AZERBAIJAN'S OIL COMPANY UPBEAT ON COOPERATION

C O N F I D E N T I A L BAKU 000140 SIPDIS SIPDIS E.O. 12958: DECL: 02/18/2018 TAGS: PGOV PREL ENRG PBTS TU TX AJ SUBJECT: AZERBAIJAN'S OIL COMPANY UPBEAT ON COOPERATION WITH TURKMENISTAN, FRUSTRATED WITH TURKEY ON TRANSIT Classified By: Ambassador Anne E. Derse, (Reasons 1.4 b,d) ¶1. (C) SUMMARY: SOCAR President Abdullayev was very upbeat upon hearing of Turkmen President Berdimuhamedov's willingness to increase bilateral cooperation with Azerbaijan and looked forward to follow up discussions with the USG as soon as possible. He denied European charges that SOCAR was not energetically pursuing commercial contracts for Shah Deniz Phase Two gas, saying that his team was pursuing all major options, but could not finalize any deal until gas transit through Turkey was solved. He expected that the GOT and GOAJ would be able to address this issue after April 1, at which point the price derived for Shah Deniz Phase Two gas from the transit agreement could not be used as a benchmark for the ongoing re-negotiations of Shah Deniz Phase One gas. Foreign Minister Mammadyarov confirmed that SOCAR's arguments that current Turkish proposals would result in commercial losses to Azerbaijan were trumping his geopolitical arguments for early agreement on transit in internal GOAJ discussions. He again urged the USG to appoint a Presidential level energy envoy to counter President Putin's active personal energy diplomacy. END SUMMARY. ¶2. (C) On February 8 and February 12, respectively, Ambassador Derse met with SOCAR President Rovnaq Abdullayev and Foreign Minister Mammadyarov to brief them on Ambassador Mann's January 29 meeting with Berdimuhamedov and her follow up discussions with President Aliyev (septel). ¶3. (C) The Ambassador briefed Abdullayev on Eurasian Energy Coordinator Ambassador Mann's recent trip to Turkmenistan (reftel). Abdullayev agreed that Berdimukhamedov's comments appeared to reflect a significant change in the GOTX attitude. He repeated President Aliyev's observation that if the GOTX were willing to discuss joint Serdar-Kapaz (S-K) development, it meant it is relinquishing claims on the ACG field. VP Nasirov said that Turkmen gas volums flowing westward could enable sanctioning of "two to three pipline projects to Europe." When the Ambassador cautioned that this was not an assumption we believed could be drawn from teh discussion in Ashgabat and asked why Abdullayev thought GOTX's willingness to jointly develop S-K meant GOTX relinquishing ACG claims, Abdullayev walked over to a large map showing all the relevant Caspian offshore fields. Pointing to Serdar-Kapaz, he showed that stipulating GOAJ ownership of any part of it would by definition mean GOAJ ownership on its western side. Since ACG is west of Serdar-Kapaz, by definition ACG would also be in GOAJ waters, Abdullayev maintained. ¶4. (C) Abdullayev said he envisioned 50-50 shared cooperation on S-K based on a Production Sharing Agreement (PSA),similar to the ACG PSA. SOCAR and the GOTX State Gas company would participate as joint owners, and there would also be two or so U.S. energy companies as consortium members (with SOCAR VP Nasirov addition "and not BP"). The companies developing S-K would give the two state companies a percentage of the output as profit oil, as in the ACG PSA. Abdullayev said that he would seek U.S. companies like Chevron and Exxon, who dealth with him "openly and honestly." ¶5. (C) Abdullayev said the three main bilateral issues (GOTX) Block One to Azerbaijan interconnector; joint ownership of Sardar-Kapaz; delimitation) were each and all "solvable from a technical viewpoint." A 60-kilometer interconnector feeding into the existing Azerbaijan offshore pipeline infrastructure could be built in six months, and would work as an interim solution because of spare capacity in Azerbaijan's existing offshore pipeline infrastructure (as not all wells are drilled). ¶6. (C) (C) This interim interconnector would only be able to carry relatively low volumes and only for a limited amount of time, because eventually the full capacity of the pipeline infrastructure would be needed. However this interconnector could set the stage for something bigger and more permanent with higher capacity. In this regard SOCAR VP Nasirov said that a confidential BP study indicated that there could be production of 30 bcm/a from Block One as early as 2017. It should be called something like the "AIOC-Petronas Gas Exchange Line," he stressed, without any mention of the names of either Turkmenistan or Azerbaijan. ¶7. (C) Abdullayev said he would be meeting with BP Azerbaijan head Bill Schrader on February 13 to discuss, inter alia, connecting Block One to AIOC infrastructure. The President of Petronas had also invited Abdullayev to meet to discuss long-term oil supply contracts, which, Abdullayev said, would provide cover for him to also discuss the interconnector with Petronas. ¶8. (C) Abdullayev said as a next step he hoped Ambassador Mann would travel to Baku (preferably before Ashgabat) to brief GOAJ energy interlocutors in detail on his previous Ashgabat visit and to discuss next steps. Gas Supply Contracts -------------- ¶9. (C) The Ambassador