SOCAR WILLING TO PROVIDE GAS TO GEORGIA BUT

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001012

SIPDIS

E.O. 12958: DECL: 10/21/2018
TAGS: PGOV PREL AZ ENRG GA
SUBJECT: SOCAR WILLING TO PROVIDE GAS TO GEORGIA BUT
DOESN,T WANT TO BE PLAYED

Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b,d)


1. (C) SUMMARY. According to Azerbaijan's State Oil Company,
Azerbaijan is prepared to provide necessary volumes of gas to
Georgia during the winter months, but prefers to do so on
more commercial vice concessionary terms. According to SOCAR
and BP Azerbaijan sources, Georgian winter gas needs are
approximately seven million cubic meters per day (mcm/d).
Georgia currently has estimated winter gas supplies of at
least 3.7 mcm/d from Azerbaijan and as 'transit gas' from
Gazprom. While Azerbaijan is ready to provide greater
amounts to forestall a humanitarian crisis, SOCAR is
reluctant to incur substantial financial losses by providing
additional gas to Georgia at sub-market prices, particularly
if Georgia can buy supplementary gas volumes (albeit more
expensively) from Gazprom. SOCAR believes that by claiming
that Azerbaijan is 'unwilling' to sell it winter gas, Georgia
is seeking USG political intervention on its behalf in an
attempt to politicize what are essentially commercial
negotiations between it and Georgia. Georgian Embassy DCM
Nikoloz Gugitidze separately told Embassy that Georgia was
having no difficulties securing gas supplies from Azerbaijan
for the winter. END SUMMARY.


2. (U) On October 21, EnergyOff discussed Georgia's winter
gas needs with BP Azerbaijan's Gas Marketing Manager Richard
Ruddiman, and (separately) with SOCAR Marketing
Vice-President Elshad Nassirov, SOCAR Presidential Advisor
Murat Heydarov and SOCAR Head of Gas Operations Kamal
Abbasov. Additionally, on October 21 Poloff discussed energy
issues with Georgian Embassy DCM Nikoloz Gugitidze.


SOCAR - THE NUMBERS



3. (C) Speaking about GOAJ gas supplies to Georgia, SOCAR
Head of Gas Operations Abbasov pointed out that the two
sources of Azerbaijan gas for Georgia are 1) the Shah Deniz
Consortium; 2) SOCAR (i.e. non-Shah Deniz) gas.
Additionally, Georgia receives gas from Russia/Gazprom as in
kind payment for transit services. Using a million cubic
meters per day (mcm/d) as a unit of measurement, he said that:


GEORGIAN WINTER GAS DEMAND: 7 MCM/D


7 mcm/d = Georgian winter gas demand


GEORGIAN WINTER GAS CURRENT SUPPLY: 3.7 MCM/D


1.2 mcm/d = Shah Deniz (SD) gas to be provided to Georgia in
the winter months, up from the current level of 0.6 mcm/d

2.5 mcm/d = SOCAR (non-SD) gas SOCAR intends to sell to
Georgia during the winter months, up from the current amount
of 1.4 mcm/d

1 mcm/d = "transit gas" Gazprom will give to Georgia for
transiting gas to Armenia

3.7 mcm/d = total Azerbaijan gas to Georgia currently
expected for the winter, plus 'transit gas'

Abbasov said that Georgia was seeking 4 mcm/d of Azerbaijan
(non-SD) gas for October, 6 mcm/d for November, and 6.7 mcm/d
for December.


'THEY CAN BUY FROM RUSSIA'



4. (C) SOCAR Marketing VP Nassirov agreed that given the
above numbers, the total amount of Azerbaijan gas (both SD
and non-SD) currently scheduled to be provided to Georgia for
the winter months is 3.7 mcm/d, leaving a supply gap of
approximately 2.3 mcm/a (after transit gas is added to the
Georgian supply).


