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