DAS BRYZA DISCUSSES ENERGY COOPERATION WITH FM

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000282

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/26/2018
TAGS: ENRG PGOV PREL AJ
SUBJECT: DAS BRYZA DISCUSSES ENERGY COOPERATION WITH FM
MAMMADYAROV, MED BABAYEV, AND DEPUTY SPEAKER ALASGAROV

REF: BAKU 136

Classified By: AMBASSADOR ANNE E. DERSE PER 1.4(B,D).


1. (C) SUMMARY: During a March 4-5 visit to Baku, EUR/DAS
Bryza discussed energy cooperation in separate meetings with
Foreign Minister Elmar Mammadyarov, Minister of Economic
Development Heydar Babayev, and Deputy Speaker of Parliament
Valeh Alasgarov. Bryza briefed Mammadyarov on his recent
energy talks with the Hungarians, cautioning that
Azerbaijan's hesitance to sign a deal was making the
Europeans nervous, especially while Gazprom was leading them
to believe that Azerbaijan did not have sufficient gas to
fill the Nabucco pipeline. Alasgarov complained of Russia's
backdoor tactics in courting European countries to join
Southstream, and recommended that the U.S. stop pressing them
to act in their own interests and let them drift a bit.
Echoing Alasgarov's reference to "Turkish arrogance," Babayev
said that Azerbaijan's priority was to sell gas to Europe,
not just Turkey. He agreed with DAS Bryza that political
leadership was needed in the negotiations, noting that if
price were really the cause of the disputes, they would have
been resolved by now. END SUMMARY

FOREIGN MINISTER
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2. (C) During a March 4 meeting with Foreign Minister (FM)
Mammadyarov, DAS Bryza briefed on his recent discussions with
the Hungarian government regarding Hungary's March 6 decision
to join Russia's Southstream gas pipeline. He said that it
was critical for Hungary to establish diversification before
moving on to an agreement with Russia, but noted that Hungary
-- like Bulgaria -- was under tremendous pressure from
Russia, and making political, rather than strategic,
decisions. DAS Bryza emphasized that the USG believes there
will be sufficient demand for natural gas to sustain both the
Nabucco and Southstream pipelines. However, he said that
Southstream was designed to derail Nabucco and the
Turkey-Greece-Italy (TGI) pipelines and prevent Azerbaijani
gas from reaching Europe. Southstream faced a serious
economic disadvantage in comparison with TGI and Nabucco, but
may end up being built but remain half empty, as has been the
case with the Blue Stream pipeline linking Russia and Turkey;
Gazprom could finance Southstream within three years by
simply raising the price of gas in Europe.


3. (C) Bryza told the FM that the USG is working with Hungary
to encourage it to remain aligned with its Nabucco partners
to secure diversification of gas supply, rather than being
diverted by Southstream. He said that Hungary's MOL had
expressed willingness to sign a gas sales/purchase agreement
with Azerbaijan -- today -- but Azerbaijan was not ready
because of its gas transit dispute with Turkey. According to
Bryza, both Turkey's BOTAS and Azerbaijan's State Oil Company
(SOCAR) embrace models of gas transit pricing that are in use
in Europe, and are therefore unwilling to compromise.
Resolving this dispute requires its elevation to the
political level for discussions between President Aliyev and
Prime Minister Erdogan. A possible solution, Bryza
continued, was for Turkey to reach a straightforward gas
sales/purchase agreement with Azerbaijan for a set volume of
gas (rather than a 15 percent reserve of the gas flowing
across Turkey) at a price lower than the Russian price in
Turkey that Azerbaijan favors but higher than the "netback"
price enshrined in TGI's inter-governmental agreement. Bryza
cautioned that failure to wrap up the gas transit dispute was
providing space for Russia to court Central and Southern
European countries for Southstream rather than TGI and
Nabucco.


4. (C) Bryza noted that the U.S. had been urging Turkey to
behave as a reliable transit state rather than as a broker of
gas sales, adding that Turkey was most worried about having
sufficient gas for domestic consumption at a politically
palatable price - e.g., not more expensive than Azerbaijani
gas sold further downstream in Europe. Mammadyarov stated
that while oil is Azerbaijan's "cash cow," the GOAJ was
"doing gas for political reasons." This, he said, was
infuriating Russia and Iran, but the GOAJ persisted because
it was important for Azerbaijan's future. The FM said that
the GOAJ was tired of "talk and lip service" from the
Europeans, and that he thought the GOAJ would continue
negotiating with Turkey. Mammadyarov agreed the solution
would have to be mutually beneficial to Turkey and
Azerbaijan. But if such a solution were reached, he asked,
would the Europeans be ready? DAS Bryza assured the FM that
they were, and were indeed anxious to move on with gas
sales/purchase agreements, specifically listing Greece,
Romania, Hungary, and Bulgaria; he emphasized that Gazprom
had led them to believe Azerbaijan did not have sufficient

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gas.

DEPUTY SPEAKER OF PARLIAMENT
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5. (C) DAS Bryza discussed energy policy, including political
and contractual roadblocks, with Deputy Speaker of Parliament
and former SOCAR official Valeh Alasgarov. After briefing
Alasgarov about the negotiations, Bryza said the two big
challenges to the current negotiations are the Europeans'
disbelief that Azerbaijan has enough gas to supply the
potential pipelines; and Turkey,s desperation to obtain
cheap gas for its estimated future needs.


