AZERBAIJAN: BP EXECUTIVE BULLISH ON SECOND PHASE

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001516 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: 12/18/2017 TAGS: PGOV PREL AJ ENRG SUBJECT: AZERBAIJAN: BP EXECUTIVE BULLISH ON SECOND PHASE ENERGY SECTOR DEVELOPMENT REF: BAKU 1496 Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d) ¶1. (C) SUMMARY: A high-level BP executive said that BP is optimistic on the next stage of Azerbaijani energy sector development, saying that results of recent exploratory drilling confirms that there is "lots left to do" in the offshore Southern Caspian basin. The West should not have "unrealistic expectations" about the role BP can play in solving any winter gas crisis in Georgia: the key to any solution is Azerbaijan President Aliyev's willingness to incur large-scale economic losses by selling additional gas volumes to Georgia while increasing use of mazut domestically. BP denied seeking to "sell out" Azerbaijan in exchange for enhancing its role in the Russian energy sector. Both BP and Azerbaijan are eager to solve the current dispute over profit allocation in its ACG Production Sharing Agreement, although not all ACG partners agree with BP as to the ideal compromise solution. However, President Aliyev has a clear strategic vision of exporting GOAJ energy to Europe, and as such is seeking to move past the current contretemps so that the next stage of Azerbaijan energy sector development can begin. END SUMMARY. ¶2. (C) On December 17 Ambassador Derse met with visting BP Chief Executive of Exploration and Production Andy Inglis, BTC CEO Rashid Javanshir, and BP retired senior executive Ed Whitehead. Also present were UK Ambassador to Azerbaijan Carol Browne, and notetakers from the US and UK Embassies. BP'S INTERESTS IN RUSSI -------------- ¶3. (C) In response to the Ambassador's question, Inglis said that approximately 25 percent of BP production came from Russia, whereas only approximately 10 percent of its profits came from Russia (for example, a barrel of Russian crude had only half the profit margin of a barrel from the Gulf of Mexico). He denied that strategic considerations about BP's activities in Russia influenced its activities in Azerbaijan, saying that BP confronted these same arguments when contemplating BTC and SCP. He explicitly denied a recent Russian press piece saying that BP was contemplating an asset swap with Gazprom in which Gazprom would gain BP's Shah Deniz share in exchange for BP acquiring assets in Russia, ascribing the rumor to misunderstandings of a June 2007 deal in which TNK-BP was forced to sell its stake in the Kovykta Gas Field to Gazprom. BP RELIABILITY -------------- ¶4. (C) Having met earlier that day with President Aliyev, Inglis said that the President above all wanted a reliable partner in developing Azerbaijan's energy infrastructure so that he had "maximum predictability." Inglis said that Aliyev knew that BP was such a partner. Inglis contrasted BP's strong performance in Azerbaijan, where "we have done what we've said, and as a result Azerbaijan will soon be providing one million barrels of day of oil to the world market," with ENI's "worthless" performance in executing its PSAs in Kazakhstan. DISPUTE RESOLUTION -------------- ¶5. (C) Inglis said that the AIOC Consortium has still not reached an agreement with the GOAJ about resolving the dispute on how to calculate Rate of Return (ROR) for the Azeri, Chiraq and Gunashli (ACG) Production Sharing Agreement (PSA),a dispute that potentially involves allocation of billions of profit dollars over the life of the PSA, and the solution of which is a prerequisite for subsequent BP development of Azerbaijan's energy sector. However, Inglis said there was "goodwill on both sides," and it was clear that President Aliyev was eager to "turn the page on this current issue" and engage in the next phase of Azerbaijani energy sector development. Although BP, as operator of the ACG PSA, had a proposed compromise solution, Inglis said that there was a "misalignment" among the partners, with one ACG BAKU 00001516 002 OF 003 partner's resistance to agreeing to any compromise impeding coming to a solution (COMMENT: although Inglis did not state it explicitly, it was clear that he was referring to ExxonMobil). GEORGIA -------------- ¶6. (C) Inglis