AZERBAIJAN: SOCAR SAYS USG MUST HELP WITH

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000173

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/27/2017
TAGS: ENRG AJ TU GA PREL PGOV
SUBJECT: AZERBAIJAN: SOCAR SAYS USG MUST HELP WITH
KAZAKHSTAN, TURKMENISTAN ENERGY

REF: BAKU 132

Classified By: DCM Jason P. Hyland, Reasons 1.4 (b,d)


1. (C) SUMMARY: In a January 25 meeting with the Ambassador,
SOCAR President Rovnaq Abdullayev defended the recent rise in
energy prices, saying that energy could not be sold below
cost and that prices had to be normalized. The GOAJ was
keeping the public in the dark about the "huge expense" of
converting oil to heavy fuel for use in power plants, as a
result of avoiding buying gas from Gazprom. In addition to
its own gas reserves, the GOAJ was looking to Turkmen and/or
Kazakh gas to meet the European demand for Caspian gas. For
Caspian gas to move to Europe a transit regime agreement with
Turkey was essential, and Abdullayev asked for USG help in
this regard. The GOAJ and related companies were ready to
move on an Intergovernmental Agreement, but lack of progress
was due primarily to Kazakh political considerations and
differences between the government and the companies
involved. Abdullayev welcomed news of the February 7
US-Azerbaijan "Energy Diplomacy Dialogue" as a way to "push
things forward." He said that Azerbaijan would have the ten
billion cubic meters of gas ready to provide to the Nabucco
project o/a 2012, and said that SOCAR was considering
becoming the sixth Nabucco partner. END SUMMARY.


2. (C) On January 25 the Ambassador met with SOCAR President
Rovnaq Abdullayev. Also present were SOCAR Foreign
Investments Division General Manager Vagif Aliyev and
EnergyOff (as notetaker).

ENERGY PRICE RISES ARE GOOD
-------------- -


3. (C) Concerning the January increase in energy prices as
dictated by the Tariff Council (ref a),Abdullayev said that
the government had been selling energy below cost and needed
to 'normalize' these prices - "for over ten years no one
wanted to do these changes - reforms are always difficult."
But the energy sector needed extensive reforms, to include
registration and fee collection. He said that "the people
understand" that the price increases will help Azerbaijan's
development, "will make the energy sector more efficient and
help attract more foreign investment." Non-targeted
subsidies are bad, and stop development. Part of the GOAJ's
efforts would be to teach Azerbaijanis to economize in their
domestic energy use. The GOAJ used 600 to 700 million manats
to eliminate these energy subsidies, and President Aliyev's
economic decrees to increase salaries will cost the state
budget over one billion manats, whereas increasing the gas
prices will result in only 200 million manat additional
government revenue. If AzerEnergy has one hundred percent
collection rates, the increased electricity prices will
result in additional 150 to 200 million manat government
revenue.

ENERGY CORRIDOR
--------------


4. (C) Were it not for the production problems with Shah
Deniz, Abdullayev said that Azerbaijan and Georgia would be
experiencing energy security, no longer dependent on Russia.
Despite these Shah Deniz problems, the GOAJ has chosen to
refuse the Russian gas being offered at USD 235 per thousand
cubic meters, instead refining its own oil, originally
intended for export, for use as mazout in domestic power
plants in place of gas. Abdullayev said that this strategy
is resulting in a "huge economic loss" for the government,
about which the public is being kept in the dark. In the
longer term, Abdllayev was confident that the gas situation
willbe normalized, with the goal being the GOAJ covering its
own gas energy needs by the end of 2008. In this regard,
SOCAR would pursue an ambitious program to expand its own
domestic gas production. He said that the GOAJ's first
priority was the domestic market, with any surplus gas to be
exported to Europe. As for Georgia, he said that the
government wants to help, but is also aware of the criticism
that the government sells gas cheaply to Georgia while
charging its own people more. Meanwhile, Abdullayev said
that Russia was "not sleeping," and had its own plans to
counter Caspian gas from reaching Europe.

TURKMENISTAN/KAZAKHSTAN
-------------- --


5. (C) Abdullayev said that he sensed 'new opportunities'

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for the Southern Energy Corridor. Abdullayev said that the
SCP gas pipeline was ready and that the "Southern Corridor
was working." As for marketing Shah Deniz gas, SOCAR was in
ongoing negotiations with DEPA and Edison re the TGI
pipeline. He had also had "good discussions" with the
visiting OMV CEO Ruttenstorfer the previous day (ref b),whom
he told that starting in 2012 approximately 10 bcm of Shah
Deniz gas would be available for export to Europe (2 bcm/a to
Greece and 8 bcm/a to Italy). However, Shah Deniz would not
be sufficient for both TGI and Nabucco, and as such
Azerbaijan was seeking to develop other domestic fields.


6. (C) Even with increased domestic gas production,
Abdullayev said that it would be important for the GOAJ to
talk with Kazakhstan and Turkmenistan about getting their gas
transiting westward. Although "Russian and Iran wouldn't
like it," Abdullayev stressed that the best route for Turkmen
gas was through Azerbaijan, and he asked for USG help in
convincing Turkmenistan to look westwards for its gas sales.
Abdullayev and the Ambassador agreed that construction of an
approximately 80 kilometer pipeline to connect offshore
Turkmen fields to the Azerbaijani gas pipelines would be a
relatively easy and inexpensive first step. Concomitantly,
Abdullayev added that Turkey had to be ready, both
technically and in terms of an equitable transit regime, to
transit any gas coming from across the Caspian. Giving
Abdullayev the latest official statements by State Department
spokesman Boucher on Turkmenistan, the Ambassador said that
the USG was "very interested" in a new relationship with
Turkmenistan, that it supported multiple gas export pipelines
for Turkmenistan, and that it was looking forward to working
with Azerbaijan in this regard. She added that the USG was
particularly interested in the offshore 'Block Number One"
field, where Petronas is the operator.

