PRESIDENT ALIYEV ON TRANS-CAPSIAN AND EUROPEAN GAS

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000256

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DEPT FOR EUR/CARC AND EB; PLEASE PASS TO USTR

E.O. 12958: DECL: 02/08/2017
TAGS: ECON ENRG EPET PREL PGOV RU TU TX AJ
SUBJECT: PRESIDENT ALIYEV ON TRANS-CAPSIAN AND EUROPEAN GAS
INITIATIVES

REF: BAKU 98

Classified By: Ambassador Anne E. Derse per 1.4 (b,d).


1. (C) Summary: During a February 6 meeting with the US
delegation to the Economic Partnership Commission (septel),
President Aliyev outlined the changing regional energy
picture. Touting Azerbaijan's refusal to bow to Russian gas
policies as "an example for the region" and an act that
"destroyed the myth of Gazprom," Aliyev said that
Azerbaijan's experience in standing up to Russia on gas could
help persuade Kazakhstan to hasten its involvement in the
East-West energy corridor. He said Kazakhstan's oil
ultimately will find its way into the BTC, as it has "no
other choice" but that it will take time, infrastructure and
US persuasion to convince Kazakhstan to join a new
trans-Caspian gas initiative. Aliyev said Azerbaijan could
become a gas supplier to Europe "more quickly than
anticipated" due to Shah Deniz phase II, deep gas from ACG,
and increased production from SOCAR's own holdings, into
which Aliyev would direct SOCAR to focus all of its
investment over the next few years. Yet he worried that
under Russian pressure Turkey could renege on the Istanbul
agreements to redistribute Shah Deniz phase I gas; he also
asked for a public show of support from the US
to an expected reaction and further counter Russian pressure
on energy issues. Aliyev said he made a strategic choice to
reach out to Turkmenistan following Niyazov's death, in hopes
of repairing historically tense relations and bringing
Turkmenistan into the East-West energy corridor. Aliyev
underscored that all of these new initiatives would require
close coordination with and a
strong and public show of support from the United States; the
launch of a new high-level energy dialogue requested by
Foreign Minister Mammadyarov (ref) could be an effective way
to promote an expanded East-West corridor. End summary.


2. (C) During a February 6 meeting with the US delegation to
the Economic Partnership Commission (septel),President
Aliyev outlined the changing regional energy picture. "A lot
still needs to be done on energy," Aliyev told the
delegation. The situation is "complicated," with lots of
players with very different agendas. Azerbaijan's
achievements -- the BTC and SCP pipelines -- are due to
international cooperation. Azerbaijan, with strong US
support, was a pioneer in bringing international capital to
the Caspian region. Yet these projects were not the end;
they were only the first stage of development, Aliyev said.


3. (C) Aliyev noted that Azerbaijan had begun an energy
dialogue with the EU, as symbolized by the October 2006
EU-GOAJ Energy MOU, and had successfully concluded an
Inter-Governmental Agreement (IGA) with Kazakhstan to bring
Kazakh crude into the BTC pipeline. Azerbaijan had worked
with Turkey and Georgia to provide gas that will enable
Georgia to make it through this winter, and it has the
potential to work with Kazakhstan on new arrangements for gas
supplies. Yet "other countries" want to control gas
supplies, and "only Azerbaijan" can be a new source of gas
for Europe, Aliyev said. He noted that Algeria, Russia and
Iran are talking of joining forces to create a new gas
cartel, adding that "we all know what the outcome will be."
Although Azerbaijan is a "small and wounded country,"
Aliyev said "we are open to wider gas cooperation." "Our
goals coincide," he told the delegation; but we need to be
"accurate and consistent" as we explore new areas for
cooperation. "This stage involves other countries, with
other resources and other consumers." Yet this new
cooperation could be important for Azerbaijan and the whole
region -- including the Caspian and Black Sea regions, as
well as Central Asia.


