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