Identifier
Created
Classification
Origin
08BAKU893
2008-09-18 13:49:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AZERBAIJAN LAYS OUT A VISION OF, AND SEEKS USG

Tags:  PGOV PREL AJ TU TX ENRG 
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INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 3008
RUEHAH/AMEMBASSY ASHGABAT PRIORITY 0579
RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEKDIA/DIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEKJCS/JOINT STAFF WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000893 

SIPDIS

E.O. 12958: DECL: 08/18/2018
TAGS: PGOV PREL AJ TU TX ENRG
SUBJECT: AZERBAIJAN LAYS OUT A VISION OF, AND SEEKS USG
SUPPORT FOR, ITS SOUTHERN CORRIDOR STRATEGY

REF: BAKU 868

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

C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000893

SIPDIS

E.O. 12958: DECL: 08/18/2018
TAGS: PGOV PREL AJ TU TX ENRG
SUBJECT: AZERBAIJAN LAYS OUT A VISION OF, AND SEEKS USG
SUPPORT FOR, ITS SOUTHERN CORRIDOR STRATEGY

REF: BAKU 868

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


1. (C) SUMMARY: In a September 18 meeting with DAS Bryza and
Ambassador Derse, SOCAR Marketing VP Elshad Nassirov outlined
a sober and comprehensive approach to catalyzing our Southern
Corridor efforts. Driven by the shock of recent events in
Georgia, Nassirov reflected a level of urgency shared by his
President in his subsequent meeting with Bryza, Nassirov
asked for high-level USG support to help persuade the Turkish
Government that it is in its own long-term best interest to
allow Caspian gas to transit Turkey, and to help persuade the
Turkmenistan Government to sell gas from the offshore Livanov
field to Turkey. If the GOTX were to sell gas to Turkey at
its border, Azerbaijan could build an interconnector (i.e.a
Cross-Caspian pipeline),Turkey would get the short-term
eight bcm/a it is seeking, Azerbaijan would get transit
through Turkey, Russia would be compelled to offer
Turkmenistan European netback prices, and there would be
enough gas to sanctiona Nabucco(and other) pipeline. For the
first time, Nassirov indicated Azerbaijan had decided to
proceed with development of ACG deep gas, which could provide
significant new gas volumes in the next few years. Nassirov
also confirmed that he will be in Washington DC October 1-2.
Embassy Baku recommends that the relevant senior level
policymakers working on regional energy issues meet with
Nassirov during this visit, whose strategic vision and
practicle problem-solving approach drives much of
Azerbaijan's energy policy. END SUMMARY.


2. (C) On September 18 DAS Bryza and Ambassador Derse met
with SOCAR VP for Marketing Elshad Nasirov. Also present
were Murad Heydarov, Senior Advisor to the SOCAR President,
and EnergyOff (notetaker).

TURKEY STILL THE PROBLEM
--------------


3. (C) Nassirov told Bryza that the GOAJ would not take
ongoing commercial negotiations with European potential
buyers of Shah Deniz Phase Two (SD2) gas any further until
and unless Turkey agreed to transit Azerbaijan gas to Europe,

since doing so would "show Turkey that we don't have any
other option." He underscored that Azerbaijan would exercise
its option to leave the gas in the ground if it cannot
establish a direct relationship with European buyers, in
support of Azerbaijan's broader strategic goal of European
integration.

SOCAR-GULER READOUT
--------------


4. (C) Nassirov said that in talks last week with GOT Energy
Minister Guler and Botas Director-General Duzyol, SOCAR
sought to convince them that GOT long-term interest lay in
granting transit, and that the GOT should be thinking beyond
the 2013 timeframe. Of the three countries that can serve as
transit for Caspian and Central Asian gas, Ukraine transits
approximately 100 bcm/a, Belarus approximately 70 bcm/a
(COMMENT - gas transiting Belarus is closer to 20 bcm/a END
COMMENT),and Turkey zero bcm/a. If Turkey opens its doors
for gas, not only will its strategic significance for Europe
increase, but Turkey will also attract greater gas volumes
for itself, since countries east of Turkey will get the best
netbacks by selling to the Turkish market. With open Turkish
gas transit, SOCAR had told Guler Turkey could attract a
minimum of 50 to 70 extra bcm/a, to say nothing of the
additional investment it would get in Turkish energy
infrastructure. Guler's response remained that Turkey
"wanted its eight bcm/a" from SD2.


