AZERBAIJAN PRESIDENT TELLS DAS BRYZA ALL SHAH DENIZ PHASE TWO GAS TO BE EXPORTED

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000784 SIPDIS SIPDIS E.O. 12958: DECL: 06/13/2017 TAGS: SUBJECT: AZERBAIJAN PRESIDENT TELLS DAS BRYZA ALL SHAH DENIZ PHASE TWO GAS TO BE EXPORTED Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d) ¶1. (C) SUMMARY. In a June 5 meeting with EUR DAS Bryza and Ambassador Derse, President Aliyev said that he planned to meet domestic gas needs with SOCAR domestic gas production, freeing up all Shah Deniz Phase Two gas for export through Turkey to Europe. DAS Bryza told Aliyev of his efforts to convince Hungarian Prime Minister Gyurcsany to "wait three years" until 2015 for Azerbaijani gas for Nabucco, which will put Hungary in a stronger bargaining position with Gazprom. Responding to Aliyev's contention that European potential gas customers were "playing a double game," Bryza said that they were frightened of committing to Azerbaijani gas over Russian gas, only to find that Azerbaijani gas was unreliable. President Aliyev said the overland oil transportation problems stemming from Middle East Petroleum's control of the corridor would go away as he has given the Transportation Ministry an increased role to play in this sector. END SUMMARY. ¶2. (C) In a June 5 meeting, President Aliyev discussed energy, Nagorno-Karabakh and press freedom issues with EUR DAS Bryza and Ambassador Derse (the latter two covered septel). NABUCCO: WAIT 3 YEARS -------------- ¶3. (C). Referring to the March 12 IHT article ("Hungary chooses Gazprom over EU"),DAS Bryza told the President that he recently had a good three hour, one-on-one discussion on energy with Hungarian PM Gyurcsany. Gyurcsany had told Bryza that he believed there would not be enough Azerbaijani gas to start Nabucco by 2012. Bryza told Aliyev that he had told the Hungarian PM to "wait three years;" - starting around 2015 or 2016, Azerbaijan,s production would/could be edging up toward 0 billion cubic meters (bcm) annually, provided investors synchronized their upstream and midstream efforts and optimistic production estimates panned out. In this scenario, Azerbaijan would have 20 to 30 bcm of gas available annually for export past Turkey. Bryza stressed to Gyurcsany that the U.S. was not pressing Hungary to choose Azerbaijan/U.S./EU and Nabucco over Russia, but rather was helping Hungary maneuver itself into a position in which the diversified option of Azeri gas would help Hungary negotiate more mutually beneficial contractual terms with Gazprom. Bryza told Aliyev that the Hungarian PM had said, "let,s make it happen." ¶4. (C) Showing the President a slide from an OME study ("Cost of New Gas Delivery to EU15 Countries by 2020"),Bryza showed Aliyev how Caspian gas made the most economic sense for supplying Nabucco. Bryza said he had met the previous day in Vienna with Nabucco Managing Director Reinhard Mitschek, who told Bryza that "we need a sign" from Azerbaijan, and who also expressed interesting exploring the possible export of Turkmen gas from Block 1 to Europe via Azerbaijan and Nabucco. President Aliyev said when the Nabucco project was originally conceived it was intended for Turkmen and Iranian gas; now, Azerbaijan will participate in Nabucco. He pointed out that when Azerbaijan originally began to develop its gas resources in the late 1990s, "we were only prepared for the Turkish market." Now, "Azerbaijan is ready" to export to Europe. SOCAR will produce 8 bcm in the coming year, maybe up to 10 bcm afterwards. However, BP has "let us down," producing no more than 2.8 bcm from Shah Deniz this year. Aliyev said he would try to maneuver SOCAR into a more operational role at Shah Deniz to avoid future disappointments with BP. EUROPE: TWO-FACED OR SCARED? -------------- ¶5. (C) President Aliyev said the USG and GOAJ seemed most interested in the project of gas diversification to Europe, more so than the Europeans themselves. Europe was playing a "double game," and European gas consumers were "not eager" to pursue Azerbaijani gas. He cited as examples the Hungarian Foreign Minister, who was worried about Gazprom and the threat of gas cut-off, and the Greek President, who said on June 1 that Russia, Greece and Bulgaria would build