AZERBAIJAN: SE MORNINGSTAR, PRESIDENT ALIYEV

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000693

SIPDIS

DEPT FOR EUR/CARC, SCA/CEN, S/E MORNINGSTAR;
MICHAEL P. OWENS, ACTING DIR, INR/OPS

E.O. 12958: DECL: 09/01/2019
TAGS: ENRG EPET AJ KZ TX
SUBJECT: AZERBAIJAN: SE MORNINGSTAR, PRESIDENT ALIYEV
DISCUSS TURKMENISTAN, KAZAKHSTAN (C-RE9-01677)

REF: A. BAKU 688

B. STATE 087261

C. ASTANA 1449

Classified By: Classified by Charge d'Affaires Donald Lu,
Reasons 1.4 (b) and (d)


1. (C) Summary: President Aliyev and Foreign Minister
Mammadyarov separately told Special Envoy for Eurasian Energy
Richard Morningstar August 27 that, despite Baku's diplomatic
efforts, Turkmenistan largely remains a mystery. The Turkmen
President's recent statements on Ashgabat claims to the Azeri
and Chirag (Osman and Omar) offshore oil fields, operated by
BP, and demands for international arbitration run counter to
Turkmenistan's interests, and suggest that the Turkmens are
"afraid in all directions." Azerbaijan nonetheless is
prepared to work with Turkmenistan on commercial projects,
including development of the Serdar-Kyapaz offshore field.
Azerbaijan also opposes President Medvedev's contention at
Astrakhan that all Caspian littoral states must approve
sub-sea pipeline projects. Turning to Kazakhstan, Aliyev
said that over the longer term a cross-Caspian oil pipeline
would be preferential to enhanced tanker traffic. The
President does not expect anything of substance to come out
of the proposed September 13 Caspian summit at Aktau,
Kazakhstan. End Summary.


2. (C) During an August 27 discussion with Special Envoy
Richard Morningstar that focused on gas sales and transit
talks with Turkey, President Aliyev discussed Azerbaijan's
relations with Turkmenistan and touched on prospects for
cross-Caspian oil from Kazakhstan's North Caspian fields
reaching the Baku-Tbilisi-Ceyhan pipeline. The President's
comments on Shah Deniz natural gas and the Southern Corridor
for export to Europe are reported ref A.

Turkmenistan Still a Mystery
--------------


3. (C) President Aliyev acknowledged that Azerbaijan had
been caught off guard by Turkmenistan President
Berdimuhamedov's recent outburst on Caspian delimitation. In
those comments, the Turkmen President reasserted
Turkmenistan's claim to rights to the Azeri and Chirag
offshore oil fields, which comprise the lion's share of the
Azerbaijan International Oil Consortium's (AIOC)
Azeri-Chirag-Guneshli (ACG) development, operated by BP. The
Turkmen President also allegedly demanded international
arbitration to resolve the issue, even though odds of a
favorable outcome for Turkmenistan seem poor.


4. (C) Aliyev said that Turkmenistan's recent actions cannot
easily be explained, particularly since Azerbaijan's
relations with Ashgabat were normalized last year and the
presidents of the countries have met twice in their
respective capitals. Turkmen President Berdimuhamedov had
even suggested that he would study Azerbaijan's "model" of
working with foreigners, i.e., international oil companies.
That exercise, however, does not seem to be taking place.
Rather, Aliyev said, Turkmenistan seems to be afraid "in all
directions," with change being at the core of their fear.
Foreign Minister Mammadyarov, meeting separately with Special
Envoy Morningstar, also said that he was puzzled. He noted
that he had discussed delimitation issues on a number of
occasions with his Turkmen counterpart, but such a harsh line
had not been taken.


5. (C) "The current system," President Aliyev said, is not
sustainable. Gas sales to Russia have been discontinued and
the Iranians are not a reliable partner. Ashgabat hopes that
it has sufficient financial resources to hold itself over
until winter, but Azerbaijan is skeptical. A new natural gas
pipeline to China, with a 40 billion cubic meter capacity,
should open this winter, but Turkmenistan may not have the
capacity to fill it. In this context, President
Berdimuhamedov delivered his sharp words on the disputed oil
fields and Caspian delimitation to Azerbaijan.

Azerbaijan Ready to Proceed on Commercial Projects
-------------- --------------

BAKU 00000693 002 OF 003




6. (C) Azerbaijan is prepared to work with Turkmenistan on
development of the Serdar-Kyapaz oil field, which lies in the
heart of disputed Caspian waters, according to the President.
Unfortunately, Turkmenistan has taken "no practical steps"
and made "no movement." Rather, the Turkmen President only
makes "statements and declarations." FM Mammadyarov
separately suggested to Special Envoy Morningstar that full
bilateral or multilateral agreement on delimitation may not
be necessary to begin work on exploration and development of
Serdar-Kyapaz. Rather, he said, work could progress on a
business deal and the parties could proceed along the lines
of commercial terms. This type of arrangement might also be
useful in constructing a full cross-Caspian natural gas
pipeline or working with companies to link existing oil and
gas transport infrastructure. The Foreign Minister said that
nonetheless it will take time for the Turkmen President to
"get more confident and comfortable" with these ideas.

