEB Assistant Secretary Sullivan and the Ambassador,
President Aliyev discussed regional energy developments.
Sullivan and Aliyev also reviewed the bilateral economic
relationship, and Iran (septel). USTDA General Counsel Jim
Wilderooter, DOE's Tyler Tiller, EEB/ESC Rob Garverick, and
Pol/Econ Chief (notetaker) also attended the meeting. Aliyev
was accompanied by Economic and Energy Advisor Ali Asadov.


3. (C) Aliyev emphasized that the U.S. and Azerbaijan need
to continue to coordinate their efforts on energy security,
as their cooperation had been essential to the region's first
major developments and is critical to develop more broad
regional cooperation. Aliyev noted that his goal is to
develop a strong country with rule of law, democracy, and an
open, market economy. Azerbaijan's democratization and rapid
economic growth, he said, present a great opportunity.

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KAZAKHSTAN
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4. (C) Aliyev characterized his August 7-8 trip to
Kazakhstan as "very successful." Noting that "two important
documents" had been signed, Aliyev said that he and Kazakh
President Nazarbayev had agreed to unite their efforts on the
development of Caspian infrastructure, including the
development of new transportation networks, and also had
agreed to cooperate on energy initiatives in Georgia, "to
prevent other forces from taking advantage of the situation."
(Note: Local press reported that the two Presidents signed
an agreement on strategic cooperation in the energy sector
and a memorandum of understanding on the joint implementation
of a trans-Caspian project. The agreement focuses on the
transport of Kazakh energy and the joint use of Azerbaijan's
energy infrastructure, while the MOU fleshed out details of
the 2006 Azerbaijan-Kazakhstan IGA.)


5. (C) Turning to trans-Caspian issues, Aliyev said that
SOCAR is ready to work with Kazakhstan's oil companies. He
said Azerbaijan had offered Kazakhstan "broad cooperation,"
especially in transportation. However, Kazakhstan had offered
compressor stations in place of a new trans-Caspian pipeline,
arguing that Russia would be less likely to be upset by an
LNG project. Aliyev said that Azerbaijan, on the other hand,
is ready to build a trans-Caspian oil pipeline and
potentially a gas pipeline as well.

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TURKMENISTAN
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6. (C) Aliyev said that Azerbaijan's relationship with
Turkmenistan is "improving," noting that the two countries
had established a new economic commission and that plans were
underway for Turkmenistan to reopen its embassy in Baku.

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Aliyev said that Azerbaijan is ready to provide Turkmenistan
with modern facilities and infrastructure. During his recent
discussions with Kazakhstani President Nazarbayev, Aliyev
said that Nazarbayev believes that new Turkmen President
Berdimukhamedov is "reasonable" and indicted that Kazakhstan
would be willing to cooperate with Azerbaijan and
Tukmenistan on energy issues.


7. (C) A/S Sulliva briefed Aliyev on his August 13-15
meetings in Turkmenistan, noting that the U.S. was looking at
ways to engage President Berdimukhamedov. In his meeting
with Berdimukhamedov and in a public address in Turkmenistan,
Sullivan said he emphasized the importance of developing
Turkmenistan's energy sector and new supply routes,
particularly Trans-Caspian routes. Sullivan noted that he
had told Berdimuhamedov that having only one or two buyers of
Turkmen gas was not in Turkmenistan's interest. He also
underscored that having greater diversity in trading and
energy routes and partners helped to reinforce Turkmenistan's
policy of neutrality. Berdimukhamedov was forward-leaning
with regard to the energy and economic discussions he had
with Sullivan, and also accepted U.S. Energy Secretary
Bodman's invitation to Turkmen energy officials to visit
Washington. In his discussions with Berdimukhamedov,
Sullivan said that he cited Azerbaijan as a model that
Turkmenistan might consider as it develops its energy sector,
noting that the SOCAR and western energy company model would
lead to greater long-term gains than the Gazprom model.
Sullivan urged Aliyev to offer assistance to Turkmenistan to
help guide it through this transition and learning period.