6. (C) Alasgarov said that many European officials discussing
Nabucco or TGI are doing so in bad faith and are "in
Gazprom,s pocket," recalling that Gazprom provided over $150
million to Turkish officials to secure Turkey's agreement to
pursue the Blue Stream pipeline in the late 1990s. He
pointed out that Azerbaijan has offered "100 percent
ship-or-pay" contracts as a guarantee that it will provide
the amount of gas promised or pay for it. Alasgarov asserted
that this eliminates the risk of volume shortages or price
fluctuations for European countries and makes it impossible
to blame European reluctance on economic or logical reasons.
He also spoke disparagingly about Austrian gas company OMV,
saying it wants an agreement with large volumes for financing
and then plans to use Azerbaijani gas for its own speculative
gains. Azerbaijan should sign a contract to guarantee the
price it would receive rather than let OMV "use our volumes
for their financing," retain 51 percent ownership, and reduce
payments to Azerbaijan with a list of reasons like the high
cost of operations and financing or low rates-of-return,
Alasgarov added.


7. (C) Alasgarov pointed out that according to Turkish law,
BOTAS is required bid out 80 percent of contracts to private
companies. The law also gives the seller the final right of
refusal, Alasgarov said, in theory making it possible for
Gazprom to designate the private gas companies it will
contract with in Turkey by refusing seller approval to any
company but the one Russia chooses. Annoyed about "Turkish
arrogance" and suspect of the motives behind the Turkish 15
percent netback proposal, Alasgarov said, "Azerbaijan cannot
be dictated to." He said that Azerbaijan could sell its gas
at a good price "right here," alluding to the potential for a
bigger profit from selling gas to Iran than shipping it to
Europe. He thanked the U.S. for its efforts to maintain the
Nabucco and TGI countries' focus on these two projects,
despite the fact that it would not be a direct beneficiary,
but pointed out that, "you don't have to save them," alluding
to Europe. Alasgarov recommended that the USG stop
negotiating with European countries. Alasgarov said he was
pessimistic about Europe and Turkey's political will to move
forward on Nabucco or TGI given the Russian influence. He
said that while prime ministers and presidents would change,
attitudes would remain the same.

MINISTER OF ECONOMIC DEVELOPMENT
--------------


8. (C) Minister of Economic Development Heydar Babayev
discussed economic growth, the upcoming Economic Partnership
Commission (EPC),co-financing, and energy with Bryza.
Babayev said that over the next two years Azerbaijan will
have more than 15 billion USD in oil revenue, and the GOAJ
knows it must control budget expenditures closely to prevent
runaway inflation. He pointed out that Azerbaijan's
accession to the World Trade Organization (WTO) was still "at
the top of the agenda" and thanked the U.S. for the good
bilateral relationship it has maintained with Azerbaijan in
every sphere.


9. (C) Babayev said he hopes to attend the EPC on April 14-15
to highlight "the positive results of our joint efforts."
Bryza agreed but raised the issue of co-financing of U.S.
assistance programs, which the Ambassador pointed out is an
important part of the bilateral relationship and key to EPC
success. The Ambassador asked for clarification of a
recently-received letter outlining a new bureaucratic process
for co-financing approval to comply with Azerbaijani law.
The Ambassador pointed out that the new process will send the
wrong signal if it is applied to previously discussed
co-financing projects. Babayev reassured Bryza and the
Ambassador that the GOAJ has set aside 1.7 million AZN (other
sources have said 1.6 million AZN - approximately 1.9 million
USD) to co-finance joint projects. However, he said,
Azerbaijani law prohibits money transfer to a U.S. Treasury
account. Babayev said he would speak to Minister of Finance
Sharifov, but reassured the Ambassador and Bryza that the
letter will not slow down co-financing of previously

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discussed projects. Instead, he said, it is just a question
of finding the right mechanism to allocate the money.


10. (C) Babayev characterized energy discussions with Greece,
Turkey and Italy as positive, but then began to talk about a
possible Trans-Adriatic Pipeline to Switzerland. Babayev
said, "The more countries (in Europe) that we supply with oil
and gas, the bigger the attraction will be for Central Asia,"
which he described as still "hesitant." DAS Bryza urged
Azerbaijan to focus on achieving TGI and Nabucco as
priorities, citing the urgent need for gas supply contracts
for TGI soon and making sure it has the gas to fulfill its
obligations on time. Bryza briefed Babayev on his recent
discussions in Turkey and Europe. To move TGI negotiations
forward, Bryza said that he is encouraging Turkey, and now
asking Azerbaijan, to raise negotiations on gas transit to
the political level. Babayev agreed that political
leadership is necessary, saying that if price was really the
issue slowing the negotiations down, it could have been
resolved in a week. To prevent a relationship from becoming
problematic, like the one between Russia and Ukraine, Babayev
said the contracts should be clear. Turkey should know how
much gas it wants and how much it is willing to pay.
Azerbaijan, he said, should know how much it can export and
should be able to fully fulfill its contract. Azerbaijan is
ready to do its part, Babayev said, but BOTAS' behavior is
manipulative, resembles Gazprom's, and creates
misunderstandings. Babayev said Azerbaijan wants to do more
than supply Turkey with gas; it wants to supply gas to
Europe. He agreed with Bryza that reaching a political
compromise with Turkey that involves direct gas
sales/purchase agreements between Turkish and European
consumers and Azerbaijan's SOCAR is necessary.

COMMENT
--------------


11. (C) The standoff with Turkey over the 15 percent netback
proposal clearly continues to rankle senior GOAJ officials.
SOCAR has indicated that the issue could be resolved in
April, after Azerbaijan and Turkey agree to a new price of
Shah Deniz Phase I gas (reftel). The proposed
U.S.-Azerbaijan-Turkey trilateral meeting on the margins of
the Economic Partnership Commission, coupled with EU Nabucco
Envoy Van Aartsen's efforts, could help make progress on this
issue.


12. (U) DAS Bryza has cleared this message.
DERSE