said that the USG is hearing increased numbers of complaints from European company representatives that Azerbaijan was moving too slowly in negotiating gas supply contracts for SD2, citing specific comments from OMV, Edison and MOL. In the light of these comments and the recent Gazprom deals in favor of Southstream, many are blaming Azerbaijan for the delay in realizing the Southern corridor poject, i.e. "we're losing Nabucco because of Azerbaijan." ¶10. (C) Abdullayev firmly disputed this charge, saying that his Foreign Investment Section was dealing primarily with gas issues and is in negotiations with companies backing TGI, Nabucco, the Trans-Adriatic Pipeline (TAP) and the Ceyhan-Haifa pipeline. VP Nasirov added though that "it would be good of the Turks heard these same complaints," i.e. it would be good if Turkey were to hear that Azerbaijan was slow in negotiating gas supply contracts, as he felt it would put pressure on Turkey to resolve transit with Azerbaijan. In this regard, the President of Statoil Hydro would be visiting Turkey next week, and SOCAR had told him he should tell his GOT energy interlocutors that it was his impression after talking with the other Shah Deniz partners that Azerbaijan was "not going to sanction SD2 development without clear and transparent transit terms from Turkey." Turkey should get the impression that "Azerbaijan was as stubborn as the Turks" on this issue. SOCAR has asked BP to make similar points in Turkey. ¶11. (C) In this regard, Nasirov said that he would also be talkign with USTDA's Dan Stein about the possibility of a "White Stream" feasibility study. Azerbaijan could not be seen as initiator of this study since it would anger the Turkes, but if Georgia, Ukraine or Romania were to ask for it, this act would also help convince the Turks that Azerbaijan was weighing options that did not involve Turkish transit. ¶12. (C) Referring to Edison, Nasirov said it had done Azerbaijan a service in dissuading Turkey from being a Gazprom-styled buyer/seller, and that it could do a further service in dissuading Turkey from adhering to its "unfair and non-transparent" 15 percent netback proposal. ¶13. (C) VP Nasirov confirmed that part of the reason the GOT wanted to implement its 15 percent netback proposal was to that the resulting sub-market price of Azerbaijani gas could be used as a benchmark by Turkey in renegotiating the price of SD1 gas. (Comment: SD1 gas price is currently under re-negotiation, with the new, more market-based price to start in April). ¶14. (C) Echoing President Aliyev (septel) Abdullayev said that he too expected that gas transit negotiations with Turkey would go forward after April 1, and that it would be "tough." He pointed out that GOT insistence on its netback proposal would mean that out of (for example) 10 bcm/a that transited Turkey for Germany to be sold at USD 300 per thousand cubic meter (tcm),Turkey would have the right to buy 1.5 bcm/a from Azerbaijan. This SD2 gas that could be sold for USD 300 per tcm in Germany and for at least USD 270 in Turkey would have to be sold at the Turkey-Georgian border to Botas at USD 200 (given USD 100/tcm transit price across Turkey),resulting in lost profits for the GOAJ. Abdullayev said that the GOT wants this SD2 gas at USD/tcm so that it can use it as a benchmark price in future gas negotiations, "correcting the mistake" Botas made when it negotiated unfavorable gas supply contracts with Iran and Gazprom, causing gas to be more expensive in Turkey. Abdullayev mused that there were possible "out of the box" solutions to the Turkish transit issue, to include an Azerbaijani company in Turkey buying the SD2 gas and selling it to Turkish power stations. ¶15. (C) Abdullayev said it was the "mechanism and not the amount" of the GOT 15 percent netback proposal that SOCAR found unacceptable. He added that not only SOCAR, but all the SD commercial partners were opposed to this scheme, which would result in significant lost profit in marketing SD2 gas. ¶16. (C) Ambassador Derse thanked Abdullayev for the explanation. However, she stressed that SOCAR must realize the USG's deep concerns over the inroads being made by Azerbaijan's commercial competitors in the gas market that could hurt the viability of the Southern Corricor projects, and underscored that Azerbaijan was running the risk of losing long-term markets. She urged SOCAR to move as quickly as possible to conclude gas supply contracts. ¶17. (C) Abdullayev repeated that "after April 1," when the price of SD2 gas couldn't influence the re-negotiated price of SD1 gas, SOCAR would "have serious discussions with Turkey" to solve transit, and before April 1 Azerbaijan would be "using its big guns" in an effort to prepare Turkey to relinquish this scheme. He said that the Ambassador could relay to Washington that commercial negotiations were underway that SOCAR was confident would lead to the signing of gas supply contracts. SOCAR was talking to TGI (Edison and DEPA),TAP (EGL) and Nabucco (OMB, MOL, RWE),in addition to other energy companies, and had signed confidentiality agreements and received transportation tariff information from them. He confirmed that the Nabucco partners had offered