8. (C) Aliyev responded that Turkmenistan's transformation
is very important for the entire region. Turkmenistan had
been a closed state since its independence, and former
President Niyazov had pursued a policy that was "the opposite
of education." Now, Turkmenistan -- like Azerbaijan, Aliyev
noted -- needs to diversify its economy. High oil and gas
prices present a unique opportunity. Sullivan noted that he
had encouraged Berdimuhamedov to undertake economic reforms
when economic growth was strong, as it currently was in
Turkmenistan.

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THE POLITICS OF ENERGY SECURITY
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9. (C) Reviewing Azerbaijan's strategic decision not to buy
gas from Russia, Aliyev said that Azerbaijan had solved all
of its energy problems. With Shah Deniz Phase I production,
decreased domestic consumption, and plans to double SOCAR's
gas production in the next two years, Aliyev said that
Azerbaijan can now meet all of its own and Georgia's gas
needs. Development of new infrastructure and transportation
links with the Eastern Caspian is of great political
importance, Aliyev said, although "frankly speaking, this
creates a headache for us" and Azerbaijan needs to evaluate
the "political costs" of its policies. Noting that Russia
currently enjoys a monopoly on export routes from the Easter
Caspian, Aliyev said that the only other route is through
Azerbaijan. "We need to evaluate all potential and existing
risks ... and work with potential partners," Aliyev said,
concluding that his government is "most interested in
bringing these (Eastern Caspian) resources to Azerbaijan."


10. (C) Aliyev stressed that the U.S. and Azerbaijan need to
continue their joint efforts on regional energy security.
U.S. involvement, he said, is needed to ensure maximum
results with minimum losses. He also stressed that the EU
should be more active on energy issues. The EU, Aliyev said,
is naive. When he raised energy issues during his 2004 visit
to the EU, Aliyev said that EU officials at that time
responded that Russia is their major energy supplier; they
saw no need to engage with Azerbaijan. Now, however, Aliyev
said EU officials are beginning to understand that Russian
wants to monopolize Europe's energy supply in order to
reestablish political dominance over Eastern Europe and the
entire former Soviet sphere.


11. (C) Sullivan responded that the U.S. has been engaged in
intense energy discussions with the EU, and that the U.S. and
the EU issued a joint statement on energy following the US-EU

BAKU 00001062 003 OF 004


summit that emphasized the importance of the Caspian region.
Sullivan added that he had briefed EU officials just prior to
his trip to Azerbaijan, and it appears that key EU countries
realize that Russian actions are impacting areas outside of
energy security.


12. (C) Sullivan noted that Russia and other G8 members last
summer had agreed to the St. Petersburg Energy Security
Principles which emphasize transparency, open investment, and
diversity of supply routes and sources. However, Russian
actions in the energy realm have not been consistent with
their G8 commitments, which were "strongly reaffirmed" just
two months ago in Heiligendamm, Germany at the June G8
summit. Sullivan added that Russian actions transcend energy
security, and impact the independence and sovereignty of
states like Azerbaijan, which is another reason why Caspian
energy issues are important to the U.S.


13. (C) Aliyev agreed, noting that Russia "says the right
things but behaves differently." Aliyev characterized
Russian energy-related actions in Georgia as a "big mistake,"
stating that Russia probably "underestimated" Azerbaijan's
relationship with Georgia (referring to Azerbaijan's decision
to provide gas to Georgia in the winters of 2006 and 2007).
Noting Russia's heavy-handed energy policy toward Belarus,
Aliyev laughed that other CIS leaders say "if they treat
Belarus like that, what can the rest of us expect?" The real
face of Russian policy, Aliyev continued, is to "monopolize
everything." Russia is talking to Qatar and Algeria, and
wants to create a "belt of energy monopolists." However,
Russia looks at Azerbaijan, Aliyev said, and sees a "tiny
pipeline that can damage Russian plans." Azerbaijan's Shah
Deniz field is a "huge opportunity," Aliyev continued. "We
destroyed their myth of unique (gas) supply. The Russian's
mistake, Aliyev said, was "when they started to exert energy
pressure on us."

