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

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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

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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