ENERGY BILAT
--------------


7. (C) The Ambassador said that a high-level delegation was
coming to Azerbaijan February 5-7, both to launch a bilateral
Economic Partnership Commission and also to initiate a new
dialogue on energy. The USG proposed a meeting on February 7
to discuss bilateral energy issues, with the USG participants
representing "all parts of the puzzle:" EB A/S Sullivan, SCA
PDAS Steve Mann (responsible for Kazakhstan and
Turkmenistan),and EUR DAS Bryza, and these interlocutors
would be quite interested in hearing his opinions.


8. (C) Abdullayev said that such a high-level visit would
help "push things forward." He didn't have much insight into
Turkmenistan, although he added that during Soviet times
Turkmen energy production was administratively under
Azerbaijani supervision. At one point after independence
Petronas had proposed to President Niyazov a joint project
with SOCAR, but Niyazov turned down the project due to SOCAR
involvement, even though the resulting project without GOAJ
participation was far more expensive than it would have been
otherwise. Abdullayev said there were other occasions where
Turkmenistan incurred vastly increased expenses rather than
allow Azerbaijani participation in the Turkmen energy sector.



9. (C) With Niyazov,s passing, SOCAR was still keenly
interested in helping Turkmenistan with developing its energy
infrastructure. Abdullayev said that SOCAR was ready from a
technical viewpoint; what he was waiting for was a political
agreement that would allow him to go forward. Most of
Azerbaijan's large energy-related construction projects were
drawing to a close, and Abdullayev said he did not want to
lose the trained workforce - "if we stop for one or two
years, they will go." The Ambassador repeated that there
would be a strong new effort at energy diplomacy from the
USG, that the upcoming February 7 meeting would be very
important in this regard, and she asked Abdullayev to think
over what issues the GOAJ should address in such a meeting.

HGA
--------------


10. (C) Abdullayev said that no concrete decisions had been
made concerning an HGA, and that Kazakhstan seemed "unready"
to proceed. The problem seemed to be between the Kazakh
government and the various partners, which has resulted in a
delay in the start of Kashagan until 2011-2012. The Kazakh
government wants to build the related infrastructure in
Kazakhstan, vice allowing some of the infrastructure to be

BAKU 00000173 003 OF 003


built in Azerbaijan, which was slowing down the process and
increasing expenses. The Ambassador asked what the USG could
do to move the process forward, to which Abdullayev replied
that he could not tell Kazakhstan how to best act in its own
interest, adding that Azerbaijan was ready to ship Kazakh oil
whenever Kazakhstan was.

TURKISH TRANSIT
--------------


11. (C) Abdullayev said the next scheduled discussions with
Turkey are to be o/a February 6, at which time redistribution
of Shah Deniz gas will be discussed. He envisioned that by
summer Shah Deniz gas would be going to Turkey, and some gas
through Turkey to Europe. At this point the GOAJ was not
discussing transit issues with the GOT. The GOT thinks that
if a transit arrangement is worked out with GOAJ, then Iran
also will seek one with Turkey. When the Ambassador asked
how the USG could help facilitate GOAJ-GOT dialogue on a
transit regime, Abdullayev said that the USG should 'send a
message' to Turkey to encourage its willingness to engage on
this issue, which was the key to the whole "Southern
Corridor" project. There also has to be a new agreement
among Botas and the Azerbaijan Gas Supply Company (AGSC - the
marketing entity for Shah Deniz gas) for transit of
additional (i.e. Phase Two) Shah Deniz gas. There also needs
to be an additional agreement for the 300 mcm of GOAJ gas
earmarked for Greece, which could be either Shah Deniz gas or
other SOCAR gas.

NABUCCO
--------------


12. (C) In response to the Ambassador's question, Abdullayev
said that there would be 10 bcm of export gas available for
the Nabucco pipeline in 2012. He said that he had had a very
positive meeting with the head of OMV, who had paid his first
visit to Azerbaijan (ref b). Pointing out that the Nabucco
Project has five partners each with a twenty percent share,
Abdullayev said that SOCAR might well seek to become the
sixth Nabucco partner.

HOW MUCH GAS?
--------------


13. (C) In response to the Ambassador's question about gas
reserve estimates, Abdullayev said that Shah Deniz has over
one trillion cubic meters of proven reserves, and that GOAJ
as a whole has 2 trillion cubic meters of proven reserves and
4-5 trillion cubic meters of estimated but not proven
reserves. He said estimates of ACG deep gas were above 500
thousand billion cubic meters.


14. (C) COMMENT: The visit of OMV CEO Ruttenstorfer to Baku
(ref b) and his meeting with Abdullayev were useful in
focusing SOCAR attention on gas quantities that need to be
available starting o/a 2012. Abdullayev's comments about the
need to draw in Kazakhstan and/or Turkmenistan gas also
indicate his awareness that for significant gas to be
available for export west in the short- to mid-term, in
addition to developing Shah Deniz Phase Two, ACG Deep gas and
other domestic reserves, Azerbaijan needs to look east across
the Caspian. END COMMENT.
DERSE