the Burgas-Alexandroupolis pipeline. Still, Aliyev said the Hungarian FM,s visit to discuss Azeri gas for Nabucco was constructive. ¶6. (C) DAS Bryza said the "Europeans were frightened." As BAKU 00000784 002 OF 002 the Hungarian PM said to him, "I don,t want to ave to choose between Russian and Azeri gas," since if he opted for Azeri gas and Azerbaijan couldn't deliver, "my people will freeze." Bryza said Greek officials have relayed similar sentiments to him. Gazprom has used threats not to renew gas supply contracts and false claims that Azerbaijan has no gas available for TGI or Nabucco to wean potential European customers from the prospect of Azerbaijani gas. Aliyev said that the EU should understand that "Gazprom is not reliable." By 2011 the Russian domestic price of gas will be the market price, and Gazprom will not be able to supply enough gas to meet its commitments. ¶7. (C) DAS Bryza said that the GOAJ had many "great negotiators" who sought to avoid looking overly eager in the fear of bidding down the price of Azerbaijan,s gas. But, Europe was misinterpreting Azerbaijan,s reticent approach as indifference. Aliyev said the main reason for Azerbaijan's plight was Shah Deniz's underperformance to the tune of 2.8 bcm this year instead of 6.5 bcm. "We relied too much on BP, which is why we have increased our domestic production." Aliyev said the goal was to meet domestic gas demand (by 2010 approximately 11-12 bcm) with domestic production, freeing up all Shah Deniz gas for export, which was why the GOAJ was insisting on being the marketer of Shah Deniz Phase II gas. He said he saw Azerbaijan exporting approximately six bcm/a of Shah Deniz gas to Turkey, no more than 2 bcm/a to Georgia, with the rest exported "past Turkey." ¶8. (C) President Aliyev said that delivery of Azerbaijani gas to Greece this year will be a significant step, demonstrating "Azerbaijani gas in Europe." Bryza said that SOCAR's expanded gas production would be a "strong signal" to European markets. Concerning gas to Greece, Bryza said that the Greek government had been upset with MED Babayev's last-minute cancellation of his Athens trip, in order to accompany President Aliyev to Tajikistan. Aliyev said that had he known that Babayev had this commitment in Greece, he would have sent Babayev to Greece. ¶9. (C) Aliyev said the recent Russian-Kazakhstan-Turkmenistan energy agreements, announced when he was in Krakow, were a "bad signal to Europe." Putin timed this announcement deliberately, Aliyev said, to undercut Poland,s energy summit in Krakow, (which was attended by Aliyev, Yushchenko of Ukraine, Saakashvili of Georgia, Adamkus of Lithuania, and Kaczynski of Poland). President Aliyev noted that he had spoken with Turkmen President Berdimuhammedov by phone recently and would be meeting him in St. Petersburg at the upcoming June 10 CIS summit. He had not discussed the issue of Turkmen gas being shipped to Europe via Azerbaijan on the phone, thinking it "premature," but would do so when they met. MIDDLE EAST PETROLEUM -------------- ¶10. (C) DAS Bryza referred to problems of access and transparency in oil shipments through Azerbaijan to Batumi since Middle East Petroleum had increased its role. Bryza said these problems have resulted in decreased volumes moving through Azerbaijan and a loss of Azerbaijan,s market share to Neka in Iran. President Aliyev said it had been thought that a private carrier (i.e. Cross-Caspian, controlled by Middle East Petroleum) would be more efficient, but that it hadn't worked out that way. Now, "the matter had been resolved, and things were like before." Aliyev said Chevron was in favor of the Azerbaijani position, but had been forced by Kazakhstan to use Batumi. Aliyev said that both Georgian terminals (Batumi and Kulavi) must be used, and that Azerbaijan has agreed with Kazakhstan to divide the trans-shipped oil between these two terminals. Responsibility for the corridor would move to the Transportation Ministry. ¶11. (C) Ambassador Derse asked about the status of gas transit talks with Turkey, and who would take the lead for the GOAJ in these talks. President Aliyev said that either SOCAR's Abdullayev or Energy Minister Aliyev, would have the lead. ¶12. (U) DAS Bryza has cleared on this cable. LU