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5. (C) To fill this gap, Nassirov said "Georgia can buy it
from Russia." Clarifying, he said that if necessary to
prevent a humanitarian crisis, the GOAJ would provide Georgia
as much gas as technically possible, an amount equal to
approximately seven mcm/d of non-SD gas. However, there was
little doubt that Gazprom would sell gas to Georgia,
providing Georgia were willing to pay the customary Gazprom
price to Georgia of approximately USD 275 per thousand cubic
meters (tcm). Nassirov said that Georgian comments that
Azerbaijan was "unwilling to provide it gas" were its attempt
to politicize commercial gas negotiations between it and
SOCAR, to negotiate a better price. In this way, it could,
as in previous winters, buy more relatively inexpensive
Azerbaijani gas, given the Azerbaijan price of USD 250/tcm
for Georgian commercial customers and USD 200/tcm for
non-commercial customers.


6. (C) EnergyOff pointed out that previously SOCAR President
Abdullayev had said that Azerbaijan would meet all of
Georgia's winter gas needs. After reaffirming that the GOAJ
would do so this winter if necessary, Nassirov added that
"much had changed" since these statements was made, to
include the fact that Azerbaijan has substantially less crude
oil than expected due to ACG field's substantial production
problems (NOTE: current ACG oil production is now around
540,000 bpd, down from a pre-incident peak of 900,000 bpd,
and will not exceed 640,000 until and unless problems at the
Central Azeri platform are solved). Lower oil production
means less Azerbaijani fuel oil (mazut),which it burns in
its power plants in increased volumes when forced to provide
Georgia with additional winter gas volumes. Plummeting oil
prices have similarly affected Azerbaijan's willingness to
incur the substantial financial losses it does whenever it
has to sell additional winter gas volumes to Georgia and
burn, and not export for profit, increased amounts of its
fuel oil. While underscoring that Azerbaijan would always be
the supplier of last resort for marginal winter gas amounts
to Georgia, Nassirov strongly denied that there was any
impending crisis - Georgia was simply trying to save money.


7. (C) In an October 21 conversation, BP Azerbaijan Gas
Marketing Manager Richard Ruddiman confirmed the above
SOCAR-provided numbers, adding that:

- Under the contract currently in force, from the Shah Deniz
Consortium Georgia is entitled to an annual volume cap of
approximately 0.4 bcm/a and a daily maximum amount of 1.2
million cubic meters per day (mcm/d).

- Currently Georgia is asking for and receiving 0.65 mcm/d
from the SD Consortium, less than the full daily maximum of
1.2 mcm/d, as Georgia normally only asks for this full amount
of 1.2 mcm/d for the winter months.


8. (C) As for total Azerbaijan gas supplies, Ruddiman said
that total Azerbaijani gas production is approximately 34
mcm/d:

8 mcm/d = Shah Deniz Consortium gas provided to Azerbaijan

8 mcm/d = ACG associated gas provided to Azerbaijan

18 mcm/d = SOCAR production


9. (C) In an October 21 conversation with Poloff, Georgian
Embassy DCM Nikoloz Gugitidze said Georgia was having no
difficulties securing gas supplies from Azerbaijan for the
winter.


10. (C) COMMENT: The differing accounts we hear in Baku and
Tbilisi about the status of gas supplies from Azerbaijan to
Georgia appear to be heavily influenced by commercial
concerns on both sides. Commercial negotiations between
SOCAR and Georgia on winter gas amounts and prices is
ongoing. President Aliyev has repeatedly stated that he is
fully aware of Georgia's strategic importance for Azerbaijan
and that he is willing to do what is necessary to ensure that
Georgia has sufficient winter gas. Azerbaijan has proved as
much by its actions in recent years, providing gas at very
favorable prices to Georgia while absorbing substantial
losses by burning mazut from oil Azerbaijan would have
otherwise sold at high global prices. However, Azerbaijan

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is unwilling to take a major financial hit on Georgia's
behalf unless absolutely necessary. SOCAR, at least, feels
that that point has not yet arrived. The Russians will
continue to pressure Azerbaijan, as they have in the past,
about gas sales to Georgia. For Azerbaijan to cede to such
pressure would be a major shift in policy, and not one we
anticipate based on all indications to date. END COMMENT.
DERSE