PM NOGHAIDELI TALKS TOUGH ABOUT BP AND AZERI GAS

C O N F I D E N T I A L TBILISI 002498 SIPDIS SIPDIS STATE FOR EUR/CARC AND EEB/ESC/IEC E.O. 12958: DECL: 10/04/2017 TAGS: ENRG EPET GG AJ RU AR SUBJECT: PM NOGHAIDELI TALKS TOUGH ABOUT BP AND AZERI GAS Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). ¶1. (C) On October 4, the Ambassador met with Georgian Prime Minister Noghaideli. Noghaideli told the Ambassador that shortly before he went to Baku on September 27-28 for a meeting of the Georgian-Azerbaijani Economic Commission, he received word from the Azerbaijanis that there would be no chance of finalizing an agreement for supply of Azeri natural gas to Georgia over the winter. The reason, Noghaideli said, was BP's decision to reduce gas supplied to Azerbaijan from the ACG field, leaving less gas available for Azeri and Georgian use. Noghaideli said that BP's chairman is coming to Baku on October 19 to meet with the Azeri leadership on future development of oil and gas reserves in Azerbaijan. He expects the negotiations to be difficult. In fact, he believes that BP is "blackmailing" the Azeris by reducing ACG gas output, in order to gain an advantage in discussions of new PSA's for future oil and gas output. Noghaideli said bluntly that if BP fails to negotiate in good faith with Azerbaijan and its behavior interferes with Georgia's ability to receive Azeri gas, Georgia will "create problems" for BP and its consortium in their use of the SCP and BTC pipelines and the rail route to Supsa. (Comment: Noghaideli knows that Azerbaijan is committed to helping it through the coming winter to the extent it can. His threat to make trouble for BP is clearly intended to bolster the negotiating position of his friends in Baku against BP. The outcome of the October 19 talks between BP and the Azeris will clarify whether any action by the USG is warranted.) ¶2. (C) Noghaideli said that Georgia has received no Azeri gas other than its allotment for transit through the SCP pipeline since September 1. It is once again dependent on Russian gas to fill its needs completely. He fears that Russia will use the situation to pressure Azerbaijan and Georgia for its own ends. Depending on the weather and demand in Georgia, Noghaideli said that he expects Georgia to soon be able to obtain from 70 to 100 percent of its winter gas needs from Azerbaijan. Realistically, he thinks Azerbaijan won't be able to deliver 100 percent this coming winter. However, a new contract was signed with Russia in July, which will provide 200 million cubic meters from July 2007 to August 2008 in return for transit of gas to Armenia from Russia. He thinks Georgia can fill its eight million cm/day winter gas demand with five million cm from Azerbaijan and three million from Russia. Noghaideli refused to disclose how much he expects Georgia to have to pay Azerbaijan for gas. Unofficial estimates range from USD 140 to USD 170. Noghaideli said that the Azeris have spent USD 15 million to increase the capacity of an existing pipeline (other than SCP) into Georgia. ¶3. (C) Noghaideli discussed Armenia's dealings with Iran on natural gas in response to a question by the Ambassador. He said that the Armenia-Iran deal is structured as a swap of gas for electricity, that supplies one-third of Armenia's winter gas needs. However, the exchange does not work well because Iran needs electricity in the summer rather than winter. Armenia's remaining gas supply comes from Russia, and Noghaideli said that Armenia pays only USD 64 in cash per thousand cubic meters, with the rest of the USD 110 price coming in barter and other complicated exchanges. In any event, he said, there is no way Iran can undercut Russia's price, in some respects because its deal with Turkey commits it to offer no lower price for gas to Armenia than it offers to Turkey. In the end, he said, the Iran-Armenia pipeline is intended to insure against a cutoff of gas to Georgia by Russia that would stop the flow of Russian gas to Armenia. TEFFT