said that the subject of GOAJ gas for Georgia this winter had come up in his talks with President Aliyev. Inglis said the President clearly chafed under what he perceived as a "double standard" by which Georgia was fawned over by the international community while engaging in the same behavior for which Azerbaijan was excoriated. Aliyev told Inglis that the GOAJ's current gas contract with Georgia would last until the January 2008 Presidential elections, the implication being that any deal after the elections would not be as favorable for Georgia. Aliyev told Inglis that Turkey might well not be able to take its Shah Deniz volumes, so that additional volumes for Georgia could indeed become available. ¶7. (C) Inglis stressed to the Ambassador that the Shah Deniz Consortium was contractually bound as to what it could do with Shah Deniz gas, so that any change to gas distribution would have to be agreed upon by the relevant contractual parties, vice by BP's unilateral fiat - "we don't have the ability to break agreements." Inglis also said that it was his understanding that Georgia's gas needs were closer to 4 million cubic meters a day (mcm/d) than the 7 or 8 that Georgia claimed, and that from technical viewpoint most if not all of this gas could be sent from Azerbaijan if the political decision were made by President Aliyev to incur major economic loss in exchange for the geostrategic goal of supporting Georgia. ¶8. (C) Given the above, Inglis asked the Ambassador to "pass the message to Washington" that there should be "no false hopes" as to the role BP could play in solving Georgia's winter gas woes. Azerbaijan's political willingness to "be flexible" (i.e. to take an economic beating by burning mazut so that it can export gas to Georgia) would be a key determinant in finding enough gas for Georgia. MORE TO DO FOR BP -------------- ¶9. (C) Inglis said that the recent SDX-04 discoveries of gas in the off-shore Shah Deniz mega-field at the deeper, pre-Fasila levels, indicated that the Southern Caspian basin held more reserves than previously estimated. More generally, previously drilled exploratory wells that came up dry could now be reconsidered with the possibility of finds at greater depths, as was happening with Total's current interest in the off-shore Absheron field, where in 2001 Chevron drilled down to 6,500 meters without finding commercially viable reserves. As such, there was a "significant reserve base" still in Azerbaijan, and as such "lots left to do" in developing Azerbaijan's energy infrastructure. When asked about availability of GOAJ gas in light of the various TGI and Nabucco timetables, Inglis said that Azerbaijan both had the resources and the strategic vision of delivering these resources to Europe, and Europe had the demand which could only grow greater, and he was not, therefore, too concerned about timing issuesor of Azerbaijan being 'locked out' of European markets. TURKMENISTAN -------------- ¶10. (C) Inglis said that the West would perforce have to "go slowly" in developing Turkmenistan's energy sector, due primarily to implementation capacity issues in Ashgabat. He compared present-day Turkmenistan to the Azerbaijan of the late 1980s and early 1990s, in that there were only a handful of people in Ashgabat familiar with the "Western mindset." However, he was impressed with GOTX President Berdimuhamedov, who he described as "thoughtful." As for Azerbaijan, he described the change since the early 90s as "phenomenal," much of which he ascribed to the strategic vision of Aliyev father and son. BAKU 00001516 003 OF 003 ¶11. (C) COMMENT: Inglis was "on message" in repeating a number of themes heard previously from BP concerning its activities in Azerbaijan: primarily that it was here for the long haul, and eager to lead the way in the next stage of Azerbaijan's energy sector development, which it sees as being highlighted by ACG PSA extension, access to ACG Deep Gas, and Shah Deniz Phase Two. He also clearly laid down a marker about gas for Georgia. Inglis' optimism contrasts with President Aliyev's continued sharp line about BP's "stealing our oil," and failure to cooperate on gas for Georgia -- an attitude which we believe reflects a newly assertive GOAJ interest in re-defining the terms of engagement with the IOC's. END COMMENT. DERSE