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

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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