AZERBAIJAN: AMBASSADOR MANN TALKS ENERGY WITH

C O N F I D E N T I A L BAKU 000191

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/02/2018
TAGS: PGOV PREL AJ TU TX ENRG
SUBJECT: AZERBAIJAN: AMBASSADOR MANN TALKS ENERGY WITH
PRESIDENT ALIYEV

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


1. (C) SUMMARY: President Aliyev seeks enhanced cooperation
with Turkmenistan on offshore energy development, and is
willing to be minority partner with the GOTX in developing
the Serdar-Kapaz field. Aliyev seeks concrete action from
Turkmenistan showing it is interested in such cooperation,
and agreed that GOTX approval to be part of a USTDA
feasibility study on cross-Caspian gas transit would be such
a step. Eurasian Energy Coordinator Mann said President
Aliyev and Azerbaijan could provide a good example to
Berdimuhamedov of both how to invite foreign energy companies
into a productive partnership, and how to conduct balanced
relations with Russia, and urged Aliyev to strengthen his
relationship with Berdimuhamedov in order to facilitate
bilateral cooperation. Mann and Aliyev agreed on the need
for BTC expansion to 1.8 million barrels a day and possibly a
'second BTC' to handle increased Kazakh oil volumes. In this
regard Mann urged Aliyev to approve intermediate BTC
expansion to 1.2 mmbd. Aliyev said GOAJ is concerned about
possible GOAJ financial losses and is delaying approving
intermediate expansion to 1.2 barrels a day until the ACG
Partners "clarify the situation." Aliyev said that currently
Azerbaijan has "no gas for Georgia," but that if the ACG
Partners were to re-inject less, it could provide Georgia
with gas. On gas transit through Turkey, Aliyev repeated
that the GOT insistence on its 15 percent netback scheme was
preventing timely pursuit of commercial contracts for
Azerbaijani gas. END SUMMARY


2. (C) On February 25 Ambassador for Eurasian Energy
Diplomacy Steve Mann and Ambassador Derse met with President
Aliyev to discuss energy issues. Also present were USTDA
Regional Director Dan Stein, USTDA Azerbaijan Desk Officer
Jamie Merriman, and Embassy Energy Officer.

NEW POSITION
--------------


3. (C) Ambassador Mann said in his new position as Ambassador
for Eurasian Energy Diplomacy he will be coordinating the USG
effort on energy, working as part of a team with analysts and
policy-makers in Washington and with Ambassadors in the
field. Mann noted EUR DAS Bryza's depth of knowledge on
energy issues and advised that he would continue to play a
special role and continue as the lead on Nabucco and in
handling the European gas downstream.


4. (C) One specific focus of Mann's would be Turkmenistan,
which he thought was "in play." This was a "fascinating
time" for Azerbaijani energy development. The first phase
was focused on the "Contract of the Century'" the second
phase would focus on dealing with new volumes, from Shah
Deniz Phase Two, ACG DeepGas, Kashagan and Tengiz, plus
(hopefully) Turkmensistan. President Aliyev was happy to
hear of Ambassador Mann's new position - "it is good you are
back, because we can't do it ourselves." The energy
situation was more complex now than at the time of BTC's
conception - there were "more players, and it is more
difficult to bring these players together."

SOUTHERN CORRIDOR
--------------


5. (C) Aliyev said Europe must understand that Azerbaijan can
provide "large gas volumes." Not only was there Shah Deniz
Phase Two (SD2),but also the Inam field was currently being
developed. Azerbaijan's providing energy to Europe will
create a "new psychology" in Kazakhstan and Turkmenistan,
showing them that sending Caspian energy westwards (vice
through Russia) "doesn,t depend on them; it'll happen
anyway." It was imperative to bring together all elements,
to include Central Asia, Turkey and the European Union.
Azerbaijan should lead the process ("we must be the coach and
the captain"),since it was "in the middle" and both a
producer and a transit country. It also had the experience
that Europe and Central Asian countries lack, and has all the
infrastructure and relating agreements in place. Aliyev
cautioned that time was of the essence: "if we lose time, we
lose the game." In this regard, solving gas transit through
Turkey was crucial, since once that issue was resolved,
Azerbaijan could start "serious negotiations" with other
countries.


