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