AZERBAIJAN: RWE, TGI, OMV, DEPA ALL SAY 'TIME IS

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000584

SIPDIS

E.O. 12958: DECL: 06/14/2018
TAGS: PREL PGOV AJ ENRG
SUBJECT: AZERBAIJAN: RWE, TGI, OMV, DEPA ALL SAY 'TIME IS
NOW' FOR SHAH DENIZ PHASE TWO DECISON

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


1. (C) SUMMARY. Companies involve with TGI and Nabucco, two
of the three pipelineprojects seeking to buy Shah Deniz
Phase Two gas agree that the next six months are crucial for
rogress in the Southern Corridor project, and that main
stumbling block currently is the issue of gas transit through
Turkey. END SUMMARY


2. (C) On June 4 in four successive hour-long meetings,
Ambassador Derse met with Edison's Executive VP for Corporate
Development Roberti Poti and Business Development Manager
Elio Ruggeri; DEPA's Chairman Mr. Asimakis Papageorgiou and
General Director for Corporate Development and Planning Dr.
Vassilios Tsombanopoulos; RWE Gas Midstream's CEO Stefan
Judisch and Business Development Head Jeremy Ellis; and OMV's
President Werner Auli and Azerbaijan Country Manager Wolfgang
Sporrer. Deputy Assistant Secretary Matt Bryza participated
in the Edison and DEPA meetings; Embassy notetaker was also
present for all four.

EDISON (TGI): NOW OR NEVER
--------------


3. (C) Edison said that on June 11 the IGI Poseidon Sa, the
company that will design, develop and manage the Greece-Italy
natural gas pipeline, would be created. It defended its
Turkish transit 15 percent netback proposal, saying that it
left Azerbaijan with an "acceptable" profit. However, if
the 15 percent clause of the TGI IGA imperils the prospects
of SD2 sales, there is an option in the IGA that would allow
striking this clause. In this regard, Edison has told the
Shah Deniz Consortium that it could buy SD2 gas at the
Turkey-Greece border, so if Azerbaijan can get better transit
terms from the GOT, it is fine with Edison. Edison had also
told SOCAR it would accept a 'conditional' contract,
predicated on the issue of gas transit through Turkey being
satisfactorily solved. What was key was that Edison get a
minimum of 6 bcm/a from Azerbaijan before 2009, otherwise "we
look elsewhere or be forced to postpone the project."


4. (C) Repeating well-worn themes, Ruggeri said that Nabucco
was "a bridge too far," that it needed cross-Caspian gas from
Turkmenistan to get sanctioned, and that this gas wouldn't be
available in time. SOCAR's selling 6 bcm/a to Nabucco
wouldn't be enough to sanction it, and would doom TGI. In
this regard, TGI and Nabucco were not competitors, since TGI
was a project that could be launched now, whereas Nabucco had
to wait for sanctioning until more volumes become available.
Additionally, TGI would weaken the chances of Southstream,
since it would lessen if not obviate the need for
Southstream's southern branch. Referring to the expression
of unconditional support for TGI in the bilateral USG-GOAJ
Energy MOU, vice a conditional statement of support for
Nabucco, he asked if the USG position had changed since this
document was signed.


5. (C) DAS Bryza said there was no change in USG policy,
merely an "evolution," and a sense that "Nabucco could
happen." The USG had always thought that TGI was the more
'doable' of the two projects, but was seeking to have both
happen if possible, so as to maximize gas supplies to Europe.
Part of the reason for the shift in emphasis in USG
pronouncements was the USG sense that "Nabucco needed more of
a push" than TGI.


DEPA (TGI): NOW OR NEVER
--------------


6. (C) DEPA said the June 11 launch of Poseidon Sa was
important, as it created a unified Italian-Greek company to
discuss with Azerbaijan, and sent a signal to the markets
that TGI was 'real.' DEPA was talking with SOCAR about
purchasing another 1 bcm/a from SD1 (available from
debottlenecking). DEPA was currently getting 0.5 bcm/a from
SOCAR this year and was scheduled to get 0.75 bcm/a next
year. Additionally, Greek Development Minister Folios and
Azerbaijan had agreed in principle that Azerbaijan would sell
another 1 bcm/a to Greece next year, giving Greece 1.75 bcm/a
from Azerbaijan in 2009, an amount comparable to the 2.8
bcm/a it would get from Russia. TGI would carry 3.5 bcm/a of
Azerbaijan gas for Greece (with the addition of another 0.75
bcm/a of SD2),which would help meet Greece's strong growth
demand for gas.

BAKU 00000584 002 OF 003




7. (C) In addition to the three competing pipeline projects,
Turkey, Azerbaijan and Georgia would also need SD2 gas, and
as such SOCAR had asked DEPA what the minimum amount needed
of SD2 gas to sustain/sanction TGI. DEPA said that
TGI/Poseidon needed 8 bcm/a minimum of SD2 gas to sanction
the project and maintain EU approval, although worst case it
could sustain with 5 bcm/a.