4. (C) EB Assistant Secretary Sullivan, SCA Principal Deputy
Assistant Secretary Mann and EUR DAS Bryza briefed Aliyev on
the energy component of their regional trip, noting that an
inter-agency delegation was traveling to Kazakhstan, Turkey
and Georgia, as well as to an IEA conference in Paris, to
showcase Caspian resources, motivate our European allies to
focus on this region and promote regional cooperation. Mann
noted that Kazakhstan increasingly needs to consider
trans-Caspian options. Russian unwillingness to expand CPC
pipeline capacity is likely to continue, and companies are

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looking for new export routes that do not transit Russia.
The Tengiz field will double production soon and Kashagan is
expected to come on-line in 2011. The Russian attitude
toward Kazakh exports is clear, Mann said, and we have warned
Kazakhstan about Iran. This leaves the Aktau-Baku corridor
as the
only viable new export route for Kazakh oil. We have great
respect for the IGA, and we have encouraged Kazakhstan to put
the conditions in place to start implementing the agreement,
Mann said.


5. (C) The Kazakhs, Mann noted, are under Russian pressure.
"Everyone is under Russian pressure!" Aliyev interjected.
Agreeing, Mann said that above a certain volume, Kazakhstan
will need to develop a pipeline for crude exports, as
shipping will not be economical. Although some in Kazakhstan
believe a five-nation agreement is needed for a pipeline,
neither the US nor Azerbaijan believes this to be true, Mann
said. "That's right," Aliyev affirmed. Kazakhstan's new
Foreign Minister is open to these ideas, Mann concluded, and
this is a likely area for Azerbaijani cooperation. Aliyev
agreed, saying that
"we are working on that." But for Kazakhstan, Aliyev
continued, the best method of persuasion is to have the
infrastructure in place. Nazarbayev agreed to sign the IGA
only after BTC was opened; Kazakhstan likely will join (a new
gas pipeline) only after the commercial prospects and
arrangements for a pipeline are clear.


6. (C) Repeating that "we all feel Russian pressure," Aliyev
noted that Russia had severely pressured Azerbaijan over its
recent efforts to expand gas exports. "That was a clear
signal," he underscored. But Kazakhstan can "easily" join
the east-west corridor, Aliyev said; there is no need for a
five-party agreement on Caspian delimitation. Azerbaijan has
a sea border with Kazakhstan; the two countries could sign an
agreement for new transit and export arrangements. "US
persuasion could be more
efficient," Aliyev said, suggesting that we could resume
trilateral (US-Azerbaijan-Kazakhstan) meetings as had taken
place in London. Kazakhstan is now part of BTC; we need to
do the same with gas. "There are no serious doubts that this
will happen," Aliyev said. "Kazakhstan needs us more than we
need them" because its oil production will top 100 million
tons. "BTC is the only way," Aliyev said. He
noted that Kazakhstan wants to be the OSCE Chair in 2009;
"that shows political ambitions." "They'd like to be
suppliers to the EU," Aliyev said, and the only way is
through SCP, not Russia. Aliyev noted that Russia had
suggested that Azerbaijan sell gas to southern Russia in a
gambit to prevent Azerbaijani gas supplies from reaching
Europe, a proposal the GOAJ was quick to turn down. Unlike
Azerbaijan, Aliyev said, Kazakhstan does not have any other
options. Now, it can only sell gas to Russia for USD 100 per
tcm, when Russia turns around and resells gas to Europe at
USD 300 per tcm. Azerbaijan already is a partner to the EU,
Aliyev said, "I feel how the situation has changed" in
response to Russia's gas policies.


7. (C) Referring to his government's decision not to buy gas
from Russia this year, Aliyev said with evident pride that,
"We are an example. If we survive, they (Kazakhstan) will
see that they can too." And if Kazakhstan joins new
trans-Caspian energy initiatives, Aliyev said, "probably
Turkmenistan will too." Turkmenistan, Aliyev continued,
"needs to be more oriented toward the West." "As a country,
we already accomplished what we had planned; the East Caspian
would be a good addition." But at this
moment, Aliyev continued, trans-Caspian initiatives would
"create more headaches." "We have become exposed to Russian
attacks," Aliyev added, but "we see it in our strategic
interests" to become a transit country, as this will provide
for Azerbaijan's successful long term development.


