AZERBAIJAN: MINENERGY DESCRIBES SOCAR-GAZPROM GAS

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000300 SIPDIS DEPT FOR EB/ESC, EUR/CARC E.O. 12958: DECL: 04/13/2019 TAGS: ENRG EPET ECON AJ SUBJECT: AZERBAIJAN: MINENERGY DESCRIBES SOCAR-GAZPROM GAS SWAP Classified By: AMBASSADOR ANNE E. DERSE, REASONS 1.4 (B,D) ¶1. (C) Summary: Azerbaijan Minister of Energy Natiq Aliyev described to EUR DAS Matt Bryza April 3 a natural gas swap agreement between Azerbaijan,s SOCAR and Russia,s Gazprom that would provide gas to the North Caucasus Republic of Dagestan in exchange for Russian gas for an Azerbaijani-owned petrochemical complex in Turkey. Azerbaijani gas for Dagestan would be SOCAR,s &own,8 i.e., it would not be from the Shah Deniz consortium. Minister Aliyev complained that the Turks continue to block Azerbaijan,s efforts to deliver gas to Europe, including Greece and Bulgaria. He agreed that more discussion of alternative projects, like Georgia LNG or a trans-Black Sea &White Stream8 might be useful, but questioned their commercial viability. End Summar ¶2. (C) EUR DAS Matt Bryza met April 3 with Azerbaijan Minister of Energy Natiq Aliyev to discuss regional energy developments, including Azerbaijan,s interactions with Russia, Turkey and others in the neighborhood on gas purchases and transit issues. Minister Aliyev noted up front that the State Oil Company of Azerbaijan,s (SOCAR,s) recent dealing with Russia,s GazProm ) which garnered much international press coverage ) are &a very natural development.8 He did not foresee cooperation in that sphere as a substitute for the Southern Corridor (ref),nor think that SOCAR-GazProm discussions would significantly interfere with ongoing transit talks with Turkey. He noted, however, that Azerbaijan is interested in additional steps to &develop leverage8 over the Turks, who continue to be seen in Baku as obstructionists on natural gas transit to Europe. SOCAR-GazProm Swap -------------- ¶3. (C) Minister Aliyev described SOCAR,s immediate plans with GazProm as a &swap arrangement,8 which would require SOCAR to deliver &its own gas8 to Dagestan (Russian republic in the North Caucasus, bordering Azerbajian) in exchange for GazProm deliveries of natural gas via Blue Stream (Black Sea) to Turkey,s Chemical-Petroleum (PetKhim) complex, which SOCAR owns. To supply PetKhim now, SOCAR must purchase Russian natural gas from Turkey,s BOTAS at prices approaching USD 500 per thousand cubic meters. These exorbitant prices, which exceed the cost of Russian natural gas in Germany, have challenged the commercial viability of PetKhim, Aliyev said. Under a swap arrangement, cash would not likely exchange hands. Rather, the Minister said, SOCAR and GazProm would establish a nominal &price8 for gas deliveries, factoring in transport costs, and accordingly exchange the goods. The swap arrangement would thus provide PetKhim with lower input costs, while allowing the company (and SOCAR) to circumvent Turkish transit issues. It was not clear that the Ministry of Energy, SOCAR or GazProm had discussed the arrangement with BOTAS or the Government of Turkey. Turks Still Obstructionists -------------- ¶4. (C) DAS Bryza told Minister Aliyev that he and others in the U.S. Government are working closely with Turkey on transit issues, and asked if it would be useful, in Azerbaijan,s view, to talk more about opportunities for liquefied natural gas (LNG) at Georgia,s Black Sea coast or White Stream, a pipeline that would run under the Black Sea from Georgia to Romania, Bulgaria or Ukraine. Aliyev said that it would be useful to talk, but noted that these projects, particularly White Stream, are difficult to do commercially. &We would have to bring in Central Asia,8 he said, as stable volumes would be needed for a long period, perhaps 20 years. ¶5. (C) Returning to Turkey and transit, Aliyev said that the Turks must understand that Azerbaijan will never sell gas at Turkey,s border. Investors are not interested in the Turkish market, but rather in Europe. Turkey,s current proposals thus offer &no commercial or political benefits8 to Azerbaijan. &At least sales to Russia would mean better political relations with Moscow,8 he noted. BAKU 00000300 002 OF 002 Azerbaijan Still Aiming for Europe -------------- ¶6. (C) DAS Bryza said that he had recently visited Sofia and found Bulgarian leaders anxious and angry about January-February gas import curtailments. As a result, the Bulgarians are interested in importing natural gas from Azerbaijan and would like to approach Turkmenistan. Aliyev said that Azerbaijan stands ready to deliver 1 billion cubic meters (BCM) to Greece and, via a spur, 1 BCM to Bulgaria. Turkey, however, is blocking these efforts. The Minister noted that Bulgaria currently allows Russia access to its territory for gas transit to Turkey, and suggested that Sofia demand that the Turks do the same for gas imports from Azerbaijan.. ¶7. (C) Comment: When subsequently told of Energy Minister Aliyev's comments on the SOCAR-Gazprom March 27 MOU, SOCAR Marketing Vice-President Elshad Nasirov said that SOCAR had not briefed the Foreign Ministry or the Energy Ministry on the MOU, implying that any comments made by these ministries on the agreement would be uninformed. Minister Aliyev, nonetheless, seemed to be well versed on the topic. He spoke practically about SOCAR,s relationship with Gazprom, explaining in detail the swap arrangement for PetKhim. Overall, he seemed to have changed his talking points on Russia. Previously ) somewhat counter to that of SOCAR ) the Minister had emphasized playing nice with Moscow on energy issues. In this meeting, however, he presented a more balanced strategic vision, with Azerbaijan reaching out in multiple directions ) north and west ) for energy cooperation in the future. Turkey, meanwhile, will not likely be pleased with a swap arrangement on its own territory. It is not clear, though, that Ankara has the ability legally to interfere with the project. Moreover, it remains to be seen whether this swap arrangement is an exclusive deal between Baku and Moscow, or a sign of things to come. ¶8. (U) DAS Bryza did not have an opportunity to clear this cable before departing Baku. DERSE