AZERBAIJAN PRESIDENT, SPECIAL ENVOY GRAY DISCUSS

C O N F I D E N T I A L BAKU 000726

SIPDIS

EUR FOR MATT BRYZA; EEB FOR BOYDEN GRAY AND STEVE MANN

E.O. 12958: DECL: 08/03/2018
TAGS: ECIN ECON ENRG EPET PGOV PINR PREL AZ TU
SUBJECT: AZERBAIJAN PRESIDENT, SPECIAL ENVOY GRAY DISCUSS
NEXT STEPS IN ENERGY COOPERATION

REF: A. BAKU 719

B. BAKU 721

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


1. (C) SUMMARY: In a July 14 meeting with Special Envoy
Gray, President Aliyev sought USG views on how to best
proceed on the Southern Corridor project. SE Gray reaffirmed
the U.S. commitment to work with Turkey and the EU to enable
gas transit. To entice Turkmenistan into shipping gas west,
Aliyev remained convinced that any final consumer needed to
take the initiative to buy gas at the Turkmen border.
President Aliyev was unhappy with Secretary Rice's comments
in Prague implying a lack of democracy in Azerbaijan, saying
"such comments are not helpful." Clear in this meeting with
President Aliyev was his eagerness to accept guidance from
the USG on how to move forward vis-a-vis gas transit through
Turkey, and to a lesser extent, bilateral energy cooperation
with Turkmenistan. Also palpable was his assessment that
Azerbaijan could rely on no one else, in the face of a
"full-court press" by Russia, lack of progress on transit
with Turkey, confusing correspondence with Turkmenistan and
perceived problems with BP. END SUMMARY


2. (C) On July 14 Special Presidential Envoy for Eurasian
Energy C. Boyden Gray, Eurasian Energy Coordinator Ambassador
Steve Mann and Ambassador Derse met with President Aliyev.
Also present were (on the U.S. side) U.S. Trade and
Development Agency Regional Director Dan Stein, Department of
Energy Director of Russian and Eurasian Affairs Lana Ekimoff,
and Embassy Energy Officer, and (on the GOAJ side)
Presidential Personal Assistant Ali Asadov.

TURKEY TRANSIT
--------------


3. (C) SE Gray gave President Aliyev a read-out of his July
9-13 Turkey visit. He sensed an energy policy split within
the GOT, an impression supported by other knowledgeable
observers with whom he had spoken. In separate meetings, a
positive and upbeat PM Erdogan and MFA U/S Apakan (FM Babajan
was out of town) seemed eager to cooperate with Azerbaijan
and the West in energy sector development and on Southern
Corridor projects. The PM was also very positive about his
Nakhchivan June 4 meeting with President Aliyev. However in
SE Gray's meeting with the Energy Minister, a brusque Guler
focused exclusively on getting Azerbaijan to fulfill its
"promise" to Turkey of eight billion cubic meters annually
(bcm/a) of Shah Deniz Phase Two (SD2) gas. Guler said that
the GOT could facilitate the transit of the other five bcm/a
of SD2 to Europe through its own internal pipeline network,
obviating the need for any new pipeline, and not factoring in
any gas for Georgia. SE Gray told Aliyev that the PM had
suggested a energy working group between the U.S. and the GOT
MFA, which he interpreted as a manifestation of the PM's
desire to shift responsibility for Southern Corridor energy
issues from the Energy Ministry to the Foreign Ministry,
rumors of which he has heard elsewhere.


4. (C) Aliyev said Azerbaijan had made no "promise" of 8
bcm/a to Turkey. He did not believe there was such an
internal policy split, or that the Energy Ministry could be
acting independently. SE Gray's information "complicates our
plans," since "there would be nothing left" of SD2 were the
GOAJ to sell 8 bcm to Turkey. "If we agree to their demands
for 8 bcm, what will be their demands in the future?"
President Aliyev has told SOCAR that if there is no agreement
on transit through Turkey, SD2 development should not be
sanctioned (COMMENT: In a subsequent conversation between
SOCAR Vice-President Elshad Nassirov and Eurasian Energy
Coordinator Ambassador Steven Mann, Nassirov requested that
this Presidential dictum linking SD2 development to fair
transit not be communicated to the GOT, as the GOAJ was
seeking indirectly to persuade Turkey that the GOAJ was
seeking other export options for SD2 gas not involving
transit through Turkey END COMMENT).

