AZERBAIJAN: SOUTHERN CORRIDOR BREAKTHROUGH

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000404

SIPDIS

E.O. 12958: DECL: 05/19/2019
TAGS: AJ TK PGOV PREL ENRG
SUBJECT: AZERBAIJAN: SOUTHERN CORRIDOR BREAKTHROUGH

REF: BAKU 401

Classified By: Pol-Econ Counselor Robert Garverick, Reasons 1.4 (b,d)


1. (C) SUMMARY: After 18 months of stasis, there seems to
have been a breakthrough on bilateral negotiations between
Azerbaijan and Turkey that could lead to creating a "Southern
Corridor" for gas. Azerbaijan's State Oil Company (SOCAR)
believes this breakthrough is at least partially due to the
dismissal of GOT Energy Minister Guler and the appointment of
his successor, Taner Yildiz. According to SOCAR, Yildiz has
"orally agreed" to allow transit of Azerbaijani gas to
European markets, with the gas supplier (Azerbaijan's Shah
Deniz Consortium) to decide which pipeline project to
sanction with its volumes. Turkey has also offered
significantly higher prices for the Azerbaijani gas it is
already receiving. If in fact Turkey has changed its stance
on both transit of Shah Deniz Phase Two future gas volumes
and the price it will pay for the Shah Deniz Phase One gas it
is currently receiving, the Shah Deniz Consortium can resume
the largely suspended development of the Shah Deniz Stage
Two, and Azerbaijan and its partners can now begin to decide
which of the competing pipeline projects to sanction with its
volumes. END SUMMARY.


2. (C) On May 15, SOCAR Marketing Vice-President Elshad
Nasirov told EnergyOff that the GOT's dismissal of Energy
Minister Hilmi Guler and the arrival of new Energy Minister
Taner Yildiz had resulted in "much progress" in bilateral
energy negotiations. Nasirov thought there had not been much
progress in Prague during the Nabucco summit, as he had heard
that although Turkey was willing to proceed with the Nabucco
Intergovernmental Agreement (IGA),Botas was still saying
that it would not approve the addendum concerning tariffs.
However, Nasirov mused that it seemed that PM Erdogan and
Energy Minister Yildiz had realized that what was best for
the dysfunctional company Botas was not necessarily in
Turkey's strategic interest. As such, he thought ultimately
Turkey would approve the Nabucco IGA and related addendum,
Botas reluctance notwithstanding.


3. (C) Nasirov said the real progress started on May 12, when
a Botas delegation arrived in Baku, and later with the
arrival of Energy Minister Yildiz as part of the visit of PM
Erdogan (see ref). In these talks SOCAR found Yildiz "more
resolute" than his predecessor in seeking a solution to the
bilateral energy problems relating to Shah Deniz Phases One
and Two (SD1, SD2).


4. (C) On SD2, Nasirov said that GOT Energy Minister Yildiz
and SOCAR had come to an "oral agreement" that Azerbaijan gas
could transit Turkey, and that the producers (the Shah Deniz
Consortium) would decide which of the three pipeline project
(TAP, Nabucco, TGI) it would support via SD2 gas sales.
SOCAR's position was still that it would not decide which of
the three it would choose until it compared relative
netbacks. There was also progress on SD2 gas sales to
Turkey, with the idea being contemplated of sales of four
bcm/a to Botas, and four bcm/a to 'other companies' within
Turkey.


5. (C) Nasirov said there was also progress on pricing for
SD1, with the corresponding possibility of arbitration
becoming more remote (the next meeting with SD Consortium
lawyers in this regard is June 10 in London). Yildiz and
SOCAR discussed a scenario whereby the current price caps on
SD1 gas are lifted, with SD1 prices for April-December 2008
equal to approximately USD 240 per thousand cubic meters, and
the 2009 SD1 price being approximately USD 137 per thousand
cubic meters (Note: since oil and gas prices have fallen in
2009 relative to 2008). No final agreement on SD1 prices has
been reached, but an optimistic Nasirov pointed out that this
latest Turkish offer for SD1 was "more than double" the
existing Botas offer.


6. (C) Nasirov said that he had been keeping the SD
Consortium fully apprised of events (Note: Indeed as
EnergyOff was entering SOCAR he met the relevant gas
marketing executives from BP, StatoilHydro and Total, all
seemingly quite happy, leaving the building having just met
with SOCAR). When EnergyOff asked Nasirov what the USG could
do to help at this point, a smiling Nasirov answered,

BAKU 00000404 002 OF 002


"nothing."


7. (C) Nasirov said that SOCAR cooperation with Turkmenistan
was ongoing, although the Turkmen were "doing the smart
thing" by waiting 1) to see if Turkey would allow transit; 2)
until there was at least one pipeline from Turkey to European
markets. He seemed to think that Turkmen gas could be
available in time to participate in Nabucco, should that
project be green-lighted.


8. (C) On Russia, Nasirov said that "Erdogan had barely left
Turkey" when Gazprom called to say it was coming to Baku on
May 19 to discuss gas sales. Similarly, Iran's Neftiran
Intertrade Company (NICO) was also coming to Baku. Nasirov
said that SOCAR's progress with Turkey was doubtless spurring
Russia and Iran to check back in with SOCAR to see where they
stood.


9. (C) COMMENT: Embassy Baku looks to our Embassy Ankara
colleagues to explain what seems to be a 180 degree about
face on Turkey's part concerning both transit of upstream gas
to European markets and also the price it is willing to pay
for the upstream gas it buys (could it be as simple as Guler
leaving and Yildiz coming on board?). Suffice it to say that
these twin problems were the major impediment to progress in
the Southern Corridor, and if in fact Turkey has changed its
stance, Azerbaijan can now begin to decide which of the
competing pipeline projects to sanction with its gas volumes,
and the Shah Deniz Consortium can resume the largely
suspended development of the Shah Deniz Stage Two. END
COMMENT.
LU