SHAH DENIZ WELL TO RESUME PRODUCTION, AZERBAIJAN

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000061 SIPDIS SIPDIS DEPARTMENT FOR EUR DAS BRYZA E.O. 12958: DECL: 01/11/2017 TAGS: ENRG PREL PGOV IR RU TU AJ SUBJECT: SHAH DENIZ WELL TO RESUME PRODUCTION, AZERBAIJAN STILL SEEKING GAS OPTIONS Classified By: Acting DCM Joan Polaschik per 1.4 (b,d). ¶1. (C) SUMMARY: On January 15 BP plans to resume production at the first Shah Deniz well, where production has been ceased since mid-December due to a leak, although a BP executive questioned whether Shah Deniz production could play a significant role in meeting regional winter gas needs. Once Shah Deniz production resumes, SOCAR will continue negotiations with Gazprom. The GOAJ will seek to make up an approximate daily gas deficit of eight to ten million cubic meters in part by increased burning of fuel oil in its power plants, which in turn will necessitate decreased oil exports and oil income. SOCAR Vice-President Elshad Nassirov, the SOCAR official responsible for Gazprom negotiations, believes that even at USD 235 per thousand cubic meters the GOAJ should buy gas from Gazprom and seek to fulfill GOAJ Shah Deniz contractual obligations to Turkey in 2007 vice 2008, so as to minimize the losses to Azerbaijan due to the difference between the low price at which it must sell to Turkey and the increasingly high market price of gas. Nassirov asked the the USG to use its influence with Turkey to encourage Turkey to agree to redistribution of 2007 Shah Deniz gas. He also asked EnergyOff for USG reaction if the GOAJ were forced to buy gas from Iran. According to Statoil, Turkey is not ready to receive Shah Deniz gas nor does he expect to be ready in the near future, and as such there will be a defacto 'redirection' of Shah Deniz gas to Azerbaijan and Georgia once produciton resumes. END SUMMARY. SD01 Back Online Jan 15 -------------- ¶2. (C) On January 11 a BP executive involved with Shah Deniz told EnergyOff that BP is in the process of plugging the leak that led to the mid-December 2006 shut-in and production stoppage of Shah Deniz well SD01. Testing showed the leak to be non-structural and less serious than BP had feared. As such, BP expected to have the SD01 well up and running on January 15. If it opens as expected, after a short ramp-up, this well will produce approximately 5.7 million cubic meters/day (mcm/d). The BP executive said he expected the second Shah Deniz well to begin production in early March, with the third well to start possibly in late April, although he wasn't sure about this third date. He added that in his personal opinion any trilateral conversation among Turkey, Azerbaijan and Georgia about redirection/redistribution of Shah Deniz gas would be premature, and should wait until after SD01 has a 'track record' of production. He also said that as promised BP was "pushing as much associated ACG gas as it can" to SOCAR in the first quarter of 07. Currently, this amount equals 8.3 mcm/d. ¶3. (C) On January 12 EnergyOff met with SOCAR Vice-President Elshad Nassirov. He gave EnergyOff the following numbers about Azerbaijan's winter gas supply and demand: Total GOAJ Demand (mcm/d): 38-40 Total GOAJ Gas Supply (mcm/d): 29.8 - Gazprom: 0 (but approximately 4.1 if they are able to come to an agreement) - Associated ACG: 8.3 - Stored gas: 8 - SOCAR: 13.5 Total Shortage (mcm/d): 8.2 to 10.2 FUEL OIL -------------- ¶4. (C) Nassirov said that Azerbaijan would seek to make up for this gas supply gap by using increased amounts of fuel oil in place of gasoline in Azerbaijan's power stations. In this regard, he confirmed press reports that SOCAR would cancel its January crude oil exports from Novorossiisk. ¶5. (C) Nassirov said that of the 2.5 million tons of non-ACG oil that Azerbaijan would produce in 2007, it would use 1.7 million tons to make fuel oil, exporting only 800,000 tons. 1.7 million tons of oil would yield 700,000 tons of fuel oil, which would yield the equivalent of 0.8 bcm/a. (Note: In October 2006, Presidential Energy Advisor Asadov had said that Azerbaijan could use approximately 2 million tons of oil to make approximately 1.2 million tons of fuel oil, which would be the equivalent of 1.8 to 2.0 bcm of gas.) Nassirov said that the recent tripling of electricity prices was also expected to decrease consumption, which would in turn BAKU 00000061 002 OF 003 decrease the need for fuel oil and gas in the power stations. ¶6. (C) Nassirov discounted a January 9 'Azertag' news story saying that 'Azerigas' of Azerbaijan and 'Botash' of Turkey were scheduled to sign a Shah Deniz gas production sharing agreement in Istanbul the week of January 15. He pointed out that Azerigas was not authorized to enter into any agreement with any other foreign entity and that the Turkish Cabinet of Ministers must approve any division of Shah Deniz gas volumes. He said that Azerbaijan had postponed the planned December 26-27 Energy Minister trilateral in Istanbul because the technical