6. (C) Repeating that "we have the gas," Aliyev said Socar
has increased its domestic gas production twice. Azerbaijan
was currently producing a total of 27 billion cubic meters
(bcm/a) annually (Comment: inside and outside the PSAs). BP

would re-inject 11 of those 27 bcm into the ACG field. "BP
doesn't want to give us this gas for free," which is why they
are re-injecting it. Returning to one of his favorite
themes, distrust of BP, Aliyev said that "I don't know BP's
agenda..they are active in Russia...there are rumors...I have
my suspicions..." Aliyev said that if there were agreements
in place, "Nabucco would have gas today." Azerbaijan has "17
to 18 bcm/a available for sales" (Comment: it is unclear
where President Aliyev is getting these numbers, unless he
assumes that all ACG associated gas is available for sale).


7. (C) As for ACG Deep Gas, Aliyev said "Azerbaijan will do
it," i.e. SOCAR, vice BP. This way Azerbaijan will not have
to apologize for BP's performance failures, as it did when
Shah Deniz Phase One had start-up delays. SOCAR will also
start the offshore drilling Umid-Babek field soon - "we can
do it easily, and easier for you to work with us since there
is no consortium." (Comment: According to BP, SOCAR is
technically unable to develop ACG Deep Gas. Additionally,
according to the terms of the PSA the ACG Partners, who have
the right of first refusal and the right to match any offer
on the table to develop ACG Deep Gas, can for all intents and
purposes prevent anyone else from developing it until the PSA
runs out in 2024. As for SOCAR's developing Umid, BP points
out that SOCAR, under tremendous pressure from the President
to have a "success," are developing only a small portion of
the field, with negligible amounts expected to be extracted).



8. (C) Aliyev said his recent trip to Hungary was good,
although he described Hungarian officials as "slow and
hesitant." Nabucco was key for Hungary (Comment: this
meeting was held the same day as the Russia and Hungary
agreed to cooperate on the South Stream Gas Pipeline
project). The Bulgarian President would be coming to
Azerbaijan in early March as part of a regional trip.
Ambassador Mann said that the USG had encouraged Bulgaria not
to sign up for South Stream, or to do so only with serious
"red lines," but "Bulgaria was weak." Pointing out that the
USG "continues to support Nabucco as part of a range of
alternatives," Mann urged support and said that GOTX
commitments to send new volumes west would be an important
step.

GEORGIAN GAS
--------------


9. (C) Aliyev said Georgian President Saakashvili has been
seeking more additional gas from Azerbaijan, but "we don't
have any gas for them." The only Azerbaijani source for
additional volumes would have to come from the 11 bcm/a the
ACG Partners are currently re-injecting - "if BP were to
re-inject 10 instead of 11 bcm/a, Georgia's problem would be
solved." BP won't consider this option, since its bottom
line is profit, whereas Azerbaijan's bottom line is
strategic. Hence, Azerbaijan sold gas to Georgia in the
lead-up to the recent Georgian elections, even though doing
so cost Azerbaijan USD 25 million dollars. Barring
additional associated gas from the ACG field currently being
used for reinjection, if Azerbaijan were to sell additional
volumes to Georgia without taking any financial losses it
would have to charge a price of USD 300 per thousand cubic
meters (tcm) to compensate for the cost of burning mazut in
place of the lost gas.

TURKISH GAS TRANSIT
--------------


10. (C) Concerning gas transit through Turkey, Aliyev said
Turkey would eventually have to act in accordance with
international practice. He criticized Turkey for cutting off
gas supplies to Greece, contrasting it with GOAJ behavior -
"even though we had the coldest winter in 75 years, we held
to all our gas commitments." Turkey's gas cut-off of Greece
undermined what Turkey, Georgia and Azerbaijan had achieved
together, and had helped Gazprom. Aliyev stressed that, as
in the past, Azerbaijan would always live up to its supply
commitments.


