AZERBAIJAN'S SOCAR UPBEAT ON TURKMENISTAN; WORRIED

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000620 SIPDIS E.O. 12958: DECL: 06/25/2018 TAGS: PGOV PREL AJ TK ENRG SUBJECT: AZERBAIJAN'S SOCAR UPBEAT ON TURKMENISTAN; WORRIED ABOUT TURKEY Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d) ¶1. (C) SUMMARY: In a June 24 meeting, SOCAR President Rovnaq Abdullayev told the Ambassador that during a recent meeting in Ashgabat he had outlined to Turkmenistan President Berdimuhamedov a vision of bilateral energy cooperation between the two countries. Berdimuhamedov struck him as a reasonable man who understood the advantages to Turkmenistan of diversifying its gas exports. As in previous meetings, Abdullayev cited continued Turkish unwillingness to provide fair and transparent transit of Azerbaijani gas to Europe as the major barrier to the Southern Corridor project. Azerbaijan has done a strong job of presenting a viable model of energy sector cooperation to Turkmenistan, and is now waiting for feedback from Ashgabat. On Turkey, as Abdullayev urged, the USG needs to continue to encourage the GOT to allow fair and transparent transit of SD2 gas. At the same time we should encourage Azerbaijan and Turkey to pursue a separate sales and purchase agreement for sales of SD2 gas to Turkey, leaving enough to sanction at least one pipeline. END SUMMARY. ¶2. (U) On June 24 the Ambassador met with SOCAR President Rovnaq Abdullayev. Also present were SOCAR Foreign Investment Department head Vagif Aliyev and EnergyOff (notetaker). TURKMENISTAN -------------- ¶3. (C) Abdullayev had "good meetings" during his June 19 Ashgabat visit. His one-on-one meeting with President Berdimuhamedov (the first time they'd met) was ninety minutes. Their meeting dwelt on only general topics of energy sector cooperation, to include those he previously broached with Head of State Agency for Hydrocarbon Resources Baimurat Muradov (ref A). ¶4. (C) Berdimuhamedov seemed a "reasonable" man who understood the importance of gas export diversity and alternative options. Berdimuhamedov told Abdullayev that Turkmenistan already has export diversity (Russia, Iran, China). Abdullayev told him that exporting gas westwards would increase Turkmenistan,s diversity and that if Azerbaijan and Turkmenistan join forces, together they could be an important source of gas for Europe and increase their geopolitical importance. He outlined to Berdimuhamedov the advantage of using Azerbaijan's offshore infrastructure to move GOTX gas west. Abdullayev believes the GOTX is 
interested in the concept of exporting some gas west, although GOTX interest could be primarily a ploy to extract higher gas prices from Russia. In this regard Abdullayev said that Berdimuhamedov had bragged to him about how starting from 2009 the GOTX would be receiving market prices for gas sold to Gazprom. ¶5. (C) Abdullayev also explained to Berdimuhamedov that GOTX was losing potential profit by selling its gas FOB, and outlined various gas export options that could increase GOTX profit. Azerbaijan was willing to put all its infrastructure at the GOTX disposal, to include even allowing the GOTX to buy a part of such SOCAR holdings as the Kulavi terminal in Georgia, Turkey's Petrochemical Holding Company (Petkim - where SOCAR is part of the owner consortium),or a refinery in Ceyhan. Berdimuhamedov's initial response was repetition of the Turkmen mantra that it sells its gas at the border. Abdullayev said he didn't offer to buy GOTX gas at the border since he felt that the GOTX would "misunderstand" such an offer (COMMENT: the GOAJ has shown this concern before, i.e. that in offering to buy GOTX gas it might present itself as Gazprom-like in seeking to buy gas only to resell it at a higher price. END COMMENT). ¶6. (C) Abdullayev said another mark of progress was that the GOTX had agreed to expand the September 9-10 joint conference in Baku into a joint exhibition and conference, with the exhibition to showcase Turkmen products. Abdullayev said that currently there were no plans for Berdimuhamedov to attend the fall joint exhibition-conference, with the GOTX Deputy Prime Minister probably leading the delegation. ¶7. (C) Abdullayev said that he touched only slightly on Serdar-Kyapaz in his talk with Berdimuhamedov, who said that he had told President Aliyev during his HOS visit to Baku BAKU 00000620 002 OF 003 that S-K had to be solved as quickly as possible. Berdimuhamedov told Abdullayev that he had "love and respect" for "his brother" President Aliyev. ¶8. (C) Abdullayev said an offended Berdimuhamedov complained to him about the Azerbaijani press writing that Turkmenistan "has no options" except exporting gas through Azerbaijan, adding that "if they said that in my country I would crush them." Abdullayev said that he should pay no attention to the Azerbaijani press. There are 560 papers in Azerbaijan, each of which "can write whatever it wants - we can't control them," with press targets including himself and President Aliyev. Additionally, "some countries" (i.e. Russia) were using Azerbaijan's free press to "sabotage" friendly GOTX-GOAJ relations. ¶9. (C) Summing up, Abdullayev told the Ambassador he felt that he had made his pitch to Berdimuhamedov, successfully presenting a vision for bilateral energy cooperation, and the next step was up to Turkmenistan. Azerbaijan has presented its own energy sector as a model for GOTX to follow, and has put its own energy infrastructure, built