a partnership share to SOCAR and that negotiations were underway in this regards. SOCAR was also pursuing the possibility of partial ownership in TAP with EGL. ¶18. (C) In respose to the Ambassador's questions about recent press reporting citing Statoil desire to sell SD2 gas to Gazprom, Abdullayev said that Statoil executives had told SOCAR as recently as the previous day that there were no negotiations with Gazprom in this regard. ¶19. (C) After the meeting's end, in subsequent brief discussion with VP nasirov, he made the following points: - SOCAR would be seeking to convince the GOT of GOAJ unwillingness to budge on the principle of fair and transparent gas transit through Turkey ("no transit, no gas"). Part of this campaign was the USTDA feasibility study on White Stream; another part was rumors of SOCAR seeking LNG plants for SD2; - The GOAJ had declined to participate with the Government of Hungary in a project to build joint gas storage acilities in Hungary to prevent OMV's entrance ito the Hungarian gas market; - In conversation with the GOT, USG officials should inquire as to whether it seeks to impose this 15 percent netback scheme on all pipeline projects transiting Turkey, to include Nabucco; - In previous conversations with the Botas President SOCAR has offered to sell Botas additional volumes at good prices if it backed off of the 15 percent netback scheme, only to be told by Botas that it needs a pricing mechanism that will "guarante" a lower price, not just SOCAR pledges to this same effect. ¶20. (C) In a February 12 meeting with the Ambassador, Foreign Ministery Mammadyarov underscored that the GOAJ is in the midst of a heated internal debate over Turkish transit issues. SOCAR, he said, is making a strong commercial argument that Azerbaijan would lose billions of dollars in energy revenue if it agreed to Turkey's proposed 15 percent netback scheme. Mammadyarov said that although he continues to argue that it is in Azerbaijan's political and security interests to reach agreement as soon as possible with Turkey on transit, he said his arguments are losing ground to SOCAR's commercial arguments. ¶21. (C) Mammadyarov urged the USG to intensify its engagement with SOCAR on gas supply contracts and more broadly on regional energy issues, and in this context again made a strong plea for a Presidential energy envoy. Noting with concern that European countries are signing deals with Gazprom, Mammadyarov echoed other GOAJ officials in urging the USG to appoint a special Presidential energy envoy to "counter Putin's personal lobbying." He added that the EU Troika, in its recent visit to Baku (septel),had delivered a weak message on energy, seeming most concerned about the implications of new Caspian energy deals for the EU's relations with Russia. Mammadyarov suggested that a high-level U.S. representative to the June 3 Caspian Oil and Gas Show could send a strong signal of support for new gas projects and counter Russian pressure. He asked specifically whether the U.S. Vice President could attend the show. ¶22. (C) COMMENT: SOCAR President Abdullayev confirmed that gas negotiations with various commercial entities involved with TGI, TAP and Nabucco are ongoing, but will not be concluded until transit with Turkey is solved, given the commercial stakes SOCAR sees at issue. We have now heard from both President Aliyev (septel) and SOCAR that GOAJ efforts to reach agreement on transit with Turkey will accelerate after April 1, when the price of SD1 gas is locked down. In the interim, SOCAR is pursuing a strategy of seeking to convince the GOT that it does not view Turkish transit as indispensable for marketing its SD2 gas, and that if Turkey doesn't accept an arrangement whereby it gets the additional gas volumes it needs at a good price from Azerbaijan in an arrangement separate from any transit deal, the GOAJ will either not sanction development or "go around" Turkey. Foreign Minister Mammadyarov confirms that in internal GOAJ debates, geopolitical arguments are not trumping SOCAR's contention that Azerbaijan stands to lose millions of dollars from Turkey's current proposals. 23, (C) To accelerate the conclusion of gas supply contracts to support development of the Southern Corridor, we need to continue to press both Turkey and Azerbaijan to work as quickly as possible towards a transit agreement on mutually acceptable commercial terms. In doing so, we need to take into account that although Azerbaijan has a major geopolitical stake in the realization of the Southern Corridor, it will not be at any cost. At least at present, the GOAJ uniformly tells us the deal Turkey is offering results in major, and unacceptable, commercial losses. Local company representatives and other informed observers generally concur. If USG analysis differs, we are happy to push back, but need the arguments. We also strongly agree with our Azerbaijani interlocutors that given Putin's personal role in energy diplomacy, a senior USG energy envoy, engaging regularly and intensively with top officials in key capitals, is essential to pushing through the difficult political and commercial agreements needed to support realization of the Southern Corridor. DERSE