SOCAR VP, SE GRAY DISCUSS NEXT STEPS RE TURKEY

C O N F I D E N T I A L BAKU 000728

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: SOCAR VP, SE GRAY DISCUSS NEXT STEPS RE TURKEY

REF: A. BAKU 719

B. BAKU 721

C. BAKU 726

D. ANKARA 1286

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


1. (C) SUMMARY: SOCAR Marketing Vice-President Elshad
Nassirov, one of President Aliyev's key energy advisors, told
SE Gray that selling any more than four billion cubic meters
(bcm) of Shah Deniz Phase Two gas (SD2) to Turkey would "kill
the Southern Corridor project." He said Turkey sought eight
bcm of SD2 gas to kill the project and to gain the ability to
force Azerbaijan to sell it gas at submarket prices. He said
Turkey should be made to realize that Azerbaijan has
alternatives for selling Shah Deniz Phase Two gas, to include
Russia, Iran, and "Nabucco without Turkey," i.e. a Black Sea
pipeline from Georgia to Bulgaria that would deliver at least
10 bcm of Azerbaijani gas to Europe. He urged the USG to
work to encourage Greece to accept a deal whereby SOCAR would
take over an existing Botas contract for gas sales to Greece.
Nassirov, the main GOAJ point person for SD2 marketing, is
focused on finding alternatives to transit through Turkey,
partly to prepare the GOAJ for alternatives, but primarily as
a way to convince Turkey that the GOAJ has options. END
SUMMARY.


2. (C) On July 14 Special Presidential Envoy for Eurasian
Energy C. Boyden Gray, Eurasian Energy Coordinator Ambassador
Steven Mann and Ambassador Derse met with SOCAR Marketing
Vice-President Elshad Nassirov. 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 SOCAR side) SOCAR Presidential Advisor
Murat Heydarov.

TURKEY
--------------


3. (C) SE Gray gave Nassirov a readout of his GOT meetings
(reftel A),highlighting the divergence in priorities between
the PM and MFA on the one hand, seemingly eager to cooperate
on the Southern Corridor, and the Energy Minister, who seemed
exclusively focused on getting eight bcm/a from Azerbaijan.
Nassirov said that the GOAJ seems to share the same vision
with the GOT MFA, adding that even the Energy Minister Gular
has always been "positive" in discussions, with Botas
leadership less so.

8 BCM = TURKISH TRICK
--------------


4. (C) Nassirov doubted that Turkey actually needed 8 bcm/a
from SD2, and said that its demands were a ploy to kill the
Southern Corridor Project and allow itself the right to
impose a price on Azerbaijan. He said that if Azerbaijan
were to sell 8 bcm/a of SD2 to Turkey, only 2.5 bcm/a would
be left, after having also accounted for Georgian and
Azerbaijani needs. This amount would be too small to
sanction any pipeline. Turkey, then being the dominant
customer for SD2 gas, would seek to unilaterally impose a
submarket price for SD2 on Azerbaijan a few years into the
contract.


5. (C) Nassirov said SD2 production would be approximately
13.8 bcm/a. Of that, 3 bcm/a would go to Azerbaijan and
Georgia, leaving approximately 10.5 to 11 bcm/a for Turkey
and beyond. The SD Consortium position is to sell a maximum
of 4 bcm/a to Turkey so that 6 bcm/a is left, enough to
sanction one pipeline project - "if Turkey needs more than 4
bcm/a, it can get it from Russia, Iraq or Iran; we need
European access." Nassirov stressed that if Turkey were to
buy more than 4 bcm/a of SD2, "there would be no European
pipeline, and Turkey would be able to impose gas prices on
Azerbaijan."


6. (C) Nassirov said that the SD Consortium was almost done
fashioning a working group to market SD2 gas (COMMENT:
According to SD Consortium member StatoilHydro, this SD
working group is composed of representatives from BP,
Statoil, SOCAR and Total. After contracts are signed, the
Consortium will create a Special Purpose Vehicle ) SPV, to
administer the contracts. END COMMENT). BP and Statoil on
the one hand and SOCAR on the other are still discussing the
exact decision-making mechanism, with each side wanting
"negative control" over the other's decisions.

