AZERBAIJAN PRESIDENT TELLS SENATOR LUGAR HE WANTS

C O N F I D E N T I A L BAKU 000051

SIPDIS

SIPDIS

FOR EUR DAS BRYZA AND EUR/CARC; H PLEASE PASS TO SENATOR
LUGAR

E.O. 12958: DECL: 01/18/2018
TAGS: PREL PGOV ENRG MARR AJ RS IR
SUBJECT: AZERBAIJAN PRESIDENT TELLS SENATOR LUGAR HE WANTS
A SIGN SOON ON TURKMEN GAS


Classified By: Charge Don Lu, per l.4 (b,d)


1. (C) Summary: In a January 14 meeting with Senator Lugar,
President Aliyev said that the Turkmen President is moving
too slowly on trans-Caspian gas discussions while at the same
time continuing to sign deals with Russia. Aliyev said that
he needs a political signal in the next six months to know
whether "they're with us or not." The President also asked
about the possibility of purchasing military equipment from
the U.S. or other NATO countries. Senator Lugar raised the
issue of the imprisoned journalists and the importance of an
open and transparent government during the run-up to the
presidential elections. He also mentioned that the
accounting of oil revenues should be equally transparent to
avoid the appearance of misappropriation of funds. End
Summary.

FRUSTRATION WITH THE TURKMEN
--------------


2. (C) Aliyev expressed concern that Central Asian countries
were not showing more support for developing energy projects
with Azerbaijan and that it was time for Turkmenistan and
Kazakhstan to clarify their position regarding transit of gas
across the Caspian and through Azerbaijan. The President was
particularly critical of Turkmen President Berdymuhamedov,
who "tells us one thing, then signs a deal with Putin." He
told Senator Lugar that Azerbaijan needed a political signal
from the Turkmen in the next six months to know whether
"they're with us or not." Aliyev said that he has offered
the Turkmen joint ownership of the disputed Sardar-Kapaz
Oil/Gas Field and is willing to accept a minority share to
move the discussion forward. He called for U.S. assistance
to encourage these countries "to push from both sides" on the
issue of trans-Caspian energy flows.


3. (C) While Aliyev mentioned that "the transit of Central
Asian gas and oil is not essential for Azerbaijan" because of
its vast oil revenues, he felt the producers should want to
use the option of transportation to Europe through Azerbaijan
as much as Azerbaijan does as it is directly in their
interest. He said that Turkmenistan in particular may have
"good intentions and cautious moves, but (because of Russian
pressure) there is no time for that." The President noted
that the price paid for Turkmen gas by Gazprom has risen from
$65 per thousand cubic meters (tcm) to $150/tcm because the
Turkmen now have the option of an alternative route through
the South Caucasus Pipeline, even if they are not currently
pursuing it. He also was concerned that some NATO members
such as Bulgaria, Greece and Hungary were signing energy
development agreements with Russia that undermined efforts to
move gas through the South Caucasus.

REQUEST TO BUY U.S. OR NATO MILITARY EQUIPMENT
-------------- -


4. (C) Aliyev mentioned that GOAJ had budgeted $1.2 billion
in military expenditures in 2008 and was interested in
expanding security cooperation with the United States. He
suggested one way was to purchase military equipment from the
U.S. or other NATO countries (read Turkey) to promote
interoperability and NATO standards. He stated his interest
in purchasing aircraft and other weapons as a way to assist
with Azerbaijan,s efforts to integrate into NATO. Aliyev
then conceded that this may not be possible due to the
ongoing Nagorno Karabagh conflict. He later acknowledged
that the purchase of maritime military equipment might be a
logical place to begin as this would not raise concerns about
possible offensive use against Armenia.

RECENT ENERGY DEVELOPMENTS
--------------


5. (C) Aliyev reeled off statistics about the energy
industry in Azerbaijan and boasted of its growing regional
importance. Aliyev stated that recent oil and gas
discoveries have revealed that GOAJ has "enough reserves (for
domestic production and significant exports) to last for 100
years, maybe more," and "will be a gas provider to the EU for

100 years." He reported that Azerbaijan has 1.2 trillion
cubic meters of proven gas reserves in the Shah Deniz Field
alone. With the additional reserves in the Azerbaijan Chirag
Gunashli (ACG) Field (i.e., "ACG deep gas") and the Umid
Field, total proven reserves top 2 trillion cubic meters. In
2008, GOAJ expects to increase domestic oil production by 100
percent and export 7 billion cubic meters of gas by the end
of the year. He expects gas production to be 27 billion
cubic meters, with 16-17 billion cubic meters available for
domestic use and export and the rest for reinjection into the
ACG Field. Aliyev also highlighted Azerbaijan,s success in
delivering gas to the EU with their shipments to Greece via
Turkey. According to the President, SOCAR's plans
development of substantial gas reserves in the Umid offshore
field so that they have enough to satisfy EU demand.

INCREASED ROLE OF AZERBAIJANI GAS PRODUCTION
--------------


6. (C) Aliyev stated that SOCAR and other domestic producers
would play a larger role in oil and gas production in
Azerbaijan. Aliyev cited problems with BP and the importance
of energy independence to national security as key factors in
this decision. Aliyev also mentioned that Azerbaijan is now
transforming into an energy producing and transit country
with the technical ability to explore and extract oil and gas
themselves. In this regard, he mentioned his decision to
have SOCAR develop "ACG deep gas" on its own, instead of
relying on BP to manage the project. Aliyev expressed his
confidence that Azerbaijan was now able to extract this deep
gas and no longer needed international assistance. Aliyev
also repeated claims made previously that BP had failed to
meet several obligations to other countries and that BP had
been caught withholding a portion of oil revenues owed to the
GOAJ for the last two quarters of 2007.

GOAJ INVOLVEMENT IN GEORGIAN PRESIDENTIAL ELECTIONS
-------------- --------------


7. (C) In his discussion about GOAJ,s close relations with
Georgia, Aliyev also commented at length on GOAJ involvement
in the recent presidential elections in Georgia. He
suggested that he affected the outcome of the recent Georgian
presidential elections by encouraging ethnic Azeribaijanis
living in Georgia to vote for Saakashvili. Aliyev stated
that because of his direct involvement, 90 percent of
Georgian Azeris voted for Saakashvili and that Saakashvili
said he "won,t forget Azerbaijan,s assistance now and in
the past." Without this support "the result may have been
different." Aliyev highlighted further GOAJ involvement in
the Georgian election when the GOAJ discreetly provided gas
to Georgia at a lower than market rate. Finally he pointed
to GOAJ assistance to Georgia last year during the winter
energy crisis when Azerbaijan provided gas at a very
competitive price even as Azerbaijan itself faced shortages.
"Unlike other countries, we don't take advantage of our
neighbor's difficulties."


8. (C) COMMENT: President Aliyev's comments about SOCAR
developing ACG deep gas itself may have made with the full
knowledge the comments would get back to BP, in the hopes of
persuading BP to be more accommodating in the current dispute
over Rate of Return calculation for the ACG PSA. From a
technical viewpoint SOCAR is quite unable to tackle the
massive challenge that ACG deep gas presents. Legally, the
BP-led ACG Consortium has "right of first refusal" on any
attempts to develop ACG deep gas, and it is unclear that it
would support a SOCAR bid. Far more likely is for SOCAR to
"take the lead" on ACG deep gas development, subcontracting
all the real work to some or all members of the ACG
Consortium.
LU