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