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). BAKU 00001012 002 OF 003 ¶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 BAKU 00001012 003 OF 003 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