8. (C) Mann, Sullivan and Bryza underscored that there is a
window of opportunity for trans-Caspian initiatives, for
Kazakhstan and possibly for Turkmenistan. Bryza added that
the new Kazakh Prime Minister Karim Masimov wants to discuss
this issue with the GOAJ. There are real opportunities in
the West -- both in TGI and Nabucco. Azerbaijan's bold
decision not to purchase Russian gas has
changed the strategic picture, Bryza said. ("Yes," Aliyev

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quietly said, pumping his fist with a satisfied smile.)
Bryza noted that a recent "Kommersant" article analyzing the
geopolitical after-effects of Azerbaijan's decision not to
purchase gas from Russia had proven that Russia's
"blackmail policy is a failure." (Aliyev, whose demeanor
visibly perked up during this exchange, said with some
surprise that he had not seen the article.) Outlining the
needs of the TGI and Nabucco projects, Bryza said that up to
16 bcma were required, and Azerbaijani-Turkish discussions
are the critical next step to develop a gas transit agreement.


9. (C) Aliyev said that Bryza's comments were "absolutely
right." The US and Azerbaijan are the "countries that
started this process." Azerbaijan cannot seriously influence
the policies of Kazakhstan and Turkey without the United
States, Aliyev said. "We need joint and coordinated
efforts." But on gas, Aliyev said, "there are too many
participants." According to Georgian President Saakashvili,
there is an "emerging special relationship" between Turkey
and Russia. Saakashvili phoned recently, Aliyev continued,
to express concern that Turkey was not fulfilling its
Istanbul commitments regarding redistribution of Shah Deniz
gas. Azerbaijan has a "message" that Turkey and Russia are
talking, Aliyev said and that is the reason Turkey is not
willing to share gas with Georgia. "We have to deal with
Turkey's ambition to redistribute Azerbaijani gas
everywhere," Aliyev said.
While Saakashvili overcame his early resistance to regional
energy cooperation with Azerbaijan, "Turkish difficulties may
continue." "We don't want Turkey to be a second Gazprom,"
Aliyev continued; "we want to sell gas to Europe." When we
concluded the deal for Shah Deniz phase I gas, Aliyev said,
the gas market was difficult. We can't change those terms.
But Azerbaijan can look ahead to Shah
Deniz phase II, deep gas from ACG, and increased production
from SOCAR's own holdings, due to "several hundred million
dollars" of investment the GOAJ is now making to
significantly and rapidly increase production. In 2007,
Aliyev said, Azerbaijan will produce 1 bcm more than in 2006;
by 2008 it will double gas production to 8 bcma. "We can
become an EU supplier more quickly than anticipated,"
Aliyev said.


10. (C) The Shah Deniz gas problems were a "big surprise"
and "very disappointing," Aliyev said; he acknowledged that
there had been problems and "some tensions" in the GOAJ's
relationship with BP. Putin, Aliyev noted, had been telling
Azerbaijan's partners that the Shah Deniz shutdown proved
that Azerbaijan had been bluffing and does not have the gas
reserves it claims. "We need to figure out what to do with
Russia," Aliyev said. He said that Azerbaijan's decision to
reject Russian gas was a "serious move, the most important
sign of our independence" since 1991. "We were the only ones
not to surrender," Aliyev noted with pride. "We would rather
freeze than surrender to blackmail."