RUSSIA
--------------


7. (C) Nassirov said that Russia was getting serious,
about blocking the Southern Corridor. During Russian
President Medvedev's recent Baku visit, Gazprom repeated to
SOCAR that it wanted to buy all SD2 volumes, not just the two
to three bcm/a that SOCAR offered. SOCAR told them to
prepare a commercial proposal. Gazprom was offering
"European prices, minus 15 percent profit for Gazprom, minus
transit," which according to Nassirov would equal an
unacceptably low USD 246 per thousand cubic meters. Despite
this low initial offering price, Nassirov categorized his
talks with Gazprom as positive, in sharp contrast to his
discussions with Turkish interlocutors. Referring to a
90-minute chat he had with Gazprom CEO Alexei Miller while
both were at the airport waiting for the arrival of President
Medvedev, Nassirov said that it was hard to describe how
relaxed and self-confident the Russian was in contemplating
Gazprom's domination of the European gas market, which Miller
seemed to take as a fait accompli. He said that Miller was
very pleased with a recent Economist article pointing to
GazProm,s influence on the Russian resurgence.

ALTERNATIVES
--------------


8. (C) Nassirov said that "Turkey should realize Azerbaijan
has other options" should Turkey refuse to provide gas
transit to Europe. In addition to selling SD2 gas to Russia
and/or Iran, the GOAJ could pursue a "Nabucco without Botas"
strategy, in which the SD2 gas went from Georgia across the
Black Sea in a pipeline to Bulgaria, enabling a minimum of 10
bcm/a to arrive in Europe, as "the Black Sea will not ask for
eight bcm." (COMMENT: When informed of technical
limitations, relating to the inability to achieve sufficient
compression offshore, that would limit pipeline capacity to
approximately five bcm/a, Nassirov subsequently refined the
idea by having the pipeline touch land, for recompression,
south of Sevastopol in Ukraine, before continuing on to
Bulgaria. END COMMENT). Nassirov said that Bulgarian
President Parvanov had been active in forming this idea.
Under this scenario, four of the six Nabucco members would
vote Botas out and subsequently vote in Gas De France. OMV
CEO Wolfgang Ruttensdorfer and OMV Gas CEO Werner Auli were
both "enthusiastic" about the idea, but told Nassirov it
would be impossible for them to mention this option to Botas.

GOAJ-GREEK CONTRACT?
--------------


9. (C) Nassirov said that currently Turkey sells 750 million
cubic meters per year of gas (mcm/a) to Greece, at USD 120
per thousand cubic meter (mcm). The price of this gas is
linked to the price of SD1 gas being sold to Turkey from
Azerbaijan, so when the SD1 price is re-negotiated upwards to
a market price, this price will also rise. Nassirov pointed
out that Turkey is selling gas to Greece at USD 149/tcm (SD1
price of USD 120/tcm, plus USD 29/bcm transportation to
Greece) while it is buying gas from Gazprom at USD 500/tcm,
and that Turkey has proved an unreliable supplier, cutting
off gas to Greece when faced with domestic shortages.
Nassirov said that in order to secure the principle of
transit through Turkey, the GOAJ is willing to in effect take
over the Turkish contract. Everybody wins -- the GOT gets a
chance to dump an economically unviable contract, DEPA gets
guaranteed gas at low prices, and Azerbaijan gets affirmation
of the principle of direct sales to a European customer, with
clear transit through Turkey. Nassirov urged the USG to
encourage the Greeks to work for this contract with
Azerbaijan.


10. (C) Ambassador Mann said that the desired end state
should be one where Turkey gets some SD2 volumes and
assurances concerning future supply of gas While other SD2
gas moves onward to Europe Referring to GOT pressure on the
USG to cooperate on GOTX energy sector development, Mann said
that the USG should remind Turkey that "there will be no
Turkmen gas without Azerbaijan." As to GOT's willingness to
budge on transit, he observed that in this part of the world
normally "nothing happens until right after it has to
happen," i.e. the transit issue will get solved only when it
needs to -- by the time when SD2 needs to enter the "define"
phase (first or second quarter 2009). Mann also told
Nassirov that the more that Azerbaijan can do to make ACG
Deep Gas a reality, the easier negotiations with Turkey will
proceed, because the GOT will "see additional volumes coming
available." Nassirov countered that he doubted that
"additional gas would make Turkey realistic," adding that
Turkey was using the gas transit issue to enhance its
prospects for EU accession. He confirmed that Gazprom had
told Turkey that it would not be able to renew its 6 bcm/a
supply contract ending in 2011. Mann concluded by saying
that this was still the "horse-trading stage," and that
current positions were not final ones. Turkey's message has
always been consistent: it wants full gas supply with
maximum flexibility, and a "cushion" for potential surplus
energy demand.


11. (C) COMMENT: Nassirov, the main GOAJ point person for
SD2 marketing, is focused on finding alternatives to transit
through Turkey, partly to prepare the GOAJ for alternatives,
but primarily as a way to convince Turkey that the GOAJ has
options. END COMMENT.


12. (U) This cable has been cleared by SE Gray, Ambassador
Mann.
DERSE