TURKEY: SDI PRICING
--------------


5. (C) On the negotiations between Botas and the Shah Deniz
Consortium for a new price for the Shah Deniz Phase One (SD1)
gas being sold to Turkey, Aliyev said the new price must be a

market price. However, there has been "no progress" with
Botas, and the matter could end up in arbitration (COMMENT:
For the first year of SD production gas was sold to Turkey at
the sub-market price of USD 120 per thousand cubic meters
(tcm) due to the pricing algorithm devised at the time of the
PSA, when oil was being sold at USD 18 dollars per barrel.
This algorithm had in it an oil ceiling price of a
then-unimaginable USD 40 per barrel. Once the new price is
agreed between Botas and the SD Consortium, it will be
applied retroactively to the date of April 15, 2008. END
COMMENT)


6. (C) Aliyev said it was unacceptable that countries such
as Turkey, Georgia and Ukraine, with no energy production
themselves, seek to present themselves as "energy suppliers."
Turkey was seeking to "separate the sources from the
market," but Azerbaijan would not let this happen. Turkey
should seek to act in accordance with international practice,
and not seek to impose terms on consumers and producers.
SD's "competition" (i.e. Russia) was working actively to
subvert the Southern Corridor by putting pressure on (inter
alia) Turkey. Aliyev said that the future of SD1 was
uncertain and now, given GOT intransigence, there was no
clear picture of whom SD2 consumers would be. For the first
of many times in this meeting, he said that he "does not know
what to do" about Turkey.


7. (C) SE Gray said Russia's threat not to renew Turkey's
six bcm/a gas supply contract expiring in 2011 was clearly an
attempt to pressure Turkey. However, there was no European
response to Russia's clear attempts to dominate the European
gas market. More generally, SE Gray said that one could not
understand EU energy policy without understanding its
priorities. Western Europe won't recognize its own gas
needs, since it cannot admit it cannot meet its climate
change goals without vast amounts of additional gas. Gray
explained that Western Europe was focused almost exclusively
on meeting its climate change goals, ignoring the threat of
Gazprom's gas monopoly. The United Kingdom's goal in all
this was to become the world's major carbon trading center.

NEXT STEPS
--------------


8. (C) In response to President Aliyev's repeated question
of what to do next, SE Gray enumerated the following steps:

- ONE: Go forward with the GOT Foreign Ministry energy
working group proposed by the PM, to test if the GOT is
serious in seeking USG help in "re-ordering its house" or is
just indulging in a "good cop-bad cop" routine, as President
Aliyev believes. Try for periodic meetings of such a group
to move the various issues forward, and to see if indeed the
PM is seeking to sideline the Energy Ministry and empower the
MFA in energy policy.

- TWO: Get Brussels more active. EU Secretary General
Javier Solana has become interested in the energy issue, and
SE Gray was scheduled to meet with his deputy the coming
week. "If Solana become involved, it is a different
picture," since he is far more effective than the relatively
weak EC President Jose Maneul Barroso, who is beholden to and
seeking to curry favor with the French.

GOTX - BUYERS MUST ACT
--------------

9. (C) Aliyev said he was surprised that Azerbaijan had
recently once again received a diplomatic note from
Turkmenistan protesting GOAJ development of the ACG offshore
field (septel),which he saw as inconsistent with the
positive bilateral cooperation exhibited by Turkmenistan on
the possibility of offshore bilateral energy cooperation and
on the upcoming September joint energy conference and
exhibition. Aliyev ascribed this letter to "Russia being
active" in Ashgabat, to include its offers of buying GOTX gas
at "market price."


10. (C) When Hungarian Prime Minister Gyurcsany recently
asked him as to what to do to expedite Turkmen integration
into the western energy grid, Aliyev said he told him that
"those who want to buy Turkmen gas must act now."
Turkmenistan was considering a cross-Caspian option, but
wants to sell its gas at the border, so buyers must be ready
and willing to buy it at the border. Aliyev told Gyurcsany

that he should sign an MOU with Turkmenistan and one with
Azerbaijan in this regard. Azerbaijan was willing to buy
GOTX gas at the border, but only if "all the other pieces
were in place," to include final customers and assured
transit. Aliyev added that the EU would be wise to invest in
any potential pipeline from Turkmenistan to Azerbaijan, much
as Russia is doing with Southstream.


11. (C) Ambassador Mann said that until the major IOCs are
allowed into Turkmenistan to develop the upstream sector, it
is bootless to focus on buying large volumes from
Turkmenistan, because such uncommitted volumes won't be
available. Instead, initially a consortium should develop
the Turkmen upstream sector. In a recent meeting with Head
of State Agency for Hydrocarbon Resources Baimurat Muradov,
there were indications that the GOTX was "re-thinking" its
proscription on international companies pursuing onshore
development. Aliyev said that such fundamental changes will
take time, and that he has seen no signs of such a changing
policy. Even if the GOTX were to adopt a new policy towards
exporting to the West, implementation will take time, with
typical gas development until production taking seven to
eight years. Meanwhile, the Southern Corridor project was
facing unexpected obstacles such as Turkey, and the June
announcement that Austria would join Southstream, which if
true would "kill Nabucco." Azerbaijan is the "easiest part"
of the Southern Corridor project, Aliyev said, "Everywhere
else there are problems." In response to a question from
USTDA Stein, Aliyev said that the GOAJ had contemplated LNG
across the Black Sea, which might make sense, given that it
had its own terminal (i.e. Kulavi).