11. (C) Ambassador Mann said that Azerbaijan has proven that
it is indeed a reliable supplier. On Turkish transit,
Ambassador Mann shared Azerbaijan's "bemusement" at the GOT
15 percent netback scheme, which both consumers and producers
were telling him was "not sustainable." Decision-making in
the Turkish energy sector was "complicated, but now that
Botas had a new management team in place, it was moving ahead
on TGI. What was notable was that Turkish gas demand has
grown back strongly to the point where it is a consuming,

vice transit, country, Ambassador Mann said perhaps what is
needed is a re-affirmed set of commitments from Azerbaijan to
Turkey on gas supply (take or pay).

KAZAKHSTAN& BTC
--------------


12. Ambassador Mann said he recently saw KMG Chairman Uzakbay
Karabalin, who pointed out (with regard to Russian subsea
objections) that there are already six thousand kilometers of
pipe in the Caspian. The Kazakh government has "already
solved the Kashagan issue, and the second generation of TCO,
which will double its production volume, is almost finished.
CPC expansion "is going nowhere," all of which means that
cross-Caspian is the preferred route for coming Kazakh oil
volumes. As such, Ambassador Mann encouraged strengthened
Azerbaijani-Kazakh ties, and urged that the two "not create
new bottlenecks" that would hinder the westward flow of
Kazakh oil. In Astana, he warned thatKazakhstan should not
become "a new Transneft" in its construction of pipelines; he
cautioned both Kazakhstan and Azerbaijan to avoid attempts
"to monopolize the trans-Caspian fleet" - both sides must
cooperate and work it out in order to make the cross-Caspian
oil transportation profitable.


13. (C) Referring to stories that the GOAJ was seeking to
delay expansion of the BTC pipeline from 1 to 1.2 million
barrels per day, Ambassador Mann said BTC expansion was
imperative. President Aliyev said the GOAJ was ready to work
constructively on this issue. The GOAJ agrees to the
principle of BTC expansion, but there are concerns and "we
need to find a compromise." Expansion at this time would
cause SOCAR to incur financial losses. Azerbaijan was
seeking answers from the ACG Partners, and once the situation
was clearer, it will be easier for the GOAJ to make a
decision.


14. (C) President Aliyev reaffirmed his desire that
Azerbaijan be a transit country. It is working with the
Kazakh government and with private IOCs, to include Chevron,
whose board of directors recently traveled to Azerbaijan.
Azerbaijan had a number of projects being finalized that
would enhance regional cooperation. It was firmly committed
to all the agreements of which it was a party, and was now
focusing on the related financial issues.


15. (C) Ambassador Mann replied that if large monetary
amounts were involved, then by all means the GOAJ should
engage in "tough discussions," but if the amounts were small
he urged the GOAJ to "stay strategic." BTC must eventually
expand to 1.8 mmbd, and all concerned must keep an open mind
to the possibility of a second BTC in the future. President
Aliyev agreed, saying "we are thinking the same way."

TURKMENISTAN
--------------


16. (C) Ambassador Mann called energy link-ups between
Azerbaijan and Turkmenistan "critical." Mann said that
during his upcoming visit to Ashgabat, he would be asking
President Berdimuhamedov if USTDA could add the topic of
westward movement of offshore Turkmen gas to the existing
feasibility study that SOCAR was administering covering
possible oil and gas pipelines from Kazakhstan to Azerbaijan.
Mann explained that when previously asked this question in
mid-2007, the GOTX had demurred, saying that it was waiting
for progress on delimitation. However, Ambassador Mann said
the thought the situation in GOTX has changed since then.
This feasibility study would not be on a "Trans-Caspian
pipeline" from Turkmenistan; it would instead focus on a
"early gas" approach.


17. (C) Aliyev said that if Turkmen President Berdimuhamedov
were to agree to have the USTDA study include Turkmenistan it
would be an "important step," and a "serious breakthrough."
Azerbaijan already had the existing infrastructure, and stood
ready to provide maximum assistance to the GOTX. The GOAJ
was a good example of the fact that relations with Russia
were not impaired by an independent energy policy, and that
the GOAJ has cooperative and friendly relations with Russia
now.


