AZERBAIJAN AND ITALY AGREE TO STEPS FORWARD FOR

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001483 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: 12/13/2017 TAGS: PREL PGOV AJ IT ENRG TU SUBJECT: AZERBAIJAN AND ITALY AGREE TO STEPS FORWARD FOR SOUTHERN CORRIDOR PROJECT Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b,d) ¶1. (C) SUMMARY: A December 12 visit by an Italian delegation headed by Minister for Economic Development Pierluigi Bersani was highlighted by the signing of an Energy MOU with the Ministry of Economic Development. Edison CEO Umberto Quadrino said that 2008 would bring commercial negotiations between SOCAR and TGI for purchase of Shah Deniz Phase Two gas, in addition to quadrilateral negotiations among the Energy Ministers of Turkey, Greece, Italy and Azerbaijan that would culminate in an April signing of a four-way IGA. This news that SOCAR will be pursuing commercial contracts with TGI partners in parallel with quadrilateral negotiations for an expanded Turkey-Greece-Italy-Azerbaijan IGA shows that the GOAJ continues to move smartly forward towards implementing the Southern Corridor Project, with the major remaining barrier being GOAJ disagreement on the GOT 15 percent netback proposal mentioned in the July 2007 trilateral IGA. END SUMMARY. ¶2. (SBU) On December 12 Italian Minister for Economic Development Pierluigi Bersani headed an Italian delegation visiting Azerbaijan on a one-day trip. He had separate meetings with President Aliyev, Energy Minister Natiq Aliyev, Economic Development Minister Heydar Babayev, and SOCAR Vice-President Elshad Nasirov. On the afternoon of December 12 Edison Chief Executive Umberto Quadrino met with the Ambassador to brief her on the trip. Accompanying him were Edison SPA Vice-President Roberto Poti and Edison SPA Business Development Manager Elio Ruggeri. Energy Officer was notetaker. ¶3. (C) An upbeat Quadrino told the Ambassador that all of his GOAJ interlocutors had been "very supportive" of the TGI project, and it had been a "very positive visit," highlighted by the signing of an Energy MOU between Bersani and GOAJ Economic Development Minister Heydar Babayev. (NOTE: Embassy is seeking copy of same.) Edison pointed out that this MOU included the Government of Italy's expressed preference for TGI over other competing projects. ¶4. (C) Quadrino said that although his GOAJ interlocutors had expressed pique at being left out of the negotiations leading to the July 26 Turkey-Greece-Italy Intergovernmental Agreement, they saw the IGA as a step forward, since in it Turkey agrees to be a transit country for gas, not a buyer-seller. He said that it seemed to be a strong point of principle for the GOAJ to have direct contracts with downstream customers while Turkey's main objective is cheap gas. Quadrini said his Azerbaijani interlocutors also continued to strongly oppose the GOT 15 percent netback proposal introduced in the IGA. However, the GOAJ made it clear it is ready to talk with the GOT about selling Turkey additional gas volumes at an attractive price, but will not accept linking between the quantity and price of gas sales to Turkey with the quantity and price of GOAJ gas sales to downstream customers. GOAJ interlocutors told Quadrino that they were also concerned that this 15 percent netback would set a bad precedent: what if, for example, Georgia or other transit countries insisted on a similar netback scheme? ¶5. (C) Quadrino told the Ambassador that 15 percent of the amount TGI customers was seeking from Azerbaijan was about 1 billion cubic meters annually (bcm/a),and that SOCAR had assured Edison that it were willing to offer Turkey a good price for additional volumes. As such Quadrino said he thought Turkey could be moved from its insistence on the 15 percent netback scheme, given that its ultimate goal was for additional volumes at a good price and Azerbaijan,s willingness to accommodate this desire. In this regard, SOCAR and Energy Minister Aliyev said they were working on a "face-saving way out" for the GOT such that they could relinquish this 15 percent netback proposal, which Quadrino noted was the brainchild of former Energy Ministry official Sami Demirbilek, who was no longer on the scene. Ruggeri said Turkish Energy Minister Guler is not wedded to the 15 percent proposal. ¶6. (C) Quadrino said that one other reason Turkey was seeking this 15 percent netback scheme was that it hoped to use the BAKU 00001483 002 OF 003 resulting sub-market price for Shah Deniz Phase Two (SD2) gas as a benchmark when it re-negotiates the price of Shah Deniz Phase One (SD1) gas (NOTE: The existing marketing agreement for SD1 gas allows Turkey