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IdentifierCreatedClassificationOrigin
08BAKU566 2008-06-18 11:36:00 CONFIDENTIAL Embassy Baku
Cable title:  

AZERBAIJAN: SOCAR TELLS SE GRAY EVERYONE WANTS

Tags:   PGOV PREL ENRG AJ TX TK 
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VZCZCXRO2209
PP RUEHAG RUEHROV
DE RUEHKB #0566/01 1701136
ZNY CCCCC ZZH
P 181136Z JUN 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 5509
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEAIIA/CIA WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC
					  C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000566 

SIPDIS

E.O. 12958: DECL: 06/16/2018
TAGS: PGOV PREL ENRG AJ TX TK
SUBJECT: AZERBAIJAN: SOCAR TELLS SE GRAY EVERYONE WANTS
GOAJ GAS


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



1. (C) SUMMARY. SOCAR President Rovnaq Abdullayev told a
USG delegation on June 2 that in addition to competition
among the Nabucco, TGI and TAP pipeline projects for Shah
Deniz Phase Two gas, Turkey, Israel, Iran and Russia have
each individually notified SOCAR that they wish to purchase
all of Shah Deniz Phase Two gas. Azerbaijan is unlikely to
take the offers of either Israel, Iran or Russia for SD2 gas,
although if Russia were to link SD2 sales to solving N-K the
GOAJ would be faced with a tough decision. Absent that
development, the competition for SD2 is still between Nabucco
and TGI, since despite SOCAR's wishes it does not seem likely
that SD2 will have enough to fill TGI and to start Nabucco; a
key question in this regard is how much (or more accurately
how little) SD2 gas will induce Turkey to open itself up for
transit of the remaining SD2 volumes. Abdullayev recognizes
that Turkmen gas will be needed to help secure new Caspian
gas sales to Europe. He also underscored that while while
the GOAJ would honor its existing PSAs, it sought a way to
transit expected volumes of Kazakh oil that would not lessen
its own ownership of the BTC pipeline. END SUMMARY



2. (C) On June 2, a USG delegation headed by Special Envoy
for Eurasian Energy C. Boyden Gray and including Eurasian
Energy Coordinator Ambassador Steve Mann, Charge D'Affaires
to Turkmenistan Ambassador Richard Hoagland, Ambassador
Derse, EEB Energy Officer Larry Wright and EnergyOff
(notetaker) met with SOCAR President Rovnaq Abdullayev,
Marketing VP Elshad Nassirov, and Development Manager Vaqif
Aliyev.

SD2: NABUCCO, TAP, TGI WANT IT...


--------------------------





3. (C) Abdullayev said in a recent meeting Nabucco partner
RWE had told SOCAR it needed to purchase at least 15.5
billion cubic meters annually (bcm/a) from the Shah Deniz
Phase Two (SD2) for the pipeline's first phase, "or else the
project won't go ahead." He said when SOCAR had talked to
OMV a year ago, it had sought a minimum of 5 bcm/a for
Nabucco. With expected annual SD2 production of
approximately 13 bcm/a, and with some of that to be
earmarked for Georgia and Azerbaijan, SD2 couldn't meet this
request even if it wanted to. He added that TGI pipeline was
seeking a minimum of 5 bcm/a from SD2 and TAP had a 6 bcm/a
minimum request, meaning that among just these three pipeline
projects aggregate demand was over 26 bcm/a.

...TURKEY WANTS IT ALL...


--------------------------





4. (C) Additionally, Botas has told SOCAR it wants to buy
all of SD2 production for domestic Turkish consumption, but
would be satisfied with a minimum of 8 bcm/a. Without this 8
bcm/a, Abdullayev understood that the GOT would not allow
transit of Azerbaijani gas for European markets. However, he
said if Azerbaijan did sell 8 bcm/a to Turkey, it would have
only 2 bcm/a left for European markets (assuming that 3 bcm/a
of SD2 would be for Azerbaijan and Georgian use). Abdullayev
said he planned to meet with the Shah Deniz Consortium to
find out the most up-to-date information on expected SD2
production. His hope was that if the GOT could be satisfied
with 5 bcm/a, perhaps there would be 10 bcm/a of SD2 left to
for two other pipeline projects. Speaking more generally,
Abdullayev said that, given an approximately USD 15 billion
expense for SD2 development, SOCAR needed to review the
overall Shah Deniz development project "to see if it is
economical."

...AS DOES RUSSIA ISRAEL, IRAN


--------------------------





5. (C) Abdullayev said that in a recent meeting Israeli
Minister of National Infrastructure Ben Elizer (in Baku for
the Caspian Oil & Gas Show), said Israel wanted to buy all of
SD2 production at market prices. Additionally, Abdullayev
said that during a meeting earlier that day, Gazprom Chairman
Alexei Miller told him that Russia too sought to buy all of
SD2 volumes at market prices. And, a few days prior an
official Iranian delegation informed SOCAR that Iran too
wished to buy all of Shah Deniz Phase Two volumes. Smiling
broadly, Abdullayev summed it up by saying that in the last
three days, Turkey, Iran, Israel and Russia had each informed
SOCAR that it wished to buy all of SD2 volumes.

