|07BAKU1070||2007-08-24 11:58:00||CONFIDENTIAL||Embassy Baku|
VZCZCXRO9179 PP RUEHDBU DE RUEHKB #1070/01 2361158 ZNY CCCCC ZZH P 241158Z AUG 07 FM AMEMBASSY BAKU TO RUEHC/SECSTATE WASHDC PRIORITY 3773 INFO RUCNCIS/CIS COLLECTIVE PRIORITY RUEHAK/AMEMBASSY ANKARA PRIORITY 2337 RUEHLO/AMEMBASSY LONDON PRIORITY 0376 RUEHBS/USEU BRUSSELS PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RUEHNO/USMISSION USNATO PRIORITY 0679 RUEHVEN/USMISSION USOSCE PRIORITY 0679 RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001070
1. (C) SUMMARY: During an August 21 meeting, BP Azerbaijan
President Bill Schrader expressed frustration with GOAJ
efforts to collect certain taxes from BP and its
subcontractors, an action Schrader characterized as a
violation of BP's Production Sharing Agreement (PSA).
Managing Director of the BP Group and Chief Executive of
Exploration and Production Andrew Inglis plans to raise these
concerns with President Aliyev. BP is continuing its
outreach efforts to Turkmenistan, planning a trip to the U.S.
and Scotland for senior Turkmen officials. Schrader
confirmed that Iran had sought AIOC approval to ship gas
condensate through the BTC, a request firmly shot down by the
BTC's American partners. He also noted that Azerbaijan is
stepping up efforts to gain more funding for the protection
of critical energy infrastructure.
GOAJ Relations Increasingly Difficult
2. (C) During an August 21 meeting with the U.S. and UK
Ambassadors, BP Azerbaijan President Bill Schrader said that,
during recent discussions with State Oil Company of
Azerbaijan (SOCAR) President Rovnaq Abdullayev on BP's 2008
projected revenue plan, GOAJ officials criticized BP's
lower-than-forecasted 2007 production from Shah Deniz as well
as the lower projected revenues for 2008. Schrader said that
Abdullayev repeatedly talked about how BP had "let down" the
GOAJ. Schrader said he told GOAJ officials that a forecast
is not a guarantee and that the reserves in Shah Deniz are
there, but the production level is just not peaking as
expected; costs are rising and revenue is down.
3. (C) Managing Director of the BP Group and Chief Executive
of Exploration and Production Andrew Inglis and Schrader will
meet President Aliyev on August 22 to pin down a date for
completion of a deal on BP's proposal to develop ACG Deep
Gas. Schrader said Inglis would also raise BP's concerns
about what BP viewed as the GOAJ's growing infringement on
the terms of the original PSA to develop the ACG fields.
Schrader said thatthe GOAJ is trying to collect over $100
million in penalties and fines for allegedly unpaid taxes for
2006 from BP's subcontractors by applying a GOAJ tax law that
BP's subcontractors had been exempt from to this point.
(NOTE: Other energy companies have made similar points to us.
END NOTE) Schrader said that BP is considering its legal
options and said that this collection strategy was typical of
a change in posture by the GOAJ toward foreign operating
companies in the country. Schrader said that the GOAJ had
been considered by many international oil companies to be
relatively more respectful of PSA rules, but now seems to be
implementing policies that encroach upon PSA rules in a
manner reminiscent of more troublesome governments, such as
Angola. Schrader said that this pattern of behavior is a bad
sign for the business operating environment in Azerbaijan,
especially for a company such as BP that planned to invest 20
to 25 billion dollars into Azerbaijan as part of its proposal
to develop ACG Deep Gas. Schrader believes that President
Aliyev must be responsible for this policy change, commenting
that no one in the GOAJ can go after the international energy
companies without top-level endorsement.
Outreach to Turkmenistan
4. (C) Schrader said that BP was sponsoring the visit of
several top Turkmenistan Government officials to Washington
in late September to meet with Energy Secretary Bodman.
Schrader said that BP would also bring the GOTX officials to
Houston and Aberdeen to educate them on the type of projects
that BP is capable of completing. Schrader also said that BP
was planning on attending the Turkmenistan Oil and Gas Show
in November in Ashgabat.
Energy Infrastructure Security
5. (C) BP believes that the GOAJ may be engaged in efforts
to raise international awareness of the security
vulnerabilities of Azerbaijan's on- and off-shore energy
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infrastructure. Schrader commented that he has personally
been advocating to GOAJ officials for years that it needs to
increase the security around the offshore platforms,
highlighting the economic impact of a terrorist attack.
Schrader said that SOCAR recently circulated a letter to
other GOAJ ministries advocating for increased security
around the platforms, at BP's request.
Iranian Involvement in BTC?
6. (C) The British Ambassador queried the BP officials about
a rumor that Iran's state oil company has officially
requested to the AIOC that it be allowed to ship Iranian gas
condensate through the BTC. Schrader said that was true, but
the American AIOC partners had voted against the proposal.
Schrader noted that Iran has made this proposal in the past,
but the AIOC had never allowed this to happen.
UK Energy Minister to Ashgabat
7. (C) U.K. officials reported that the new U.K. Energy
Minister plans to travel to Baku on September 21 following a
stop-off in Ashgabat. They noted that this would be the
first visit by an Energy Minister from the United Kingdom to
8. (C) Both BP and the GOAJ have been complaining of
deteriorating relations for the last several months. These
tensions, which reflect the GOAJ's growing assertiveness in
the energy sector, could complicate BP's efforts to negotiate
further development of the ACG field. Inglis' visit will be
an important step in these negotiations. We will report
further developments septel.