18. (C) Aliyev said that the GOAJ has striven to normalize
relations with the GOTX since Berdimuhamedov's ascension, to
include high-level bilateral meetings and telephone calls,
settling the bilateral debt issue and seeking to re-open the
GOTX Embassy in Baku. There have been many positive
developments in a short amount of time, but "now was the time

to hear Turkmenistan's plans. "We need more than good
intentions;" now Azerbaijan needed to see the GOTX take some
steps - "it is a time of clarification." If the GOTX agrees
to an interconnector, the two countries need to have a plan.
Ambassador Mann said that expansion of the USTDA feasibility
study is the concrete issue to test the GOTX's intentions,
and that after his coming meeting with Berdimuhamedov he
hopes to have a green light.

BERDIMUHAMEDOV
--------------


19. (C) Mann said he had met with GOTX President
Berdimuhamedov six times since the previous March.
Berdimuhamedov understands the magnitude of the problems
inherited from Turkmenbashi and wants to fix them, but
doesn't know how. He seems sincere but doesn't volunteer his
opinion, and his demeanor is probably the result of survival
skills that served him in good stead during the Niyazov era.
As he is unfamiliar with public policy, he chooses to
continue Niyazov's policies until other options become
clearer. Mann said he was hopeful that Berdimuhamedov was
currently reviewing existing policies with an eye towards
reform. Evidence of such intent could be seen in
Berdimuhamedov's "radical" decision to unify of the dual
exchange rate the previous November.


20. (C) Mann has talked with him and with the GOTX Foreign
Minister Meredov a lot about delimitation issues, telling the
President at one point that "no one else uses their
land-based methodology for delimitation." The previous
August the Foreign Minister said Turkmenistan "needed to
revisit its delimitation policy." However, it is hard for
Berdimuhamedov to renounce Niyazov's "far-reaching"
delimitation claims with its corresponding abandonment of
potentially billions of dollars of revenue


21. (C) In response to Mann's question about his impressions
of the GOTX President, Aliyev said he found him a "closed,
distant man." During biannual CIS meetings, when participants
tend to be informal and joke around, he is not part of the
group and stays "silent, always silent." Aliyev said he had
a good meeting with him in St. Petersburg, and that he seems
to want to change Turkmenistan's image and status,
integrating it into the regional and international community.
Aliyev said Turkmenistan needs an active reform program, but
it would be hard to make radical changes - "they have a
strange country." He agreed with Mann that Kazakhstan and
Azerbaijan could provide attractive examples to Turkmenistan
of countries successful implementing "step by step changes."
Berdimuhamedov should be told that reforms would not damage
his power, but that "when people are dissatisfied, you lose
control." Modernization means moving towards Europe and
working with institutions such as the EU and the Council of
Europe ("although they can be a headache"); the alternative
was becoming "more like Pakistan."


22. (C) Thanking President Aliyev for these insights, Mann
said that he thought that Turkmenistan could be brought into
useful negotiations, but that everything they achieve would
be based on the personal relationship between the two
presidents. The key to improved bilateral relations was the
relationship between Aliyev and Berdimuhamedov. President
Aliyev and Azerbaijan could provide a good example to
Berdimuhamedov of both how to invite foreign companies into a
productive partnership, and how to conduct balanced relations
with Russia. It would be good for Berdimuhamedov to receive
advice from Aliyev vice the USG, since when the USG speaks in
this part of the world, many think its motivation springs
from "East-West competition." Referring to Berdimuhamedov's
invitation to Aliyev to visit Turkmenistan, Mann urged that
Aliyev confirm "both dates at once," i.e. his Head of State
visit to Turkmenistan, and Berdimuhamedov's Head of State
visit to Azerbaijan.


23. (C) In this regard, Aliyev agreed that if the two
countries unite their efforts, both will become stronger, and
said he would work to improve his personal relationship with
Berdimuhamedov. However, he pointed out that when
Berdimuhamedov became President, he visited all the
neighboring countries, except Azerbaijan, and as such from a
protocol point of view, as the most junior CIS President, he
needed to come here" before Aliyev could visit Ashgabat.