5. (C) Nassirov said that in these approximately eight hours
of meetings held with Energy Minister Guler and Botas last
week, SOCAR had also made a specific proposal that if Turkey
dropped its insistence on eight bcm/a from SD2 and settled
for four bcm/a, and allowed no more and no less than 7 bcm/a
of SD2 to be sold to Europe, Turkey could have the option to
buy not just all excess SD2 gas (excluding 3 bcm/a for
Azerbaijan and Georgia),but also future production from SD,
ACG Deep Gas, Umid, Absheron, Sardar-Kyapaz, and any other
GOAJ-based gas development. Guler refused the offer, saying

BAKU 00000893 002 OF 004


the GOT "wanted its eight bcm/a" from SD2. When SOCAR
responded that if Turkey insisted on eight bcm/a from
Azerbaijan it would wind up getting no gas at all, as
Azerbaijan would not develop SD2, and that as a result Turkey
would have to seek the volumes it would have gotten from
Azerbaijan and east of Azerbaijan elsewhere, Guler responded
to the effect that "fine, let it be zero."


6. (C) Nassirov said that Guler had complained to SOCAR that
the USG, EU and others were not helping Turkey in its quest
for short-term gas security, since they were not ensuring
that Iraqi gas would directly flow to Turkey and not through
Syria or elsewhere. In this regard, Nassirov said that
Shell's CIS Strategic Advisor Dr. Neal Carmichael had
recently told him that in talks with Shell, the GOT was
similarly refusing Shell requests to provide transit to gas
slated to be developed from Iraq's Aqqaz field, demanding
that Shell sell the GOT "all ten bcm/a" of Aqqaz gas (NOTE:
Most estimates are that this field will produce o/a 7 bcm/a.
End note.).

GOT-GOTX GAS DEAL
--------------


7. (C) Nassirov said another proposal SOCAR had made to Guler
and Duzyol was that Turkey buy four bcm/a from SD2, and get
the other four bcm/a it needed from Turkmenistan, under the
existing 1998 SPA the two countries had signed. If Turkey
were to actualize this existing contract, filling out details
such as delivery point, Azerbaijan would construct the
pipeline to Block One (Livanov). Nassirov had told Guler
that given GOTX over-commitments for 100 bcm/a (30 for
Russia, 40 for China and 30 for Turkey),it would choose to
carry out those contracts with the best netbacks, with Block
One gas westwards yielding this best price and highest
netback. Guler had responded to Nassirov that he had visited
Ashgabat two weeks prior, and he agreed with SOCAR to return
there for more talks, adding however that Turkey was
skeptical that Livanov gas could move west, as it had already
been committed to Russia.


8. (C) Nassirov told Bryza that SOCAR had also pitched this
idea of a GOTX-GOT gas deal the previous week in its talks
with its talks with the GOTX Energy Minister and the new head
of the State Hydrocarbon Agency. Both of them had told SOCAR
that they liked the idea, but "someone must inform the
President," the implication being that neither of them would
dare take the matter to Berdimuhamedov themselves.

REQUEST FOR USG SUPPORT
--------------


9. (C) In regard toa possible GOTX-GOT gas deal Nassirov
told Bryzathat "Azerbaijan cannot do it alone." President
Aliyev would never ask Berdimuhamedov to sell gas to Turkey.
As such, he asked for USG support to help actualize this deal
) "Russia is on the move and the EU is dormant . . . Turkmen
leaders are afraid to raise this proposal with their
president...we need your support to explain the proposal to
President Berdimuhamedov." More generally, Nassirov said
that GOT transit could not be solved at the GOT Energy
Minister/Botas level, and asked for USG support in getting
the Turkish PM and President to realize the strategic
advantages of the Southern Corridor project, and to get them
involved in working with Azerbaijan to find a mutually
agreeable solution on transit and gas sales.

ACG DEEP GAS
--------------


10. (C) Nassirov told Bryza that the GOAJ had "decided to
proceed" with the development of the largest known
undeveloped gas field in Azerbaijan, i.e. ACG non-associated
gas (aka "ACG Deep Gas" ) non-associated gas under the oil
field currently being developed by the AIOC Consortium).
However, in order to do so, it must have a sales market for
this gas, which it can't have until Turkish transit is
solved. Turkey "cannot be considered a realistic and
profitable market" at this point, since it is refusing to pay
anything close to market price for gas, offering to buy Shah
Deniz Phase One gas at the price of USD 144 per thousand
cubic meters, with a ten percent price increase in 2009

BAKU 00000893 003 OF 004


(NOTE: Botas and the SD Consortium are currently
renegotiating the price of SD1 gas, currently at the severely
under-market price of USD 120/tcm due to price ceilings on
the gas for the first year of the SPA contract). More
generally, Nassirov said "there is no sense in producing"
additional gas in Azerbaijan without transit through Turkey,
since without transit SOCAR will be beholden to the Turkish
market, giving Turkey to power to 'renegotiate' prices
downwards a few years into the contract.


11. (C) Nassirov told Bryza that the GOAJ had "no desire" to
sell any gas to Russia or Iran, but it has listed these two
countries as potential buyers of SD2 gas so that SD
Consortium member TPAO will tell the GOT that the SD
Consortium is seriously considering non-Turkish-dependent
options.

