AZERBAIJAN WILL HELP GEORGIA WITH WINTER GAS BUT

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001238

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/11/2017
TAGS: PGOV PREL ENRG AJ TU GA
SUBJECT: AZERBAIJAN WILL HELP GEORGIA WITH WINTER GAS BUT
IT WON'T BE ENOUGH

REF: A) BAKU 1224 B0 BAKU 1227

Classified By: Pol-Econ Chief Joan Polaschik, Reasons 1.4 (b,d)


1. (C) SUMMARY: Azerbaijan finds itself in a better
situation to deal with regional winter gas shortages than in
previous years due to both Shah Deniz gas and increased
domestic (i.e. SOCAR) gas production, combined with decreased
domestic demand resulting from price increases. Although
President Aliyev has expressed his willingness to help
Georgia by selling gas as in the past, he has linked
Azerbaijan's ability to do so with the provision of
associated gas from the AIOC Consortium operating the ACG oil
mega-field to Azerbaijan. The amount of gas Azerbaijan sells
Georgia will be a function of expected domestic supply and
demand combined with a political decision on how much fuel
oil the GOAJ is willing to burn instead of gas in its power
plants. Gas marketing experts at both SOCAR and BP expect
Azerbaijan to sell from 1.5 to 3 million cubic meters a day
to Georgia this winter, with pipeline infrastructure ceiling
precluding transmission of more than 3 mcm/d. As such, these
experts recommended that the Georgian government focus on
negotiating a gas agreement with Russia, in addition to one
with Azerbaijan, as Azerbaijan by itself can meet less than
half the supply deficit Georgia is expected to face. END
SUMMARY.

ACG ASSOCIATED GAS AND GEORGIA
--------------


2. (C) Due to an August 2007 breakdown in negotiations
between the State Oil Company of Azerbaijan (SOCAR) and the
Azerbaijan International Oil Consortium (AIOC - the
consortium responsible for developing Azerbaijan's major oil
field, the ACG field),as of mid-September the latter has
decreased the amount of associated gas it was providing SOCAR
from approximately 8.5 million cubic meters per day (mcm/d)
to 4 mcm/d (ref A). Although Azerbaijan has expressed its
willingness to help Georgia by selling gas as in the past, it
has linked Azerbaijan's ability to do so with the provision
of associated gas from the AIOC Consortium operating the ACG
oil mega-field to Azerbaijan. In an October 8 conversation
with the Ambassador, President Aliyev said that while
Azerbaijan is willing to help Georgia this winter by selling
it gas as in the past, "if BP (operator of the AIOC
Consortium) reduces the gas it is giving Azerbaijan, Georgia
will get less" (Reftel B). However, given the Consortium's
need to re-inject gas into the ACG field, plus a dimunition
in their desire to show maximum goodwill due to SOCAR's
unilateral cessation of negotations, it is not at all clear
that the Consortium would resume providing this "surplus" ACG
associated gas to SOCAR in time to help Georgia for the
winter.

GOAJ GAS SUPPLY/DEMAND
--------------


3. (C) According to BP and SOCAR sources, anticipated
Azerbaijan winter gas supply and demand is as follows:

16.5 mcm/d - SOCAR production
5 mcm/d - Shah Deniz gas being sold to SOCAR
4 mcm/d - ACG Associated Gas given to SOCAR
10 mcm/d - gas available from storage
--------------
35.5 mcm/d = total GOAJ gas available


According to both BP and SOCAR, upcoming Azerbaijan winter
gas demand is unknown. Although the previous winter demand
was 30 mcm/d, since then the price of gas has increased, with
domestic consumption fallen by approximately 25 percent.