GOTX EARLY GAS
--------------

12. (C) Mann presented Aliyev with a two-page paper,
"Pathway to 'Early Gas' from Turkmenistan and Beyond,"
listing steps the GOAJ and GOTX could take to interconnect
their offshore gas infrastructures. Aliyev said that
technically it wouldn't be hard to do, if Berdimukhamedov had
the political will. Mann said that he repeatedly has told
the GOTX President to diversify gas exports, since if
Berdimuhamedov relies on Russian belief in sanctity of
contract, "Turkmenistan's only recourse will be in a Moscow
court" if the Russians go back on their promise of a "market
price" for GOTX gas. Aliyev agreed that Russian assurances
of a market price to the GOTX rang hollow, and that if
Turkmenistan had no alternative export routes, it wouldn't
get a market price from Gazprom.


13. (C) Aliyev said that neither the GOTX nor the GOAJ could
be the initiator of any cross-Caspian project. Rather, "the
consumers must initiate." But, all those with an interest in
such a project, to include individual European countries,
Turkey and BP were all under Russian Pressure. Azerbaijan,
Aliyev underscored, is &alone8 in its full support for the
Southern Corridor and in resisting Russian pressure. Gray
agreed with Aliyev, saying that it was clear that Russia
wished to vitiate the Southern Corridor Project and buy
Caspian gas for itself, as opposed to investing money into
additional production in places such as Yamal. Gray said his
concern was that if the TNK-BP project ended badly, "no
western company will want to go to Russia." Aliyev said
Russia needs additional resources, but instead was focusing
on seeking to block alternative supply to Russia. Russia
should be investing in projects with IOCs to increase
production, not in "strange pipelines" like Southstream.


14. (C) Aliyev said BP continued to relay bad news, having
recently informed Azerbaijan that there would be less
associated gas from the ACG field than expected, and that the
start of SD2 production would be delayed by one year
(COMMENT: Publicly the SD Consortium has said that SD2
production would start o/a late 2013, while privately it has
commented that the start would probably be later). Aliyev
said he "did not exclude" Russian pressure on BP with respect
to its activities in Azerbaijan. If Russia were to "separate
Azerbaijan from Europe," then it could dominate European gas
markets, hence BP could be an important tool for Russia in
this regard.

SEPTEMBER CONFERENCE
--------------


15. (C) SE Gray said he would discuss high-level USG

attendance at the September 9-10 Azerbaijan-Turkmenistan
Energy Conference and Exhibition in Baku. (COMMENT: In a
separate meeting between SOCAR Marketing VP Nassirov and
Ambassador Mann, Nassirov said that GOTX President
Berdimuhamedov would not be attending this conference, as he
felt that he could not again return to Baku until Aliyev had
made a visit to Ashgabat. The senior GOTX official would be
Vice-Premier for Oil and Gas Tachbergy Tagiev).

SEC RICE PRAGUE COMMENTS
--------------


16. (C) Aliyev commented he had noted Secretary Rice's
comments to Radio Liberty in Prague as to how oil-rich
countries experienced a decrease in democracy. Seeming to
quote from memory, he cited the Secretary as saying that
"these countries cannot be ruled as in the eighteenth
century," and that "pressure must be put on these leaders
from both the top and the bottom . . . my message to these
leaders . . . they must know that freedom will not fail."
Aliyev said that these comments directed towards Kazakhstan,
Uzbekistan, Azerbaijan and Turkmenistan "were not helpful,"
to include her specific referral to Turkmenistan - "these
kinds of things create questions."



18. (C) COMMENT: Clear in this meeting with President
Aliyev was his frustration with surrounding parties in terms
of natural gas development, marketing and transport. While
eager to accept guidance on the "way forward" from the USG,
Aliyev decried Turkey's intransigence on transit as the key
underlying problem. Lack of progress on SD1 pricing and
excessive demands for SD2 gas have further muddied the waters
with Ankara. Aliyev, as always, pointed to Russian pressure
on potential partners, including Turkey, Turkmenistan and BP,
and noted that following the Medvedev/Miller visit, Russia is
even a meddler in Azerbaijan. Mixed signals from the GOTX,
bad news from BP, heightened Russian regional activity and
inaction out of Brussels, in Aliyev's view, has left
Azerbaijan "alone," and led the President to suggest more
openly that Azerbaijan forego the sanctioning of SD2.


19. (U) Ambassadors Gray and Mann have cleared this cable.
DERSE