BP BULLISH ON SOUTH CASPIAN GAS PRODUCTION

UNCLAS SECTION 01 OF 02 BRUSSELS 001239 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ENRG EPET EU SUBJECT: BP BULLISH ON SOUTH CASPIAN GAS PRODUCTION ¶1. (SBU) Summary. In a July 16, 2008 meeting with Special Envoy Gray, Bill Schrader (President of BP Azerbaijan) and Herb Vogel (Head of BP Global Gas) presented BP's planning scenarios for potential gas supplies from Azerbaijan and offshore Turkmenistan. BP predicts Europe will face a big supply gap by 2020 and believes opening up the Southern Corridor will be essential to fill this gap. BP believes that Azerbaijan and Turkmenistan could be a major source to help meet these needs with potential production as high as 100 bcm by 2025. BP estimates that existing gas transit routes are insufficient to handle future European gas demand so new routes will have to be built. Getting the gas to Europe, however, all comes back to getting a transit agreement with Turkey. In Schrader's mind President Aliyev is happy to see the gas projects languish until he gets the European deals he wants. Meanwhile, according to Schrader, the Turks, who are playing the game like the Azeris, are starving for money. End Summary. ¶2. (SBU) In a July 16, 2008 meeting with Special Envoy Gray, Bill Schrader (President of BP Azerbaijan) and Herb Vogel (Head of BP Global Gas) presented BP's planning scenarios for potential gas supplies from Azerbaijan and offshore Turkmenistan. Finding the gas to meet Europe's needs -------------- ¶3. (SBU) BP sees Europe facing a big supply gap by 2020 and believes opening up the Southern Corridor will be essential to fill this gap. BP estimates that the EU 27 plus Turkey will need 700 to 850 bcm of gas by 2020. Current contracted supplies along with LNG that could be acquired through 2020, however, only amount to about 500 bcm. This leaves a potential supply gap of 200 to 250 bcm. BP believes that Azerbaijan and Turkmenistan could be a major source to help meet these needs. Schrader laid out four possible scenarios for gas production from Azerbaijan and offshore Turkmenistan: -- Scenario 1 - No additional access. This scenario assumes no additional access to gas resources beyond what is currently discovered and under development (Shah Deniz, SOCAR production, and Turkmenistan offshore shipped east to Turkmenistan and north to Russia). Under this scenario gas production in the region could peak at about 50 bcm in 2025. -- Scenario 2 - Limited access. This scenario assumes access to Azeri-Chirag-Gunashli (ACG) non-associated gas, in addition to the sources in Scenario 1. Under this scenario gas production could peak at about over 60 bcm by 2025. -- Scenario 3 - Access with exploration success in Turkmenistan. This scenario assumes access to ACG non-associated gas with access and exploration success in offshore Turkmenistan. Under this scenario gas production could peak at about 90 bcm in 2025. -- Scenario 4 - Access with exploration success in Azerbaijan and Turkmenistan. This scenario assumes: access to ACG non-associated gas; access and exploration success offshore in Turkmenistan; and access and exploration success in Azerbaijan. Under this scenario gas production could peak at about 110 bcm in 2025. ¶4. (SBU) BP also believes there is a large potential for more onshore gas production in Turkmenistan, but they did not consider it in their estimates, because they do not believe it will be available for exports west. "These estimates are realistic..." -------------- ¶5. (SBU) Schrader believes that BP's estimates for Azerbaijan and Turkmenistan gas production are realistic. The estimates use data BP has on Azerbaijan and data received from Turkmenistan looking at known seismic structures, with exploration discovery success in Azerbaijan, and offshore Turkmenistan is treated as a risked outcome. As such, Schrader said these numbers are possible. BP estimates that development of these gas resources would cost approximately $1.0 - 1.5 billion per bcm. This is up from $500 million per bcm just a few years ago based on inflation in the industry. BP estimates total costs to develop SD-2 will be $17 billion for production of 1-13 bcm. But, how to get the gas back to Europe? -------------- ¶6. (SBU) BP estimates that existing gas transit routes are insufficient to handle future European gas demand. Current gas export capacity from Azerbaijan can only handle 18-31 bcm BRUSSELS 00001239 002 OF 002 - this includes the South Caspian Pipeline (7bcm currently, expandable to 20 bcm ),reversing the former Gazprom export line to Azerbaijan (10 bcm),and the export link to Iran, currently running at about 0.5 bcm of gas to Iran. (Note: BP estimates the Azerbaijan-Iran pipeline would require major investment to reach full capacity of 10 bcm as the link has not been maintained during the past 30 years End note.) Existing gas export routes from Turkmenistan are similarly limited to about 60 bcm, 50 bcm through Russia and 10 bcm through Iran. It all comes down to Turkey -------------- ¶7. (SBU) Getting the gas to Europe, however, all comes back to reaching a transit agreement with Turkey. Schrader believes that Azerbaijan is not in this for the money; they already have $2.3 billion a month going into their oil fund. Instead, Schrader believes Azerbaijan's gas policy is a geopolitical strategy to tie Azerbaijan to Europe. As such, Azerbaijan is not interested in selling all of its gas to Turkey. In Schrader's mind President Aliyev has all the money he needs and would be happy to wait out the Turks until he gets the European deals he wants. Meanwhile, according to Schrader, the Turks are playing the game as if the Azeris are starving for money. Too early to be considering Nabucco -------------- ¶8. (SBU) BP views Nabucco as being marketed 10 years early. From BP's standpoint they believe the Southern Corridor will need to grow on a capillary basis - building connections and capacity in small steps rather than going for a 30 bcm pipeline off the bat. Based on their outlook for gas production from the Caspian, BP believes Nabucco would be better pitched as an early 2020s project instead of a 2012-13 project. According to BP, there will not be enough initial gas supply to justify Nabucco as currently proposed. If SD-2 produces 13 bcm, Azerbaijan and Georgia takes 1 or 2 bcm and Aliyev decides to send 1 or 2 north to Russia that would leave 9-12 bcm at the Turkish border. BP believes Turkey will want to take a minimum of 5-6 bcm for their own use, which would leave only 3-7 bcm for exports to the EU. This scenario would work for TGI, which only needs 6 bcm but not for Nabucco which needs a minimum of 8 bcm. ¶9. (SBU) Comment. BP's projections argue the case that more gas volumes will become available once an agreement on transit is reached. Much depends on how Turkey decides to play the game, but equally important for meeting Europe's long-term needs will be finding a way to open up offshore Turkmenistan for exploration and development and getting Turkmenistan and Azerbaijan to come to an understanding over gas transit. End Comment. Silverberg .