GOG NEEDS 5 MCM/D
--------------


4. (C) Knowledgeable BP Azerbaijan gas executives have given
EnergyOff the following approximate numbers about Azerbaijan
and Georgian gas supply and demand, subsequently confirmed by
SOCAR, which indicate that Georgia's winter gas demands will
exceed its current guaranteed supply by approximately 5 mcm/d:

7 mcm/d - Georgian minimal winter gas demand
1 mcm/d - Shah Deniz gas given to Georgia
1 mcm/d - Russian transit gas given to Georgia (for gas
being sent to Armenia)

BAKU 00001238 002 OF 002



MAX GOAJ CAN GIVE IS 3 MCM/D
--------------


5. (C) Of the anticipated 5 mcm/d gas deficit Georgia will
have, SOCAR and BP contacts have told EnergyOff that due to
limited current Azerigaz pipeline capacity there is an
infrastructure ceiling of 3 mcm/d for Azerbaijani gas sales
to Georgia (excluding Shah Deniz gas delivered through the
SCP pipeline). Thus, even if Azerbaijan sold Azerbaijan the
maximum amount it could send north, Georgia would still have
a supply deficit of at least 2 mcm/d. According to
Azerbaijani press accounts, last winter Azerbaijan sold
Georgia 30 mcm in January, and 40 mcm in both February and
March, for a three-month average of approximately 1.4 mcm/d.
A BP gas marketing expert told EnergyOff he thought it
unlikely the GOAJ would sell Georgia three mcm/d, with one to
two mcm/d being more possible.

STATUS OF GOAJ-GOG TALKS
--------------


6. (C) According to an October 10 local press piece, the
current GOAJ gas contract with Georgia, which provides
approximately 1.3 to 1.5 mcm/d, will end in October. SOCAR
confirmed press reports that negotiations between Azerbaijan
and Georgia are ongoing concerning a follow-on contract. (On
the GOAJ side SOCAR President Rovnaq Abdullayev and PM
Rasizade are involved.) SOCAR Vice-President Elshad Nasirov
told EnergyOff that Azerbaijan would seek to sell from one to
three mcm/d to Georgia. (COMMENT: As in the previous year,
Azerbaijan has the ability to make up for gas deficits by
burning fuel oil in its power plants, although this results
in a loss of hard currency earnings.) As a result of
Azerbaijan's inability to meet Georgian gas demand this
winter, a BP gas marketing expert believes that in the "best
case Georgia will need to buy only 3 mcm/d from Russia, worst
case around 5 mcm/d."

TURKEY?
--------------


7. (C) Both BP and SOCAR experts discounted the possibility
of Turkey redirecting any of its Shah Deniz gas to Georgia,
given its demand and the low price of USD 120 per thousand
cubic meters at which it was buying the gas. As a BP gas
marketing expert put it, "Turkey will not redirect any Shah
Deniz volumes because they need it and it is cheap."
Additionally, now that the issue of a a trigger date for Shah
Deniz Stage One has been largely set, Turkey wants to
maximize the amount of cheap Shah Deniz gas it gets before
the year expires and the Shah Deniz consortium can raise the
price to market levels.


8. (C) COMMENT: As the AIOC Consortium anticipated last year
when it began to provide 'surplus' associated ACG gas to
SOCAR as a sign of goodwill (to the detriment of
re-injection),SOCAR and Azerbaijan have become used to this
free gas, much of which was being sold to Georgia. Now, with
the decrease in this amount of associated ACG gas to SOCAR,
President Aliyev and SOCAR are blaming the AIOC Consortium
for any problems in providing gas to Georgia. It is unlikely
that the AIOC Consortium will resume giving this surplus gas
to SOCAR, given the increasingly exigent need to re-inject it
into the ACG field. Thus, how much gas Azerbaijan sells
Georgia will depend on expected Azerbaijani domestic demand
combined with a political decision on how much fuel oil the
GOAJ is willing to burn. Regardless, gas marketing experts
at both BP and SOCAR suggest it might behoove the Georgian
government to focus on negotiating a gas agreement with
Russia, in addition to the one with Azerbaijan. END COMMENT.
DERSE