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NEXT STEPS
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14. (C) Aliyev said that Azerbaijan intends to work with
Kazakhstan to ensure "practical implementation" of bilateral
energy agreements signed in 2006 and 2007. Aliyev noted that
this cooperation would include the development of
large-capacity tankers for transport of Kazakh crude across
the Caspian, as well as a joint refinery at Ceyhan.
Azerbaijan also plans to begin "practical talks" with
Turkmenistan. Although "we can't call it Trans-Caspian,"
Aliyev believes the two sides can initiate such talks "on a
technical level." Finally, Azerbaijan intends to move ahead
on a gas transit agreement with Turkey; a negotiating team,
led by the Minister of Energy, and including officials from
SOCAR and the Ministries of Foreign Affairs and Economic
Development, already had begun talks with the Turks. Noting
that Azerbaijan was deeply disappointed by Turkey's recent
agreement with Greece and Italy to sell "Caspian gas" from
Shah Deniz Phase I "as if we didn't exist," Aliyev said that
Turkey now understands that the 2001 agreement is valid only
for Shah Deniz Phase I gas. A new agreement, identifying
Azerbaijan as the seller of Shah Deniz Phase II gas, is
needed. (Note: Aliyev expressed similar frustration
regarding Turkey and the TGI to visiting EUR DAS Bryza,
reftel.)

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A PLEA FOR U.S. HELP
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15. (C) Aliyev said he needed U.S help in two specific
areas. First, Aliyev expressed concern about Azerbaijan's
ongoing efforts to negotiate a gas transit agreement with
Turkey, saying that it "may be the most difficult part" of
Azerbaijan's energy policy. Although Azerbaijan has good
relations with Greece and Italy, "Turkey wants to
redistribute gas from Azerbaijan." Complaining again that
Turkey's gas agreement with Greece and Italy referred to
"Caspian" rather than Azerbaijani gas, Aliyev asked for U.S.
help in moving forward on a gas transit agreement with
Turkey. The EU, he added, was interested in working with
Azerbaijan, not Turkey, on a gas agreement. Sullivan noted

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that thee has been some discussions about the EU hosting a
energy summit in Brussels and inviting key Caspin gas
players to move forward on energy securitycooperation.
Aliyev responded that the summit wa a good idea, adding that
the Lithuanians were organizing a similar summit in October,
with a broad "global" guest list, that he planned to attend.


16. (C) Aliyev also sought U.S. support for a possible
Azerbaijan-Kazakhstan-Turkmenistan trilateral energy summit.
Characterizing the possible meeting as a "serious political
step," Aliyev said it would send a strong signal of rebuke to
the energy summit that Putin had hastily organized in
Kazakhstan in May, in response to the Cracow energy summit.
Kazakhstani President Nazarbayev, who agrees with the idea,
had promised to talk to Turkmen President Berdimukhamedov
about the summit, but Aliyev hoped that the U.S. also would
engage the Turkmen on this issue. "I am ready to meet
whenever, wherever they want," Aliyev said, "including in
Ashgabat." Sullivan noted that the U.S. would look for an
opportunity to raise this issue with the Turkmen government.

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COMMENT
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17. (C) It is clear from Aliyev's comments to Sullivan that
U.S. and Azerbaijan energy interests truly are aligned (ref).
Aliyev's analysis of Russian motives in the region also
makes it clear that Azerbaijani energy policy is about far
more than energy; it is part of Azerbaijan's concerted effort
to flex its new-found muscles and keep a resurgent Russia
from exerting influence on Azerbaijan's independence and
sovereignty. Aliyev's continuing pique over Turkish
negotiating tactics, however, indicates that much work
remains to be done to realize our shared vision for bringing
Caspian gas to Europe. Continued U.S. engagement is
essential.


18. (U) A/S Sullivan cleared this message.
DERSE