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

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- 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
.