over a decade with billions of dollars of capital, at Turkmenistan's disposal. TURKEY -------------- ¶10. (C) Concerning the June 4 Nakhchivan meeting between President Aliyev and Turkish Prime Minister Erdogan, Abdullayev said the two sides reached agreement to build a gas main from Erzurum to supply Nakhchivan. Turkey will build it to the exclave's border, with the GOAJ completing it within Nakhchivan. Once this connection is complete Nakhchivan will no longer be dependent on Iranian gas. ¶11. (C) Abdullayev said that the two principals had no specific talks on gas transit issues or on gas sales to Turkey, other than a general GOAJ commitment to sell gas to the GOT. Although he didn't participate in the Aliyev-Erdogan meeting, he was told afterwards that the PM expressed support for Nabucco during the meeting. ¶12. (C) Abdullayev said he discussed gas issues in more detail with GOT Energy Minister Guler during the Nakhchivan summit. Guler repeated the GOT request to purchase a minimum of eight bcm/a of Shah Deniz Phase Two (SD2) gas, after which it would discuss transit of the remaining volumes to Europe. Abdullayev countered that first Botas should agree with the Shah Deniz (SD) Consortium over the new price of Shah Deniz Phase One (SD1) to Turkey, so that the Consortium knows that Botas is willing to pay market prices for SD gas. Guler's response was that SD1 price negotiations would take a long time, and it was better for both countries to settle the issue of SD2 sales to Turkey first. (COMMENT: As of April 15, 2008, Botas and the SD Consortium's Azerbaijan Gas Supply Company - responsible for marketing SD1 gas - began negotiations over the price of the SD1 gas currently being sold to Turkey at USD 120 per thousand cubic meters (mcm) . By comparison the current market price for gas in Turkey is between USD 400-450 dollars per mcm. According to Azerbaijan and SD Consortium contacts these negotiations have been slow due to Botas unwillingness to engage - upcoming septel). Abdullayev pointed out to Guler that inability to fix gas transit through Turkey would increase the possibility that the SD Consortium would sell SD2 gas to Russia. ¶13. (C) In terms of a USG message for the GOT, Abdullayev said that the USG should both encourage the GOT to "be rational and objective," and accept a normal (i.e. market) price for SD1 gas. If Turkey is able to present itself as a "normal and fixed" market and transit country, it is far more likely that the approximately USD 12 billion investment in SD2 will go forward in an optimal manner. Conversely, Abdullayev said that the GOT should be made to understand that "Azerbaijan and the SD Consortium have alternatives" (Russia and Iran) if Turkey remains truculent. The problem was, Abdullayev concluded, "we can't find anyone with authority in Turkey" with whom to discuss these issues. SOCAR Foreign Investment head Aliyev added that "from a purely commercial viewpoint, Russia and Iran are the best customers for SD2 gas," as the necessary pipelines were already in place. Abdullayev also said that the USG should encourage Turkey to realize that the GOAJ's selling it 8 bcm/a from SD2 would fatally cripple the Southern Corridor BAKU 00000620 003 OF 003 project. NABUCCO -------------- ¶14. (C) Answering the Ambassador's question, Abdullayev said that he did in fact have concerns about volumes and timing in relation to the Nabucco project. Given that OMV was the project operator, he was meeting it in Vienna on June 27, at which time he hoped to get a better idea of Nabucco's "strategy." He repeated his surprise upon hearing from RWE Midstream that the Nabucco project was seeking 15.5 bcm/a from SD2, when a year previously OMV had mentioned an amount of 5 bcm/a. He was also concerned about the estimated price of the project rising from USD 4.5 billion to 7.9 billion. SD2 - THE NUMBERS -------------- ¶15. (C) Abdullayev said SOCAR still hoped to sanction two pipeline projects with SD2 gas. Expected production from the Umid field would be used to meet increases in domestic demand, so that all SD2 gas could be exported. If SOCAR assumes SD2 production of 16 bcm/a, then it would seek to provide 3 bcm/a to Turkey, leaving 12 bcm/a to sanction two pipeline projects with 6 bcm/a each. (COMMENT: Other Embassy sources, to include SOCAR's own Vice-President assume SD2 production at 13 bcm/a. SOCAR VP Nassirov has previously told Embassy that he assumes that after sales to Turkey there will only be enough SD2 gas left to sanction one of the three competing pipelines. END COMMENT). EU --- ¶16. (C) When asked what steps the USG could take to get the EU more active in working constructively with Azerbaijan, Abdullayev repeated that the main problem was transit through Turkey. He said that neither SOCAR nor the rest of the SD Consortium is content with "verbal exemptions" from the EU that would allow the SD Consortium to sell jointly into Europe: they need written, official permission. COMMENT -------------- ¶17. (C) Azerbaijan believes it has done a strong job of presenting a viable model of energy sector cooperation to Turkmenistan, and is now waiting for feedback from Ashgabat. On gas transit, the USG needs to continue to encourage the GOT to allow fair and transparent transit of SD2 gas, while at the same time encouraging Azerbaijan and Turkey to pursue a separate sales and purchase agreement for sales of SD2 gas to Turkey, leaving enough to sanction at least one pipeline. END COMMENT. DERSE