BAKU 00000566 002 OF 003



TURKMENISTAN


--------------------------





6. (C) Abdullayev said Turkmen gas flowing to Azerbaijan
would significantly enhance SOCAR's ability to support the
various pipeline projects, agreeing with Ambassador Mann that
timing is the issue. Saying that SOCAR had laid 500
kilometers of pipeline in the Caspian in the previous year,
he added that building the 380 kilometers needed to hook up
with Turkmenistan would be easy. As such, he agreed with
Ambassador Derse that the main obstacles in the way of a
GOTX-GOAJ interconnector are political, not technical,
although he said that given ACG and SD infrastructure design,
any interconnector would have to connect to the Azerbaijani
coast. Overall bilateral delimitation is not important,
since the pipe would run east-west while the delimitation
line is north-south. If GOTX volumes were to come west, new
gas pipelines to Erzurum would be needed, although everything
depended on the volume of Turkmen gas coming west. Echoing
President Aliyev's sentiments, Abdullayev said that
Turkmenistan, not Azerbaijan must be the initiator of any
deal to interconnect their respective offshore
infrastructures in order to transit GOTX gas west. Mann
responded that while it is true that, as Abdullayev said,
"Azerbaijan doesn't need GOTX gas," it is good for
Azerbaijan to have productive relations with Turkmenistan.
All agreed that strengthening GOTX-GOAJ energy sector
cooperation should be done with as little publicity as
possible. In response to Mann's question, Abdullayev said
that SOCAR would need take or pay volume commitments from
Turkmenistan before building any interconnector or pipeline
for GOTX gas, to which SE Gray responded that they would work
on seeking such a commitment when they traveled on to
Ashgabat after this leg of the visit.



7. (C) In response to SE Gray's question about what he could
do to advance Turkmenistan-Azerbaijan energy cooperation,
Abdullayev said that the ball was in Turkmenistan's court -
he had briefed the head of Turkmenistan,s State Agency For
Hydrocarbon Resources Baimurat Muradov on Azerbaijani
proposals for joint development during his recent visit to
Baku, laying out SOCAR's vision of providing GOAJ energy
infrastructure to the GOTX and jointly developing the
Sardar-Kapaz offshore field. Now Azerbaijan was waiting for
feedback from Turkmenistan.

KAZAKH OIL TRANSIT


--------------------------





8. (C) Ambassador Mann encouraged Azerbaijan to be an
effective partner in moving Kazakh oil volumes to market.
Abdullayev said that would be no problem, as Azerbaijan had
rail, ships and pipelines available to do so. Delays were
the Kazakhs' fault, but SOCAR would be discussing commercial
principles later in the week with Kazakh interlocutors.
Azerbaijan planned to eventually transit 20 million tons
annually by rail, 20 million tons annually by BTC, and 30
million tons annually by a new pipeline, for a maximum annual
capacity of 70 million tons.



9. (C) In this regard, Mann expressed USG full support for
BTC expansion to 1.2 mmbd. Abdullayev said he wasn't against
expansion, but didn't want Azerbaijan to lose ownership share
as Kazakh oil volumes through BTC increased, as would happen
under the terms of the current PSA. Mann countered that the
current PSA was a good one and should be honored, with
Abdullayev saying that Azerbaijan always honors its
contracts. However, under the existing PSA after ZBD (zero
balance date, 2024, when the BTC Consortium loses ownership
of the pipeline), SOCAR ownership would decrease from 85
percent to 48 percent if Kazakh transit volumes were to
increase to expected levels, and this was something that
"Azerbaijani future generations would blame us for." Mann
countered that Azerbaijan's future generations would say that
SOCAR was commercially reliable, repeating that the USG
wished for BTC expansion, which was desirable for both
Azerbaijan and the US, and looked to SOCAR for support.
Abdullayev said that SOCAR fully supports BTC expansion and
will adhere to its contacts, maintaining its reputation as
the most commercially reliable country in the region.

10.(C) COMMENT: Given that Azerbaijan seeks to market its
gas for primarily geostrategic vice commercial reasons, it is
unlikely to take the offers of either Israel, Iran or Russia

BAKU 00000566 003 OF 003


for SD2 gas, although if Russia were to link SD2 sales to
Russian support for solving N-K the GOAJ would be faced with
a tough decision. Absent that development, the competition
for SD2 is still between Nabucco and TGI, since despite
SOCAR's wishes it does not seem likely that SD2 will have
enough to fill TGI and to start Nabucco. A key question in
this regard is how much (or more accurately how little) SD2
gas will induce Turkey to open itself up for transit of the
remaining SD2 volumes.



11. (U) SE Gray and Ambassador Mann have cleared this cable.
DERSE