AZERBAIJAN: SOCAR DOES "RECON MISSION" TO

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001396

SIPDIS

SIPDIS


E.O. 12958: DECL: 11/13/2017
TAGS: PREL PGOV PBTS ENRG TX AJ
SUBJECT: AZERBAIJAN: SOCAR DOES "RECON MISSION" TO
TURKMENISTAN'S OIL AND GAS SHOW

REF: BAKU 1256

Classified By: Ambassador Anne E. Derse, Reasons 1.b (b,d)


1. (C) SUMMARY: State Oil Company of Azerbaijan Vice
President Elshad Nasirov traveled to Ashgabat for the
November 14-15 Turkmenistan International Oil and Gas
Exhibition and Conference, meeting with his GOTX counterparts
on possible new energy cooperation. Having consulted with
President Aliyev prior to his trip, Nasirov laid out "ideas,
not proposals" to the GOTX as to why both countries would
benefit from a "pure transit" of GOTX gas through Azerbaijan.
SOCAR's travel to TIOGE, specifically facilitated by the
GOTX, was a signal event in the ongoing rapprochement between
the two countries' government-run energy sectors. Nasirov
was able to present a compelling argument to the GOTX as to
why it should consider exporting some of its gas through
Azerbaijan, and why it should cooperate with Azerbaijan on
offshore energy development before bilateral delimitation
issues are solved. The USG should now encourage GOTX energy
sector officials to reciprocate the visit, ideally well
before the June 2008 Caspian International Oil and Gas Show.
END SUMMARY

PRE-TIOGE
--------------


2. (C) On November 13, SCA PDAS Steven Mann, SCA/CEN Director
Pamela Spratlen, EEB Economic Officer Larry Wright and
Embassy EnergyOff met in Baku with SOCAR Vice President
Elshad Nasirov, Deputy Vice President Vitaliy Baylorbayev,
and Advisor to SOCAR President Murat Haydarov, to discuss
Azerbaijan-Turkmenistan energy cooperation, prior to VP
Nasirov's departure for Ashgabat to participate in the 12th
Annual Turkmenistan International Oil and Gas Conference and
Exhibition (TIOGE).


3. (C) Mann and Nasirov agreed that Azerbaijani-Turkmen
energy sector cooperation cannot wait for bilateral Caspian
delimitation issues to be resolved. Nasirov shared with Mann
the following three GOAJ "unofficial ideas" (vice formal
proposals) for moving forward GOAJ-GOTX energy sector
cooperation in the absence of any bilateral agreement on
Caspian delimitation:

- a gas interconnector between Block One (Livani) and the
existing Shah Deniz infrastructure;

- joint development of the offshore Sardar-Kapaz field, with
the government share of the profit to be split evenly between
Azerbaijan and Turkmenistan. In this regard, he said SOCAR
supported the Chevron proposal to the GOTX for joint
development of this field;

- Azerbaijan buying Turkmen gas "at the Turkmen western
border," and building a pipeline at its own expense).

Nasirov also said he would proffer an invitation to the June
2008 Caspian Oil and Gas show, held in Baku, in addition to
inviting his GOTX interlocutors to come to Baku any other
time.


4. (C) Mann said these ideas were all good ones. Nasirov
should also tell his GOTX interlocutors why the GOAJ chose to
work with the "supermajor" IOCs, so that the GOTX could
better understand "the differences between a Chevron and a
Buried Hill." Mann also suggested that Nasirov explain why
the time to act was now, as in a few years Iraqi, North
African and Egyptian supplies would be increasing. In
response to Nasirov's questions as to whom the best GOTX
interlocutor would be, Mann said the most influential and
competent GOTX energy sector official was the Executive
Director of the State Agency on Management and Use of
Hydrocarbon Resources Bayrammurad Muradov.


5. (C) Nasirov said the main barrier to progress in the
Southern Corridor project was still Turkey's 15 percent
netback proposal (reftel). SOCAR's studies showed transiting
gas past Turkey (for example to the main hub of Baumgarten)
would not be economically viable, and as such the GOAJ could
export its gas no farther than Turkey. Turkish insistence on
this scheme would preclude sanctioning of Shah Deniz Phase
Two, with the result that Turkey might not even get enough
gas from Azerbaijan for itself.


BAKU 00001396 002 OF 003


POST-TIOGE
--------------


6. (C) On November 15, Nasirov discussed his TIOGE experience
with Ambassador Derse and Embassy EnergyOfficer. He was
upbeat about the degree of support the GOTX had offered for
his trip, providing transport, meetings and ensuring scarce
hotel rooms were made available, which he took as a positive
signal. He had three separate meetings with GOTX officials:

- Vice-Premier Tachberdi Tagiev
- Minister of Oil, Gas and Natural Resources Baymyrad
Khodzhamuhamedov
- The Head of GOTX Neftegaz Construction (Inshaat)


7. (C) Nasirov said he had consulted with President Ilham
Aliyev before he left on what he called a "reconnaissance
mission" to Turkmenistan. He said that while he was not
authorized to give official proposals, President Aliyev
approved of the first two of the three "ideas" he had
mentioned to Mann. According to Nasirov, President Aliyev
does not want to offer to buy GOTX gas, as he thought it
would render the GOAJ the same as Russia, Turkey, Iran and
other gas customers in the eyes of the GOTX.