problems with SD-01 had rendered such a meeting unnecessary. He said that once Shah Deniz resumes production on January 15, the GOAJ would probably seek to turn this trilateral meeting back on. GAZPROM AND GEORGIA -------------- ¶7. (C) Nassirov said that Georgia had erred in acquiescing to a price of 235 USD per thousand cubic meters (tcm) with Gazprom, adding that its caving in hurt other CIS countries in their negotiations with Gazprom. He said SOCAR information from within Gazprom indicated that Gazprom would have taken a price from Georgia of USD 211/tcm. Instead of the five Georgian consumer companies negotiating individually with Russia, the Georgians should have "gone to Moscow as a single buyer," to demand a more favorable price. ¶8. (C) Nassirov confirmed that a deal was reached whereby Georgia was to receive from Azerigas 3 mcm/d for ten days each month for January through March. (Note: Azerbaijani trade press indicated that under the deal Georgia will receive 90 mcm over a 90 day period, at USD 120/tcm, with the gas to be sent at 3 mcm/d between the tenth and twentieth of each month.) He was not sure whether the gas had begun to flow. (A January 12 story in 'Turan' said that Azerbaijan injected gas into the Hajigabul-Gazakh-Gardabani pipeline on January 11 at 11 AM and that it reached the Georgian border four hours later. Turan reported that Georgia cannot receive this gas from Azerbaijan due to a damaged pipeline on Georgian territory, and that Georgia was trying to repair the pipeline.) ¶9. (C) Regarding Gazprom negotiations, Nassirov said that SOCAR was seeking 2.5 bcm at USD 149/tcm. He said that SOCAR's negotiations with Gazprom were still open and that the Baku-based Gazprom representative was calling him daily. He said that these calls belied Gazprom's earlier contentions that they might not have gas to sell to SOCAR due to "gas sales to Finland." However, SOCAR would not resume active negotiations with Gazprom until after Shah Deniz production resumed on January 15, since the resumption would put SOCAR in a stronger position. Nassirov said that "the Russian mentality" is such that they seek to negotiate when the other side is "on his knees," and that Russia would like nothing better than, for example, to negotiate with SOCAR when Azerbaijan's gas storage runs out (in 137 days, at 8 mcm/d with 1.1 bcm in storage). ¶10. (C) Nassirov said that in his personal opinion SOCAR should buy Gazprom gas even at USD 235/tcm. Nassirov said that for economic reasons Azerbaijan still hoped to fulfill its obligations to provide Turkey with 2.5 bcm in 2007. He pointed out that if the GOAJ is forced to give this same amount to Turkey in 2008 vice 2007 it would cost the GOAJ much more, given the increasing difference over time between USD 120/tcm (the price of the 2.5 bcm of Shah Deniz gas for Turkey) and USD 260/tcm (the 2007 Turkish market price) and 400-450/tcm (an approximate 2008 Turkish market price). He said that in his personal calculations, the total costs to the Azerbaijan economy of not buying gas from Gazprom could be over one billion dollars. ¶11. (C) Nassirov said that the GOAJ might still be forced to buy some gas from Iran, and asked if the USG would have any problem were the GOAJ to do so. He added that Iranian gas, at around USD 245-250/tcm, was even more expensive than Russian gas. He agreed that any gas from Iran would come after the 2007 winter, but added that even when the winter was over Azerbaijan was still going to be facing a gas deficit situation. He also repeated earlier requests of the USG to use its influence with Turkey to encourage Turkey to agree to redistribution of 2007 Shah Deniz gas. Statoil: De Facto Redirection -------------- BAKU 00000061 003 OF 003 ¶12. (C) In January 12 conversations with Statoil executives involved with Shah Deniz, EnergyOff was told that although Shah Deniz production was due to resume o/a January 15, the Azerbaijan Gas Supply Company (AGSC -- the marketing arm of Shah Deniz, led by Statoil) still has not received any word from Botas that it is ready to receive gas. Nor has Botas begun to receive any commissioning gas, a process which will last at least six weeks. The Statoil executive told EnergyOff that he does not expect Botas to be nominating volumes anytime soon, and as such there will be defacto redirection of Shah Deniz gas from Turkey to Azerbaijan and Georgia. The executive said as best as he knew, there had been no movement on trilateral talks on Shah Deniz gas redirection since mid-December. ¶13. (C) COMMENT: The earlier than anticipated resumption of Shah Deniz production (if it occurs) is good news, but Shah Deniz gas will not likely factor significantly into plans for coping with the regional winter gas shortage. As expected, by burning increased fuel oil Azerbaijan seems to be finding a way to deal with its gas supply shortage, although it still might decide it is economically viable to buy gas either from Gazprom or Iran. END COMMENT. HYLAND