Identifier
Created
Classification
Origin
07BAKU61
2007-01-12 15:16:00
CONFIDENTIAL
Embassy Baku
Cable title:  

SHAH DENIZ WELL TO RESUME PRODUCTION, AZERBAIJAN

Tags:  ENRG PREL PGOV IR RU TU AJ 
pdf how-to read a cable
VZCZCXRO7030
PP RUEHAG RUEHBC RUEHDBU RUEHDE RUEHDIR RUEHKUK RUEHROV
DE RUEHKB #0061/01 0121516
ZNY CCCCC ZZH
P 121516Z JAN 07
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 2190
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUCNIRA/IRAN COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
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).

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