24. (C) On delimitation, Aliyev said the GOTX must "be
realistic and step back from their unrealistic claims" on the
ACG Field - "they can demand a share of ACG until it runs
dry." Instead, the GOTX should concentrate on Serdar-Kapaz

(S-K). Azerbaijan was proposing a 60-40 GOTX-GOAJ joint
ownership of this field, with Turkmenistan using Azerbaijani
infrastructure to move its oil into BTC. It was unlikely
delimitation would be solved for a long time, and as such, in
the interim both countries should develop S-K jointly.
Azerbaijan "didn,t need the money" that it would get from
S-K development, but it was important to establish a new form
of partnership between the two countries. Additionally, when
the two sides agree on joint ownership of S-K, then
"automatically we agree on delimitation." (Comment: Since
ACG is west of S-K, GOAJ has previously argued that GOTX
agreement on joint S-K ownership perforce means GOTX
abandoning its ACG claims.)


25. C) Ambassador Mann said that agreement on S-K did not
necessarily mean de facto agreement on ACG; Azerbaijan should
keep the ACG issue open so that the GOTX and Berdimuhamedov
don't lose face. He agreed Azerbaijan had no monetary needs,
and that offshore joint energy development with Turkmenistan
and Kazakhstan would benefit Azerbaijan strategically.
Azerbaijan should focus on practical steps it can take to
move forward bilateral cooperation. On S-K, he said that
according to what he had heard from experts, if respective
islands were not considered in delimitation, S-K would be all
in Turkmen territory; if islands were considered then "10-15
percent" was in Azerbaijani territory. He pointed out that
in any S-K negotiations, "both sides have to get something
out of it," So the actual figure that Azerbaijan could
potentially negotiate could be different from the purely
technical outcome.


26. (C) As for GOTX claims that it only wanted to sell gas at
its border, Mann said that in the 1980s Gazprom used to say
this, which is where Niyazov picked it up. Berdimuhamedov
repeats it as their longstanding default position and perhaps
to show his cooperation with Russia. However, while Mann
referred to the late Turkmenbashi as one who thought "Moscow
put me in this (leadership) position and Moscow can take me
out," Berdimuhamedov seems to be interested in pursuing a
more balanced foreign policy.


27. (C) In response to Mann's question as to whether Aliyev
had any specific messages for Berdimuhamedov, Aliyev said
that Mann should tell him that Azerbaijan seeks to end
disputes borne of the Niyazov era. The GOAJ would consider
being a minority owner in S-K, and the GOTX shouldn't stick
with its "unrealistic proposals and ridiculous past," which
will only block future progress. Azerbaijan is ready to offer
its help, and Turkmenistan has already benefited from
Azerbaijan and the prospect of an alternative route for
Turkmen gas, in the form of higher prices for its gas from
Russia. Mann said that Berdimuhamedov has sat through "15
years of meetings" where Turkmenbashi was saying that "Geydar
Aliyev is a fox; Azerbaijan is not to be trusted," and as
such his reticence to reach out might be understandable.


28. (C) COMMENT: Aliyev fully realizes that Azerbaijan's
strategic importance significantly increases with the transit
of Turkmen gas and Kazakh oil. The GOAJ maintains it has
been actively reaching out to Turkmenistan, and now it istime
for Berdimuhamedov to show that he is serious in pursuing
joint development and is not just using Azerbaijan to extract
greater value from Russia. Aliyev is somewhat less realistic
in his appraisal of SOCAR's ability to get offshore
hydrocarbons out of the ground, whether with ACG Deep Gas or
in Umid, according to BP. Azerbaijan's contributionsas a gas
producer are for the near-term limited to the approximately
12 bcm/a due from SD2 in late 2013. Given the long lead
times involved in gas development, if the GOAJ is serious
about sending more gas west, it needs to start to prove up
its reserves. END COMMENT.


28. (U) Ambassador Mann has cleared on this cable
DERSE