AZERBAIJAN: BTC PARTNERS APPROVE EXPANSION, ACG

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000218

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/08/2018
TAGS: PGOV PREL AJ ENRG
SUBJECT: AZERBAIJAN: BTC PARTNERS APPROVE EXPANSION, ACG
PARTNERS APPROVE CHANGED PROFIT SPLIT


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


1. (C) SUMMARY: On March 6 the BTC Partners voted to approve
expansion of the BTC pipeline from one to one point two
million barrels per day (mmbd),despite strong opposition
from the Government of Azerbaijan. Earlier, the ACG Partners
had agreed to "provisionally and without prejudice" change
the profit split from ACG oil from 50-50 to 80 percent for
the GOAJ and 20 percent for the ACG Partners as of April 1,

2008. The GOAJ might still seek to delay BTC expansion to
1.2 mmbd until ownership questions relating to BTC after the
"zero balance date" of 2024 are resolved. Provisional
resolution of the profit split issue, long the major bone of
contention between the ACG Partners and the GOAJ, could help
expedite development of ACG Deep Gas. END COMMENT.


2. (C) On March 7 Energy Officer met with a western energy
executive representing one of the BTC shareholder companies,
who had been present at the previous day's BTC board meeting
to discuss the previous day's events (Background: BTC
Shareholders are: BP, Socar, Chevron, Statoil Hydro, TPAO,
Eni/Agip, Total, Itochu, Inpex, Conoco Phillips, and Hess).
The main issue before the BTC board during the meeting was
whether to approve expansion of the BTC pipeline from one to
one point two million barrels a day. This expansion would be
achieved by introducing Drag-Reducing Agents (DRAs) into the
pipeline. A vote against expansion, by cutting off funding,
would have essentially stopped expansion for the time being.

Zero Balance Date
--------------


3. (C) According to the energy executive, the GOAJ was
linking expansion to 1.2 mmbd to the status of the BTC
pipeline after "zero-balance date" (ZBD) in 2024, i.e. when
ownership of the BTC pipeline reverts back from the BTC
Partners to Azerbaijan. According to the current BTC PSA,
post-ZBD the BTC partners will reserve capacity rights for
the pipeline, which means that they will get to ship oil
basically at operational cost, without having to pay any
tariff. The GOAJ position is that the BTC partners by ZBD
will have recovered their investments plus 12.5 percent, and
as such should have no preferential rights, and should have
to pay a tariff to the GOAJ for all volumes shipped. An
intermediate position between the BTC Partners and the GOAJ
was that the BTC partners should reserve some preferential
rights and as such pay a discounted tariff after ZBD.
(COMMENT: According to a March 7 discussion between the
Ambassador and SOCAR President Abdullayev, the main issue
post-ZBD is that increased non-Azerbaijani volumes through
BTC lowers GOAJ ownership of the pipeline. Embassy will
follow up to learn more about this GOAJ concern).


4. The Energy Executive said that during the meeting Sofaz
Executive Director Shahmar Movsumov, speaking on behalf of
Socar, Sofaz and AzBTC (AzBtcv is a limited liability company
formed in 2002 as a partner in the BTC, representing
Azerbaijan in the BTC project),spoke out harshly against
approving expansion, saying "a vote for this motion was a
vote against Azerbaijan," and he urged the BTC partners to
vote against it. Those BTC members speaking for the motion
pointed out that their role as BTC directors was to do what
was best for BTC, not for their respective companies and
countries. They said that negotiation for BTC status after
ZBD could continue, and did not have to be settled before
deciding on BTC expansion to 1.2 mmbd. They also warned that
projections show that as of August 2008 there could be a
surplus of nominated volumes for the BTC pipeline over
capacity, i.e. expected volumes from ACG Partners' plus Shah
Deniz condensate(to say nothing of third-party shippers'
volumes) could exceed capacity. If BTC directors did not
vote to approve expansion, legal claims could be initiated
against the BTC Partners by these companies who have already
nominated volumes.

What is At Stake
--------------


5. (C) Just before the vote for expansion to 1.2, Movsumov
said he was not going to vote and left the room. All other
BTC partners (i.e. the non-Azerbaijani members) voted for the
expansion. In another vote, AzBTC voted against funding USD
9 million to continue work on the eventual expansion of BTC
to 1.6 mmbd, although the other BTC partners voted for this
funds allocation and the motion carried.


BAKU 00000218 002 OF 002



6. (C) Although the BTC expansion to 1.2 mmbd carried,
according to the energy executive SOCAR Deputy Vice-President
Vitaliy Baylarbayov, present at the meeting, intimated that
this expansion could still face problems when seeking to get
a pending permit from the Ministry of Emergency Situations
(COMMENT: Other BTC members have also mentioned the
possibility of MES blocking expansion).

Profit Split
--------------


7. (C) Separately, on March 4 EnergyOff a western energy
executive from an ACG Partner company relayed that the ACG
Consortium has decided that come April 1 the profit split
would shift to 80-20 in favor of the GOAJ (although factoring
in transportation costs it goes to 75-25 percent in favor of
GOAJ). This would be done, as was the January 1, 2008
switch to 50-50, on a 'provisional, without prejudice' basis,
until all ACG Partners agree on a permanent solution.
(Comment: a March 4 'Interfax' story quoted President Aliyev
as saying that Azerbaijan would 'soon' receive 80 percent of
revenue from ACG fields. The ACG Partnership had decided in
December that the profit split would go to from 20-80 percent
(GOAJ-ACG Partnership) to 50-50 come January 1, 2008 on a
"provisional, without prejudice" basis).

Another Bullet Dodged
--------------


8. (C) COMMENT: The industry contact who provided the
readout of the BTC board meeting was buoyed that the non-GOAJ
BTC Partners "hung together" and approved expansion, despite
a strong push from Azerbaijan. It is unclear if Movsumov
railed against expansion knowing it was going to pass
regardless, or whether in fact he sought by his comments to
peel off support, but then chose not to vote when he realized
he was going to lose. Regardless, the vote in support of BTC
expansion to 1.2 mmbd was a necessary (but not sufficient)
condition for timely expansion to 1.2 mmbd, which itself is
crucial. Timely BTC expansion to 1.2 mmbd is crucial both to
accommodate increased ACG volumes (as additional ACG wells
come on line later this year),possible Tengiz volumes
(slated to being in June or July),and most importantly Shah
Deniz condensate volumes. There is only a two-day storage
capacity for Shah Deniz condensate at Sangachal, so if it
cannot be shipped through BTC, after approximately two days
Shah Deniz gas production would have to be shut in, i.e.
stopped. We underscore however that BTC Board approval is
only the first step. There are many ways the GOAJ can slow
or thwart implemention as leverage in the post-ZBD
negotiations - notably by the MES withholding the needed
permit.


9. (C) COMMENT (CONTINUED): The news that the ACG Partners
have at least provisionally resolved the profit-split issue
with SOCAR is also very good news, as it increases the
possibility that the GOAJ will reach an agreement with the
ACG Partners on extension of the PSA and, more importantly
for the Southern Corridor project, beginning developing ACG
Deep Gas. It also should be noted that due to this
agreement, as of April 1 Azerbaijan will be getting more
money from ACG oil than before. END COMMENT.
DERSE