8. (C) Per President Aliyev's guidance, Nasirov pitched both
the interconnector and the Sardar-Kapaz joint development
deas. Considering the former, Nasirov said that the GAJ
was willing to split funding for it, 60 millin from each
side, but that the GOAJ was willing to foot the whole USD 120
million it would take to build it even without guarantees
from the GOTX as to assured volumes. Nasirov said to the
GOTX that without alternatives Turkmenistan would never get a
good price for its gas from Russia and Iran, but with an
interconnector even if it remains empty, the price it can get
for Turkmen gas would increase greatly.


9. (C) Nasirov told his GOTX interlocutors that the GOTX was
losing money by selling gas to Russia and Iran at sub-market
prices (USD 75 and USD 100 per thousand cubic meters -- tcm
-- respectively). Azerbaijan was offering the GOTX "pure
transit" for its gas, which would allow GOTX to sell directly
to Georgia, Turkey or farther downstream. Azerbaijan needs
GOTX gas because its 10-12 billion cubic meters annually
(bcm/a) that will be available for export will not be enough
to sanction anything more than TGI: Azerbaijan will be "tied
to Greece and Italy." But with GOTX gas transiting
Azerbaijan, other pipelines -- such as Nabucco -- can be
sanctioned and Azerbaijan can get higher prices for its gas
elsewhere.


10. (C) Nasirov said that his GOTX interlocutors avoided
active discussions and "just listened," although all three
admitted they had been thinking about exporting through
Azerbaijan, and Vice-Premier Tagiev did say that "if we
construct anything, it will be the interconnector." Oil and
Gas Minister Khodzhamuhamedov had arranged a TV interview for
Nasirov, but Nasirov explained to him why the less publicity
surrounding SOCAR's visit to TIOGE the better, so as not to
anger the Russians and Iranians, and as such there was no
interview.


11. (C) Asked about his impressions after this, his first
visit to Ashgabat, Nasirov said he was "disappointed" with
respect to the reality of Ashgabat in contrast to its exotic
image in Azerbaijan. His "five-star hotel" didn't have hot
water or a reasonable selection of food. There was sixty
percent unemployment and even the driver assigned to him by
the GOTX, who had a relatively high position, was deeply
critical of the President and of the current situation.
Nasirov said he worried the time was approaching when the new
President, more comfortable in his position, "stops
listening" to outside advice as the cult of personality
surrounding him intensifies. According to Nasirov, "the time
to come here (Asghabat) was in January; now it is late."


12. (C) Nasirov said part of this reconnaissance mission was
to see whether the GOTX mentioned either the Sardar-Kapaz
field or ownership rights to the ACG fields, adding that none
of his GOTX interlocutors mentioned either issue. Per
guidance from President Aliyev, he invited his interlocutors
to the 2008 CIOGE in Baku, in addition to inviting them any
other time their schedule permitted, at any level. Of
Executive Director of the State Agency on Management and Use
of Hydrocarbon Resources Bayrammurad Muradov, Nasirov said

BAKU 00001396 003 OF 003


that he had learned that he was the only person to whom the
Turkmen President listened on energy issues, commenting that
"he'll probably be jailed within a year or two."


13. (C) On his meeting with European Commissioner for Energy
Affairs Piebalgs, Nasirov told him that the GOAJ had the veto
right over Shah Deniz Phase Two development. According to
Nasirov, the GOAJ wants to transit its gas through Turkey to
improve its relations with the EU, which the GOAJ believes
will help it politically on the Nagorno-Karabakh conflict.
But the GOAJ wants direct access to European markets, and
will not accept the Turkish 15 percent netback proposal. He
told Piebalgs that the EU has to "impose European transit
principles and vision" on Turkey. Piebalgs had not been
aware of the details of this problem, and they agreed to
discuss it further November 30 in Brussels.


14. (C) In response to the Ambassador's question as to how
the USG could best help further GOTX-GOAJ energy sector
cooperation, Nasirov said that Washington should "keep quiet"
about its efforts in this regard. According to Nasirov, the
more done quietly behind the scenes but the less said in
public, the better.


15. (C) COMMENT: SOCAR's travel to TIOGE, specifically
facilitated by the GOTX, was a signal event in the ongoing
rapprochement between the two countries' government-run
energy sectors. Nasirov was able to present a compelling
argument to the GOTX as to why it should consider exporting
some of its gas through Azerbaijan, and why it should
cooperate with Azerbaijan on offshore energy development
before bilateral delimitation issues are solved. The USG
should now encourage GOTX energy sector officials to
reciprocate the visit, ideally well before the June 2008
Caspian International Oil and Gas Show.


16. (U) Mann did not have the opportunity to review this
message.
DERSE