NABUCCO
--------------


12. (C) Nassirov told Bryza that of the six Nabucco partners,
RWE Midstream seemed the most active in seeking to get the
project off the ground, more so than, inter alia, OMV, who
was seeking various deals with Russia. He had proposed to
both RWE and Nabucco partner OMV that "Nabucco start in
Azerbaijan," i.e. that a cross-Caspian pipeline to the GOTX
Livanov Block could be eastern terminus. Azerbaijan could
build such a pipeline in Azerbaijan and Georgia. Conversely,
Azerbaijan was exploring the possibility of building a
cross-Caspian pipeline to Turkmenistan ostensibly for the
purpose of selling its gas to China.


13. (C) Nassirov told Bryza that SOCAR's point to the GOTX
about a cross-Caspian pipeline is that once such a pipeline
is built the GOTX is assured of getting market prices for its
gas from Russia even if it never uses the pipeline to ship
gas west. Azerbaijan could build such a cross-Caspian
pipeline, approximately 200 kilometers long, "in less than
one year ) we only need Berdimuhamedov's agreement."
(COMMENT: Energy Minister Natiq Aliyev later told Bryza it
could be done in five to six months, based on the GOAJ's
experience with the Shah Deniz Phase One transport
infrastructure END COMMENT). Building this pipeline need not
wait on overall Caspian delimitation, environmental issues,
or the specific delimitation/ownership issue for the disputed
Sardar-Kyapaz (S-K) offshore field, and "Turkmenistan is
losing money" the more it delays in agreeing to such a
pipeline.

S-K DELIMITATION
--------------


14. (C) Nassirov said that the GOAJ needed a "face-saving
agreement" in which SOCAR could be the operator for the S-K
field while "95 percent" of the oil and gas belonged to the
GOTX. Azerbaijan understands that under international law
"at most" fifteen percent of S-K belongs to the GOAJ. The
PSA would be confidential, so the public need not know the
relative ownership percentages for each country.

GOAJ GAS FOR GREECE
--------------


15. (C) Nassirov told Bryza that SOCAR had offered to "take
over" the existing supply contract Botas has with the Greek
energy company DEPA. Botas is losing hundreds of millions of
dollars with the contract, since it is selling gas to Greece
at USD 149/tcm that it is buying for, on average, USD
420/tcm. SOCAR was willing to take over this contract,
paying a fair transit price to Turkey, merely to establish
the principle of direct gas sales to Europe through Turkey.
However, Botas has not accepted this offer.

THE WAY FORWARD
--------------


16. (C) Concluding, Nassirov told Bryza that the three GOAJ
energy issues with Turkey, Turkmenistan and gas for Nabucco
cannot be solved in isolation but must be solved in
combination. With Livanov gas, Turkey would gets its eight
bcm (four from SD2, four from Block 1) and Europe get 15-20
additional bcm/a via a Nabucco (and other) pipeline that

BAKU 00000893 004 OF 004


starts in Azerbaijan. Nassirov noted that BP confidential
estimates are that Block One could start producing
significant amounts o/a 2010, with up to 17 bcm/a by 2017.
Azerbaijan in this instance would become the seventh Nabucco
partner, financing pipeline construction in the Caspian to
the GOTX border, in Azerbaijan itself, and in Georgia. In
this regard, Nassirov noted it would take USD 2.5 billion to
expand the SCP pipeline.

NASSIROV IN DC
--------------


17. (C) Nassirov confirmed that he would be in Washington, DC
October 1 and 2, and was willing to meet with USG officials.
DAS Bryza said that USG policymakers would benefit greatly
from talking with him, and said he would work to set up
meetings for Nassirov.


18. (C) COMMENT: Nassirov, the SOCAR executive primarily
responsible for gas sales abroad and President Aliyev's
closest advisor on gas strategy, continues to seek
any/all means to make the Southern Corridor a reality, by
seeking to convince Turkey to provide gas transit in
accordance with existing commercial and legal norms. He
offered Bryza a sober, practicle, and comprehensive way
forward that reflects a greater degree of urgency due to the
shock of recent events in Georgia. We should support
Azerbaijan's request for USG support to 1) work with our GOT
ally to find a mutually agreeable solution to transit, and 2)
persuade the GOTX to sell gas at its border to the GOT. In a
meeting later in the day with DAS Bryza, President Aliyev
strongly reinforced this request for USG help (upcoming
septel). Additionally, Embassy Baku and DAS Bryza strongly
recommend that the relevant senior level policymakers working
on regional energy issues meet with Nassirov during his
October 1-2 Washington DC visit, and we will be seeking to
arrange such meetings. END COMMENT.


19. (U) DAS Bryza has cleared this cable.
DERSE