BP COMPLAINS OF DETERIORATING RELATIONS WITH

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001070 SIPDIS SIPDIS FOR EUR/CARC E.O. 12958: DECL: 08/23/2017 TAGS: AJ ECON ENRG EPET IR PGOV PREL TX SUBJECT: BP COMPLAINS OF DETERIORATING RELATIONS WITH AZERBAIJANI GOVERNMENT; PLANS OUTREACH TO TURKMENISTAN. Classified By: AMB. ANNE DERSE for reasons 1.4 (b) and (d). ¶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 BAKU 00001070 002 OF 002 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 Turkmenistan. COMMENT -------------- ¶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. DERSE