AZERBAIJAN: CONOCO-PHILLIPS TERMINATES UMID BABEK

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000026 SIPDIS SIPDIS E.O. 12958: DECL: 11/28/2016 TAGS: ENRG AJ PGOV PREL SUBJECT: AZERBAIJAN: CONOCO-PHILLIPS TERMINATES UMID BABEK PROTOCOL, WILL SUBMIT NEW PROPOSAL Classified By: CDA Jason P. Hyland, Reasons 1.4 (b,d) 1.(C) SUMMARY: Due to FCPA concerns with its Azerbaijan partner company 'Target,' Conoco-Phillips has terminated its protocol with SOCAR to develop Azerbaijan's offshore Umid-Babek field. SOCAR has let ConocoPhillips know that it would welcome another proposal from it to develop Umid Babek. SOCAR also said that it will seek to develop the Nakhchivan offshore gas field before Umid-Babek. In conversations with the Embassy, ConocoPhillips officials have been relatively upbeat about their chances at developing the Umid Babek field with SOCAR and without Target, especially if SOCAR, as anticipated, is unable to develop the Nakchivan field by itself. END SUMMARY. Background: November Meetings -------------- ¶2. (C) On November 29, 2006 Ambassador met with Conoco-Phillips (C-P) Executive Vice-President for Exploration and Production (Europe, Asia, Africa and the Middle East) Bill Berry, C-P Manager,Negotiations and Exploration Contracts, Exploration and Business Development Steve Park, and C-P Baku Office Representative Fidan Aqayeva (at their request),concerning C-P's involvement in the Umid Babek field. Econoff was notetaker. ¶3. (C) Berry told the Ambassador that he had had separate meetings earlier that same day with SOCAR (State Oil Company of Azerbaijan) President Rovnaq Abdullayev, Energy Minsister Natiq Aliyev, Finance Minister Sharifov, and Milli Majlis Deputy Speaker and Chairman of the Permanent Commission on Resources, Energy and Ecology Valeh Alasgarov. Berry said he had known Alasgarov for over a decade, and deemed him a "very tough negotiator, but very straight." Alasgarov told Berry that he was glad that he had not been involved in the Target deal, saying cryptically that seeing C-P involved in this deal "was like seeing my good friend with a prostitute (i.e. Target) on the streets of London." Alasgarov added however that he could not talk about the deal, nor do anything to help C-P. Berry said that Finance Minister Sharifov was even more hands-off when talking with Berry, not asking any questions and making it quite clear that he wanted nothing to do with C-P's troubles with Target. ¶4. (C) Prior to the meeting with SOCAR President Abdullayev, C-P had proposed to SOCAR that the Umid-Babek project be split into its two constituent fields, with C-P working on one in a separate bilateral arrangement with SOCAR, with Target free to work separately on the other field. Abdullayev told Berry that SOCAR would not approve of this arrangement, and would wait for the present protocol with C-P and Target to expire in February 2007 before going ahead with plans to develop the field. Berry told the Ambassador that C-P did not feel it was in its interest to let the matter drag on until February 07, and as such was terminating the protocol with SOCAR and Target. He said that C-P would know "within the next 24-48 hours" whether SOCAR would re-award the whole protocol to Target, or whether C-P would get a chance to rebid. December Resolution -------------- ¶5. (C) On December 19 EconOff met with Conoco Phillips (C-P) Manager Steve Park and C-P VP Tim Wallace (VP-Exploration and New Opportunities, Russia and the Caspian Region),and Ms. Fidan Aghayeva, to discuss recent developments. ¶6. (C) Park said that, despite C-P's belief in November that the protocol's termination was imminent, it was only on the previous day (December 18) that a revised protocol termination agreement was signed by SOCAR, Target and C-P. Socar had revised the draft termination agreement to exclude a confidentiality provision that stipulated confidentiality to survive the death of the protocol. Park said that C-P had acceded to SOCAR's request to exclude this clause from the termination agreement since there was a similar clause in the original protocol, whose validity was stipulated to survive the protocol's cancellation. ¶7. (C) Park said that they had had meetings at SOCAR earlier in the day. One such meeting was with Foreign Investment Division General Manager Vagif Aliyev, who he described as "very positive, very upbeat," about C-P. Aliyev told Park that the Embassy had been quite active in encouraging SOCAR BAKU 00000026 002 OF 002 to work with American energy companies to develop its assets. (Embassy CDA had made such a pitch for US energy companies, not specifically mentioning C-P, to SOCAR President Abdullayev earlier that same day, prior to C-P's meetings at SOCAR.) Aliyev told C-P that "no decision" has been made yet on developing Umid-Babek, or whether SOCAR will seek to do it alone or will look for partners. ¶8. (C) Aliyev also said that SOCAR intended to drill the Nakchivan field next. Park told EconOff that if indeed that were the case, then "C-P would have time with Umid-Babek." For SOCAR to do one well a year would be a "stretch," and it would take SOCAR at least a year to drill Nakchivan. Park said Nakchivan would be a very expensive and "technically difficult" well to drill, and he thought that if SOCAR has "a train wreck" in trying to drill it, then it might be more receptive to C-P's renewed involvement with Umid-Babek. Park said he has heard that Maersk would in some way be involved with Nakchivan field development, but that Total has not sought any involvement, thinking Nakchivan not to possess commercially viable amounts of gas. ¶9. (C) Park said that Aliyev encouraged C-P to put in another proposal to develop Umid-Babek. Park said that based on his conversations with SOCAR that day, C-P would do so, but that he wasn't sure the type of proposal C-P would put forward. He explained that as Aliyev explained it to him, PSAs tended to take longer to get approved, as they needed approval from the Cabinet of Ministers, the Milli Majlis and finally the President. Park said that Aliyev was suggesting that a joint venture, not needing the approval of the Ministers or the Majlis, might be quicker and easier to get approved. Park said he similarly was unsure as to what sort of relationship C-P would posit for itself in this proposal, i.e. as operator, SOCAR partner, or SOCAR subcontractor. ¶10. (C) Park said that C-P had also had a meeting with SOCAR First Vice-President for Geology Khoshbakht Yusifzade, who had previously grumbled to C-P executives that they "had already had two years to develop U-B," but had not done so. However, in this meeting Yusifzadeh was much friendlier, with Park musing that the protocol's termination might have taken some pressure off him. Yusifzadeh confirmed that SOCAR would develop the Nakchivan field before Umid-Babek. Park said that Yusifzadeh was interested in getting Nakchivan and Umid-Babek developed as quickly as possible, and as such on reflection Yusifzadeh thought C-P would be a logical choice to develop Umid-Babek, since C-P and SOCAR had already done much of the technical work beforehand - "it makes sense to do the deal with you." Park said that Yusifzadeh too encouraged C-P to submit a new proposal for U-B development, which given Yusifzadeh's great influence within SOCAR was a significant development. ¶11. (C) COMMENT: Despite C-P having to terminate its protocol with SOCAR due to FCPA concerns, it is relatively upbeat about its chances at developing Umid-Babek with SOCAR and without Target, especially if SOCAR, as anticipated, is unable to develop the Nakchivan field by itself. END COMMENT. HYLAND