AZERBAIJAN: TOTAL AND SOCAR AGREE TO EXPLORE,

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000550

SIPDIS

E.O. 12958: DECL: 06/15/2018
TAGS: PGOV PREL AJ ENRG
SUBJECT: AZERBAIJAN: TOTAL AND SOCAR AGREE TO EXPLORE,
DEVELOP ABSHERON FIELD

Classified By: Political-Economic Counselor Joan Polaschik, Reasons 1.4
(b,d)


1. (C) SUMMARY. French Energy Company Total has signed an
agreement with SOCAR to explore and develop the Absheron
offshore field, expected to be a gas-condensate field. Total
believes that production from the field could begin o/a 2015;
it has not provided an estimate of the field,s possible
reserves and acknowledges that additional pipeline capacity
likely would be needed. Although not a US company, it is
heartening to see that
with this agreement Azerbaijan is in fact seeking to
expeditiously prove up and develop its gas reserves in
conjunction with an international energy company, which will
allow it to increase gas exports to Europe. END
SUMMARY.


2. (U) On June 6, industry press reported that French energy
company Total had signed an agreement with SOCAR to explore
and develop the offshore Absheron block in the Azerbaijani
sector of the Caspian Sea. According to press accounts,
Total would control 60 percent of the project and SOCAR the
other 40 percent. Expected production was to be primarily
gas and condensate. (COMMENT: According to press, in 1997
Total and Chevron signed a deal to develop this field,
estimated at that time to contain between one and three
million cubic meters of gas and nearly 120 million tons of
oil, but the project was stopped in 2001 after a decision
that it wasn't commercially viable at the then-current
prices.)


3. (C) In a June 10 conversation, General Manager of Total in
Azerbaijan Mr. Thierry Normand said the agreement was "Heads
of Agreement," setting out the main terms of a subsequent
Production Sharing Agreement for Absheron exploration and
development. He was not willing to speculate as to possible
eventual gas and condensate
production from this field, but said that "if everything went
well," it could start production "shortly after Shah Deniz
Phase Two," i.e. at or shortly after 2015. Normand said the
negotiations with SOCAR, having taken place primarily in
Paris with SOCAR President Rovnaq Abdullayev, had been quite
positive and friendly.


4. (C) Given that the South Caucus Pipeline (SCP) capacity of
approximately 21 bcm/a would be filled by expected Shah Deniz
Phase Two production, Emboff asked how Total planned to
export expected gas volumes. Normand said that rather than
put SD2 production into the SCP, Total hoped that Azerbaijan
might "take a chance" and build another gas pipeline for SD2
volumes and for anticipated additional volumes for ACG Deep
Gas, Absheron, and possibly other GOAJ gas.


5. (C) Given the shortage of Caspian drilling platforms,
Emboff asked what Total planned to use for drilling. (Upon
hearing of Total's Absheron deal, one BP Azerbaijan executive
smiled and asked, "What are they going to drill it with?")
Normand confidently replied that although the 'Istiqlal' and
'Dede Gorgud' rigs were both spoken for, he expected to be
able to use Lukoil's semi-submersible "Maersk Explorer" rig
starting in 2009. He expected it to be a "tough drill" given
the drillings depths of approximately 500 meters (the
Absheron field is located approximately 100 kilometers from
Baku).

NICO IN SHAH DENIZ; TURKEY
--------------


6. (C) Prefacing his comments by pointing out that two-thirds
of the profit for Shah Deniz Consortium members came from
selling SD condensate and not the gas, Normand said that all
SD Consortium members save one are allowed to ship out their
SD condensate via the BTC pipeline. The BTC Consortium does
not allow NICO (Naft Iran Intertrade Company),a ten percent
owner in the SD Consortium, to use its pipeline to export its
condensate. As such, NICO was losing two-thirds of its SD
profit, about which it was not pleased. Concomitantly,
Normand said that NICO was at odds with most of the SD
Consortium about marketing of SD2 gas, and he intimated that
NICO truculence over its inability to ship its SD condensate
might cause it to be less than helpful in seeking to
expeditiously develop SD2. He characterized the
consortium,s decision not to allow NICO to use SCP as an
unfair penalty and a bad business decision that could have
adverse repercussions.

BAKU 00000550 002 OF 002




7. (C) Normand also repeated concerns heard from other SD
Consortium partners that the part of the SCP pipeline within
Turkey was substandard, and that the GOT would have to do
major upgrades in order to accommodate SD2 volumes.

SD RESERVES
--------------


8. (C) Normand said GOAJ official announcements of Shah Deniz
having 30 trillion cubic feet (tcf) are misleading. Even
assuming that SD gas-in-place reserves were 30 tcf, given a
recovery rate of approximately 50 percent, only 15 tcf of SD
gas would be recoverable.


9. (C) COMMENT: Although Total is not a U.S. company, it is
heartening to see that with this agreement Azerbaijan is in
fact seeking to expeditiously prove up and develop its gas
reserves in conjunction with an international energy company,
which will allow it to increase gas exports to Europe. END
COMMENT.
DERSE