President Medvedev's Statement Not a Hindrance
-------------- -


7. (C) President Aliyev said that Russian President
Medvedev's mid-August comments in Astrakhan on Caspian Sea
delimitation and construction of sub-sea pipelines were only
partially objectionable. Azerbaijan agrees, as Medvedev
stated, that new multilateral initiatives could and should be
based on existing agreements (which would presumably include
bilateral and multilateral agreements, such as those between
Azerbaijan, Russia and Kazakhstan). This message, Aliyev
contended, was aimed at Iran, rather than Azerbaijan,
Kazakhstan or Turkmenistan. Medvedev's other comments, which
suggested that all littoral countries must agree on
under-water pipeline construction, runs counter to
Azerbaijan's understanding. Aliyev said that he had stated
this objection directly to then-President Putin at the Tehran
Caspian summit in 2007. Turkmenistan, he said, had done the
same.


8. ( C) Any pipeline construction now in the Caspian, the
President said, is a matter of political will. "What would
they do to stop us?" The President asked. "Send
battleships? We have battleships, too." Foreign Minister
Mammadyarov separately sounded a similar note. Azerbaijan
does not have to ask Russia for permission to work with
Turkmenistan or Kazakhstan in the Caspian Sea, he said.
Russia, after all, had not asked littoral states for
permission to construct pipelines in the Baltic Sea or Black
Sea.

Kazakhstan: More Linkage to BTC Inevitable
--------------


9. (C) Special Envoy Morningstar outlined his visit to
Astana for President Aliyev, noting that a primary topic had
been cross-Caspian oil transport (ref C). Aliyev noted that
in 2009 up to 2 million tons of Kazakhstan's North Caspian
oil would flow across the Caspian by tanker and link to the
Baku-Tbilisi-Ceyhan pipeline. Oil companies operating in
Kazakhstan, he said, would consider shipping up to 10 million
tons of crude through BTC in the future. Additional
cross-Caspian flows of oil are inevitable, he said, given
Kazakhstan's production schedule. Aliyev also noted that
Kazakhstan and international oil companies could tap into the
Baku-Supsa (Georgia Black Sea) oil pipeline or Azerbaijani
rail service to Batumi (Georgia Black Sea),as well as BTC.
This could be especially attractive, the President said, as
expansion of the Caspian Pipeline Consortium (CPC) "is still
problematic."

Pipeline Better Than Tankers
--------------


10. (C) In the long haul, he suggested, a cross-Caspian oil
pipeline would be more beneficial than an enhanced tanker
fleet. Larger tankers, at 60,000 metric tons or more, would
probably not be feasible, and may not be needed. Azerbaijan
has an existing fleet of 6-7 smaller tankers -- up to 13,000
metric tons. These tankers, if managed properly, could
transport up to 20 million tons per year. Beyond that

BAKU 00000693 003 OF 003


capacity, the President said, a sub-sea pipeline would be
more economical. Responding to a question about political
objections to a trans-Caspian pipeline, the President said
that, in his view, the Russians will oppose cross-Caspian oil
transport in any manner. Thus, it is just a matter of
political will, particularly in Kazakhstan, to move forward
on a pipeline.

Caspian Summit Unlikely to Be Productive
--------------


11. (C) President Aliyev suggested that the upcoming Caspian
Summit, which apparently will not include Iran, will not be
productive. Kazakhstan reportedly has offered to host the
event in Aktau on September 13. On the official front, he
said, there is a lack of progress on delimitation. For the
summit, Kazakhstan has not produced a full agenda.
Azerbaijan, he said, had initially offered to host a Caspian
summit in 2008, but later declined. "Nothing significant was
going to be achieved," he said. Neither the President nor
the Foreign Minister could explain the proposed exclusion of
Iran in the upcoming summit. Nonetheless, President Aliyev
has tentative plans to attend, and will host President
Nazarbayev in Baku on September 30.

Comment: Aliyev Pushes Political Will in Central Asia
-------------- --------------


12. (C) President Aliyev showed no interest in pursuing
international arbitration with Turkmenistan to resolve
differences over the Azeri and Chirag or, for that matter,
Serdar-Kyapaz oilfields. Rather, he seemed inclined to
ignore President Berdymuhamedov's latest fiery rhetoric. In
contrast, the Foreign Minister proposed additional diplomacy
with Ashgabat to put forward commercial proposals to
co-develop Caspian fields. He suggested that the call for
arbitration might be a face saving measure in Turkmenistan's
bid to make and abide by decisions independent of Moscow and
Tehran. He stated that such a face saving measure could seal
the deal, after a business solution and been agreed. This
approach seems much more constructive. Baku's business
community continues to be very interested in commercial
opportunities in Turkmenistan, but mixed on the business
climate. Many echo the thoughts of President Aliyev, seeing
Turkmenistan in a cloud of mystery. Others, however, suggest
that Berdimuhamedov is clamping down on corruption and
gradually making moves to accept foreign investment.
President Aliyev's statements on a cross-Caspian oil pipeline
were bold. He is no doubt aware of the external political
difficulties that Kazakhstan faces on this front, and perhaps
found it convenient to call Nazarbayev on the carpet via his
American guests.


13. (U) This cable was cleared by Ambassador Morningstar's
staff.
LU