AZERBAIJAN, RWE UPBEAT ON NABUCCO; BOTAS SHAKE-UP

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001292

SIPDIS

SIPDIS

DEPARTMENT OF ENERGY PASS TO A/S KAREN HARBERT, DAS ALAN
HEGBURG, OFFICE OF RUSSIA/EURASIAN AFFAIRS DIRECTOR LANA
EKIMOFF

E.O. 12958: DECL: 10/26/2017
TAGS: PREL PGOV ENRG AJ TU
SUBJECT: AZERBAIJAN, RWE UPBEAT ON NABUCCO; BOTAS SHAKE-UP
DELAYS RWE NABUCCO MEMBERSHIP


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


1. (U) This is a joint Embassy Ankara - Embassy Baku cable.


2. (C) SUMMARY: According to an executive of German Energy
Company RWE, in October 19 meetings with Azerbaijan's State
Oil Company (SOCAR) and the Energy Ministry both expressed
strong Azerbaijani support for the Nabucco pipeline project.
RWE inclusion into the Nabucco partnership is waiting for new
members to be appointed and approved for the board of Turkish
Energy Company BOTAS. RWE believes that given the corruption
scandal in the Turkish Energy sector, it is unlikely that
BOTAS will able to take up any of the issues before the Board
anytime soon, to include RWE,s membership in Nabucco,
Azerbaijan and Turkey,s agreement on Shah Deniz
commencement, or the issue of transit of Azerbaijani gas
through Turkey. END SUMMARY.

SOCAR READY FOR NABUCCO
--------------


3. (C) On October 19, 2007 Ambassador Derse met with RWE Gas
Midstream CEO Stefan Judisch, who came to brief her on RWE's
involvement in the Nabucco pipeline. Judisch, who was in
Azerbaijan as part of a 65-member German business delegation,
said he met earlier in the day with SOCAR Vice-President P
Elshad Nasirov, who he termed a "good guy" with whom one can
do business. Nasirov told Judisch that Azerbaijan "needs
Nabucco." Azerbaijani Energy Minister Natiq Aliyev was
equally supportive of Nabucco in his meeting with Judisch,
but expressed his concern about the Turkish 15 percent
netback proposal (NOTE: According to a July 26
Intergovernmental Agreement on the Turkey-Greece-Italy
Pipeline signed in Rome by the Prime Ministers of Turkey,
Greece and Italy, Turkey would have a right to buy from
Azerbaijan amounts of gas equal to fifteen percent of the
total amount of Azerbaijani gas transiting Turkey, at a price
equal to the final sales price minus transportation cost).


4. (C) Judisch said that RWE was "not going to get involved"
in this Turkey-Azerbaijan gas transit dispute, and that the
current contretemps was low on his list of concerns. First
he needed RWE to get the elusive Nabucco membership, then he
needed to "get a fix on transportation tariffs," then find
supply contracts.

WAITING ON BOTAS
--------------


5. (C) Judisch said that OMV had met with Turkish Energy
Minister Gular the night of October 18. According to
Judisch, BOTAS still needed two more board members (of five
positions, two are currently empty) before it can go forward
on Nabucco membership. Energy Minister Gular had proposed
two candidates, one of whom was approved and the other
rejected, but he "didn't want to nominate the fourth
candidate by himself" for reasons of "political
horse-trading."


6. (C) Currently, Judisch said the plan is for the signing
that would make RWE a Nabucco member to occur on October 24
in Vienna, but he said he is not certain it will happen, as
it is unclear how long the Turks' inability to fill the BOTAS
board will delay the process. Judisch said that although it
is clear to all that the more Nabucco is delayed, the more
viable Russia's proposed "South Stream" pipeline becomes, he
worried that politicians' "short-term political concerns"
would outweigh longer-term strategic considerations.


7. (C) According to BOTAS General Director Saltuk Duzyol,
there are only two BOTAS Board members: himself and Osman
Zuhtu. Two recently departed board members, BOTAS Deputy
General Director Riza Ciftci and former Energy Ministry
Deputy Undersecretary Bekir Aksoy, have been indicted for
corruption related to the tender processes for the Shah Deniz
gas pipeline, Hanak-Sivas-Corum Compressor Station and the
Salt Lake Underground storage facility. The Turkish Ministry
of Energy initiated the investigation with the Prosecutor,s
office involving 30 people, both bureaucrats and private
businessmen, including BOTAS number two, Deputy Director
General Sakir Arikan.

BAKU 00001292 002 OF 002



DIFFERING GAS PRICE EXPECTATIONS
-------------- --------------


8. (C) Ambassador Derse asked Judisch for his own personal
opinion on the Turkish 15 percent netback proposal.
Repeating that for him the issue was professionally
unimportant (at least currently),Judisch said he thought
that the problem stemmed from differing gas price
expectations. For Azerbaijan selling gas to Turkey, the
benchmark price against which it had to compete was the price
of Russian gas delivered to Turkey. Any price of Azerbaijani
Shah Deniz Phase Two gas offered to Turkey that beats the
Russian price is competitive. Judisch said that Turkey
however, was seeking what he called "netback netback."


9. Explaining, Judisch said that if Nabucco intends to bring
Azerbaijani gas to Austria (Baumgarten),it will be competing
against Russian gas, which can be assumed is being sold at
USD 280 per thousand cubic meters (tcm). He said one can
also assume that Turkey buys Russian gas at USD 280 per
thousand cubic meters (tcm). If Russian gas being sold to
Turkey is USD 280/tcm, then Azerbaijan can undersell this
Russian gas by selling at USD 275/tcm. However, assuming
transit costs through Turkey for Azerbaijani gas sold to
Austria is approximately USD 120/tcm, that means that a
netback deal for Turkey (for Azerbaijani gas sold to a
downstream customer like Austria) means that Turkey can buy
gas from Azerbaijan at the Georgia-Turkey border netback
price of USD 260 (price of Azerbaijani gas being sold to
Austria) minus USD 120 (transportation/tariff costs),equals
USD 140, which would be a much better price than the USD 275
that Azerbaijan would be otherwise offer Turkey.

10 (C). COMMENT: Given the corruption scandal in the Turkish
Energy sector, Embassy Ankara believes that the BOTAS board
is unlikely to be able to take up any of the issues before
the Board anytime soon, including RWE,s membership in
Nabucco and Azerbaijan and Turkey,s agreement on Shah Deniz
commencement date (i.e. the date at which the Shah Deniz
Consortium can re-negotiate the price of Shah Deniz Phase One
gas being delivered to Turkey so as to make it more in
alignment with current market prices). Turkish Energy
Minister Guler also has yet to fill several key positions at
the Ministry of Energy, including the Deputy Under-Secretary,
who also encumbers a seat on the BOTAS Board. As such,
progress on joint Azerbaijani-Turkish issues such as gas
transit will have to wait until the Turkish energy sector
finishes cleaning house. END COMMENT.
DERSE