11. (C) This year, Aliyev continued, Azerbaijan needs to
supply gas to Europe and sell some to Georgia. "Russia
wanted to blackmail us but it didn't work." Azerbaijan's
actions, he said, "encourage other countries" and have broad
implications for the regional situation. "We destroyed the
myth of Gazprom," Aliyev continued, "and we will probably see
consequences." Aliyev said Azerbaijan
had "ruined Gazprom's monopoly" and needs to be ready for a
reaction from both Gazprom and the Russian Government. Close
"contact, cooperation and communication" with the U.S. and "a
public show of support, noting Azerbaijan's importance in
global energy security" will be key in this regard. The EU,
Aliyev said, had asked him how. He said that he had
responded, "Through non-energy visits and public
encouragement. It should be clearly stated that Azerbaijan
is a country that is important." "Our regional development
will be influenced by what happened this winter," Aliyev
underscored.


12. (C) Mann noted that Turkey is likely to push for a
trans-Caspian gas pipeline from Turkmenistan. Yet the best
way to demonstrate possibilities for new regional cooperation
is to first conclude an Azerbaijan-Turkish gas transit
agreement. Aliyev responded that Turkey previously had
promised to persuade Turkmenistan to join the East-West
corridor; maybe the situation had changed. Reflecting on

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Azerbaijan's difficult relationship with Turkmenistan, Aliyev
said he made a conscious, strategic choice to send
Azerbaijani Prime Minister Rasizade to President Niyazov's
funeral, in spite of the fact that Niyazov had gravely
insulted him by not sending anyone to Heydar Aliyev's
funeral. "If they continue to look at Azerbaijan as an
enemy, nothing will work. But if Turkmenistan changes,
everything can work," Aliyev said. In response to Mann's
suggestion that there were some hopeful signs emanating
from Turkmenistan, Aliyev said that the new government
appears to be continuing some old practices. Azerbaijan
recently received two diplomatic notes from Turkmenistan:
one inviting Aliyev to Niyazov's funeral and the second
asserting Turkmenistan's claims to a "new field." "I don't
even know which one," Aliyev said with some bemusement.


13. (C) Aliyev believes that Turkmenistan should be more
interested in cooperation than Azerbaijan. From a strategic
point of view, trans-Caspian cooperation with Turkmenistan
would facilitate regional energy negotiations. "We're more
open to cooperation" than Turkmenistan, Aliyev said, adding
that Azerbaijan would even consider giving Turkmenistan a
greater interest in disputed fields if it indicated it were
interested in joining the East-West corridor. As for any
future sub-sea pipelines, Aliyev said that "the demands on
Turkmenistan should not exceed what it can do." Russia, he
noted, "can meddle in Turkmenistan" and the US should only do
"what is necessary now." Aliyev promised to send Foreign
Minister Mammadyarov to Turkmenistan after the Presidential
inauguration to "start contact." With close cultural and
linguistic ties between Azerbaijan and Turkmenistan, there
may be an opportunity to improve relations now.


14. (C) In conclusion, Aliyev emphasized again that strong
partnership between the US and Azerbaijan will predetermine
the outcome of all of these energy issues. The EU, he said,
does not have an energy policy. Large EU member states
"build Black Sea pipelines" and "don't care that the Baltic
countries and others depend on Russia." The US needs to lead
this process. Aliyev added that he would discuss many of
these issues with Saakashvili and Erdogan the next day in
Turkey.


15. (C) Comment: While this meeting made it clear that
Aliyev takes great pride in what he views as his government's
bold, strategic decision not to purchase Russian gas this
winter, it also is very clear that he is aware that there may
be leadership and active engagement, political and technical,
potential negative consequences of this choice. His request
for USG public support, thinly veiled in references to EU
discussions, is reasonable and would further our own
interests. As Aliyev noted,
continued USG involvement is essential to expand the
East-West energy corridor. Foreign Minister Mammadayarov's
expected visit to Washington in late February/early March
offers an opportunity to show the public USG support for
Azerbaijan's energy policies requested by Aliyev, with a
formal launch of the Energy Dialogue requested by Foreign
Minister Mammadyarov (ref),could be an effective way to do
so.


16. (U) A/S Sullivanand PAS Bryza cleared this message.
DERSE