REQUEST FOR U/S JEFFERY TO VISIT BAKU IN

C O N F I D E N T I A L BAKU 000293

SIPDIS

SIPDIS

DEPARTMENT - E PLEASE PASS TO E ROBERT WINCHESTER, EUR/ERA
MATT BEH
C O R R E C T E D C O P Y (FIXED TEXT)

E.O. 12958: DECL: 03/24/2018
TAGS: PREL PGOV OVIP AJ ENRG
SUBJECT: REQUEST FOR U/S JEFFERY TO VISIT BAKU IN
CONJUNCTION WITH CASPIAN OIL AND GAS SHOW

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


1. (U) This is an action request. See Paragraph 2.


2. (U) Embassy Baku requests that Under Secretary for
Economic, Energy and Agricultural Affairs Reuben Jeffery III
consider visiting Azerbaijan June 3-4, in conjunction with
the June 3-6 International Caspian Oil and Gas Exhibition and
Conference (COGS). Given Under Secretary Jeffery's recent
appointment as the Department's Coordinator for International
Energy Affairs, a visit to Azerbaijan at this time would send
a strong signal of U.S. support for new Caspian energy
initiatives. U/S Jeffery would have the opportunity to make
a high-profile, keynote address outlining regional U.S.
energy strategy and could also lead a meeting of our new,
high-level bilateral "Energy Diplomacy Dialogue" as outlined
in the U.S.-Azerbaijan Energy MOU, signed by the Secretary
and Foreign Minister Mammadyarov in March 2007.


3. (U) Energy-producing Azerbaijan is a key U.S. ally in
regional energy issues. Working together for over a decade,
we have helped secure Azerbaijan,s independence and enhance
global energy security through our collaboration on the
Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the South Caucasus
gas pipeline (SCP). Azerbaijan is now a significant non-OPEC
oil exporter and non-Gazprom gas producer, and the success of
its BTC and SCP pipelines have served as regional models
showing how countries of the region, in partnership with
International Oil Companies, can use their mineral wealth to
further their independence and prosperity.


4. (C) Azerbaijani is now embarking on an important, second
phase of its energy sector development, focused on the export
of significant amounts of GOAJ gas to Europe and the transit
of Kazakh oil and Turkmen gas through Azerbaijan to Europe.
In this light, U/S Jeffery's trip to Baku would help the USG
in its efforts to encourage our key regional ally Azerbaijan
to:

- develop its gas resources to support European energy
diversity;

- come to a gas transit agreement with Turkey that will
facilitate the transit of Caspian gas through Europe;

- strengthen bilateral ties with Turkmenistan, to include
working on offshore energy development;

- ensure that rent-seeking activities do not hinder the
westward transit of Kazakh oil volumes through Azerbaijan.


5. (SBU) GAS DEVELOPMENT: Azerbaijan has significant gas
reserves and the GOAJ has repeatedly stated its intention to
export (to quote President Aliyev) "as much gas as it can as
quickly as it can" to Europe, for strategic as much as
commercial reasons. Azerbaijan's Shah Deniz mega-field
already supplies small amounts to Greece, in addition to
larger amounts to Turkey and Georgia. Second phase Shah
Deniz production, scheduled to start in late 2013, could
provide approximately five to nine billion cubic meters
annually (bcm/a) to either the Turkey-Greece-Italy (TGI) or
Nabucco pipeline project, both of which will help to decrease
European gas reliance on Gazprom. However, although
Azerbaijan does have significant gas reserves and could
export more than 20 bcm/a to Europe for many years, it is
lagging in its efforts to expeditiously develop its offshore
fields. Due to the long time lines involved with gas
production, if substantial amounts of GOAJ gas are to heading
to Europe by the 2018 time-frame, Azerbaijan needs to start
moving to develop its reserves now.


6. (C) GAS TRANSIT WITH TURKEY: Azerbaijan's commercial
negotiations with European potential customers for Shah Deniz
Phase Two gas have been held up by an inability to agree with
Turkey over terms of gas transit. Turkey has sought to
establish a mechanism by which a percentage of all transiting
gas is optioned for purchase by Turkey at sub-market prices.
Both upstream producers and downstream consumers have
resisted this option, saying sales agreements must be
separate from transit issues. Westward transit of Caspian
gas to Europe through Turkey depends on finding a solution to
gas transit that meets both Turkey's desire for additional
gas volumes at a politically palpable price and producers'
and consumers' desires for a fair and transparent tariff
regime through Turkey.


7. (C) TURKMEN ENERGY COOPERATION: Since the December 2006
death of Turkmen President Niyazov, the GOAJ has reached out
to new Turkmen President Berdimuhamedov. This outreach, as

exemplified by the GOAJ's March 2008 agreement to resolve
outstanding bilateral debt issues, has created the
possibility of offshore cooperation in bilateral energy
development even absent agreement on Caspian delimitation.
This bilateral energy cooperation and resultant westward
transport of GOTX gas through Azerbaijan would be a
significant success in our regional energy policy.


8. (C) KAZAKH OIL TRANSIT: Oil volumes from the Tengiz oil
field in Kazakhstan are scheduled to begin being transported
through Azerbaijan in significant volumes in mid-2008. These
volumes and the shipping, pipeline and rail routes they
establish will lead the way for future, more significant
volumes from the Kashagan field. However, the monopolistic,
rent-seeking activities of government-affiliated entities in
both Azerbaijan and Kazakhstan are threatening the commercial
viability of this Southern Corridor for oil, with the risk of
Kazakh oil being routed instead through either Iran or Russia.


9. (C) U/S Jeffery's visit would be instrumental in
forwarding our energy agenda with the GOAJ at a time when
Azerbaijan begins to enter a stage of energy development that
will be crucial for regional USG energy goals. Additionally,
having a senior level figure deliver our message in a key
capital and at a key moment to a very wide international
energy audience (through press coverage of COGS opening) at
the Exhibition itself will also be of great benefit.


10. (U) We appreciate U/S Jeffery,s consideration of this
request.
DERSE