8. (C) DEPA said that of the SD Consortium it felt that
StatoilHydro (25.5 percent share of SD Consortium) was
"hostile" to TGI and the TGI IGA, due to its affiliation with
the competing TAP project. Pointing out that TAP was seeking
5 bcm/a from Azerbaijan, DEPA said that it "couldn't rely" on
Statoil's share of SD2 (25.5 percent),although later in the
conversation DEPA said that Statoil itself realized that TAP
was "impossible" and that it was only using TAP as a
marketing ploy for SD2 gas.


9. (C) In response to DAS Bryza's question as to an optimal
USG role, DEPA said the USG should seek to solve the Turkish
gas transit issue.

RWE (NABUCCO): NOW OR NEVER
--------------


10. (C) RWE Midstream said that the "now or never" moment for
the Nabucco project was fast approaching. Early in their
Baku visit both SOCAR President Abdullayev and PM Rasulzadeh
had told them that Azerbaijan had no gas for Nabucco and that
SOCAR would be developing the Umid field itself (OMV was
seeking a part of this project). However, after subsequent
talks with SOCAR VP Elshad Nassirov, they were marginally
less discouraged about Nabucco, saying that Nassirov had told
them that no decisions would be made until gas transit
through Turkey was solved, and that it was essential that
maximum pressure be put on Turkey. RWE said that it was
clear that Nabucco would fail without Azerbaijani volumes,
and there would be no movement from Azerbaijan to decide
until Turkish transit was fixed. As such, If there were no
Turkish transit, there would be no Nabucco, and so if the USG
wanted Nabucco to succeed, it needed to "lean on" Turkey to
help solve gas transit.


11. (C) In this regard, RWE and OMV had a proposal to address
GOT supply concerns, whereby they would propose to Turkey
that in the event of a "security of supply event," determined
by an impartial international organization such as the IEA,
Turkey could have up to 50 percent of the gas being shipped
through Nabucco. The two companies have pitched this idea
four times in the last two months to the GOT, but have heard
nothing back, and Turkey has even canceled meetings with
OMV/RWE to discuss this matter. RWE said it doubted that the
GOT needed SD2 volumes; its real purpose was to lock in a
supply of inexpensive Azerbaijani gas it could use for
trading, i.e. Ankara has not forsaken its dreams of buying
and selling gas a la Gazprom. Instead of buying gas at USD
400 from Russia, Turkey was seeking to
replace at least some of the Russian gas it was buying at USD
400 per thousand cubic meter (mcm) with Azerbaijani gas at
USD 250/mcm. What Turkey should realize is that if the
markets worked effectively, it could buy gas at a netback
basis from Baumgarten.


12. (C) Referring to the EU, RWE said that EU Caspian Nabucco
coordinator Van Aartsen was an ineffective
proponent for Nabucco ("off the reservation"). RWE could
support a June Nabucco conference in The Hague, but it wasn't
going to happen because the groundwork hadn't been laid.


13. (C) RWE said that it needed 8 bcm/a of gas by 2013 to
launch Nabucco Phase One (2013),in addition to being "within
sight" of securing an additional 7.5 bcm/a for Phase Two
(2016),since "we can't do Phase One without being sure of a
Phase Two." As such, within a few months Nabucco needed a
relatively firm commitment of 15.5 bcm/a (8 plus 7.5),in
order to secure financing. It looked to Azerbaijan for Phase
One gas, and to Iraq for Phase Two.


14. (C) On Umid, RWE said that SOCAR was seeking to drill
very deep, at over six thousand meters, with bar pressure of
one thousand. It was "drilling blind," with no 3-D seismic.
As such, the potential for some type of catastrophe
(explosions, death) was not insignificant.


BAKU 00000584 003 OF 003


OMV (NABUCCO): NOW OR NEVER
--------------


15. (C) OMV said "the next six months is crucial" for
Nabucco. Nabucco needed minimum 8-10 bcm/a from Azerbaijan
in order to launch the project, and the decision needed to be
made within a few months, with preliminary transport
contracts signed by the end of 2008 and the final investment
decision needing to be made by the first quarter of 2009.


16. (C) OMV said that while certain Nabucco partners, like
MOL, were very supportive of the project, the GOT had "no
sense of urgency" about Nabucco, and OMV suspected that
Russia was pressuring Turkey in this regard. Like RWE, OMV
repeated its "security of supply" option as a possible way to
meet Turkish supply concerns and thus solve transit, but also
said that despite numerous attempts to get an answer, Turkey
remained silent. As for the EU, its support was "not
optimal."


17. (C) In order to proceed, EU Nabucco Coordinator Van
Aartsen was organizing a Nabucco countries IGA by the end of
June, although this event was not confirmed. The EU would
have to approve such an IGA, and the Nabucco Consortium would
need an IGA with sovereign guarantees from the GOT. At such
an IGA signing, Azerbaijan would be invited to participate as
an observer.


18. (C) COMMENT: All four of the above corporate
interlocutors agree that the next six months are key months
for sanctioning the various pipeline projects, and
sucessfully resolving Turkish transit is a prerequisite for
any progess. It remains to be seen whether OMV/RWE's
"security of supply clause" can unlock Turkey, or whether, as
is more likely, Turkey can be placated by a straight sales
and purchase agreement for some SD2 volumes. END COMMENT.


19. (U) This cable has not been cleared by DAS Bryza.
DERSE