to buy SD1 gas at the submarket price of USD 120 per thousand cubic meters for one year, after which the price is renegotiated). Quadrino said that SOCAR Vice-President Nasirov was aware of this GOT intention, and told him that SOCAR would be amenable to using the low negotiated price of a separate gas sales agreement with Turkey for one bcm/a of SD2 gas as a benchmark when it comes time to renegotiate the price of SD1 gas. TGI TIMING -------------- ¶7. (C) Quadrino said Edison was concerned about when Azerbaijani gas for TGI would be available. Current estimates for SD2 volumes becoming available were the fourth quarter of 2013, whereas the TGI pipeline project would need volumes in 2012, which means that there would be a gap of approximately 1.5 to 2 years between when the pipeline was ready and when Azerbaijani gas would be available. Delays in Shah Deniz Phase Two would perforce negatively impact on the project's return on investment. As such, Edison was looking at various "bridge solutions." SOCAR had mentioned to Quadrino the option of approximately six to seven billion cubic meters annually (bcm/a) of Turkmen offshore volumes becoming available, with a 128 km interconnector link-up to the existing Shah Deniz offshore infrastructure. Quadrino said that TGI would need seven to eight bcm/a the first year, with Edison seeking to reach a deal with SOCAR that would supply 80 percent of that amount, i.e. 6.4 bcm/a, with some additional amounts to be sought by DEPA for Greece. ¶8. (C) The other main issue with which Edison was concerned was the European Commission's seeming preference for Nabucco over TGI. Quadrino told the Ambassador that it was clear to him that the EC was "lobbying for Nabucco" to the detriment of TGI, especially European Commissioner for Energy Andris Piebalgs. He said that Edison would be "talking to Brussels" about this lobbying, and asked for the Ambassador's help in supporting TGI in her discussions with the GOAJ. PARALLEL NEGOTIATIONS -------------- ¶9. (C) Quadrino said that based on Edison's agreement with SOCAR/GOAJ, Azerbaijan was going forward with two separate sets of TGI-related negotiations. In February, TGI consumers (to include Edison) and AIOC/SOCAR would start commercial negotiations leading to a supply contract. In parallel, in January GOAJ Energy Minister Natiq Aliyev would start to participate in quadrilateral negotiations aiming to culminate in a quadrilateral IGA agreement (Turkey, Greece, Azerbaijan, Italy) to be signed in April in Rome. In this regard, Quadrino said that GOT Energy Minister Hilmi Guler had told him that Turkey was predisposed towards this idea of a quadrilateral IGA. Guler had also told Edison that Turkey would not stand in the way of any Edison-GOAJ gas sales agreements. ¶10. (C) In response to the Ambassador's question, Quadrino said he thought President Aliyev was a seemingly "nice guy," although "too young" and "not comfortable in his position...he will be better in a few years." Quadrino was quite pleased however in that President Aliyev gave a "clear signal of support" to the TGI project. ¶11. (C) Quadrino said that within the next 15 years, there would be 100 bcm/a less from the North Sea, resulting in an approximately 200 bcm/a gap between gas supply and demand in Europe. As such, Iraq and Iran could also play a key role in providing energy to Europe in the mid- to long-term, although Quadrino acknowleded the Ambassador's statements of the USG positin on energy cooperation with Iran. Quadrino said that Edison was also looking quite seriously at energy investments in northern Iraq. In response to the Ambassador's question about the viability of the Southstream project (a putative competitor for Nabucco),Quadrino said "it was all BAKU 00001483 003 OF 003 talk...merely a tactic" to stop Nabucco. ¶12. (C) COMMENT: News that SOCAR will be pursuing commercial contracts with TGI partners in parallel with quadrilateral negotiations for an expanded Turkey-Greece-Italy-Azerbaijan IGA shows that the GOAJ continues to move smartly forward towards implementing the Southern Corridor Project. Its continued opposition to the GOT 15 percent netback proposal is understandable, given both its concerns about being forced to sell SD2 gas at sub-market prices and the dampening effects such a netback scheme would have on prospects for drawing Turkmen gas westwards. It is to be hoped that the oft-expressed GOAJ willingness to sell additional volumes of SD2 gas to Turkey at acceptable prices will be part of a bilateral GOAJ-GOT solution. In this regard, Embassy will seek details as to the "face-saving solution" for Turkey that SOCAR intends to propose. END COMMENT. DERSE