SOCAR ON SOUTHERN CORRIDOR ENERGY TRANSIT OPTIONS

C O N F I D E N T I A L BAKU 000754 DEPT FOR EB/ESC, EUR/CARC E.O. 12958: DECL: 09/23/2019 TAGS: ENRG EPET ECON AJ SUBJECT: SOCAR ON SOUTHERN CORRIDOR ENERGY TRANSIT OPTIONS REF: A. BAKU 0693 ¶B. BAKU 0688 Classified By: Charge Don Lu Reasons 1.4 (B,D, E) ¶1. (C) SUMMARY: SOCAR continues negotiate transit fees and seek additional financial data to make a final decision on whether to throw its weight behind the Nabucco Pipeline or the competing Italy Turkey Greece Interconnector (ITGI). This past week's meetings in Baku gave the Azerbaijani national oil company another crack at Nabucco promoters OMV and RWE to push for pro-rated transit terms for a pipeline unlikely to start gas transit with a full 31 bcm (billion cubic meters per year). On the ITGI, SOCAR and BOTAS continue to go in circles on the transit pricing, with SOCAR favoring a $32 figure per tcm, and BOTAS backing $45. Senior Advisor Meetings in Baku -------------- ¶2. (SBU) Special Envoy for Eurasian Energy Ambassador Morningstar's Senior Advisor Dan Stein visited Baku from September 13 to 16. He represented the USG at the celebrations for the 15th Anniversary of the "Contract of the Century," the landmark contract which sanctioned the opening of the ACG field in 1994, and re-opened Azerbaijan's oil fields to the west after decades of Soviet rule. While in Baku, Senior Advisor Stein also met with SOCAR; several international oil and service companies (IOCs),including BP, Ajerbaijan's major producer; and Nabucco shareholders OMV and RWE. This cable, one of three, covers his discussions with SOCAR Vice President Elshad Nassirov and Deputy Vice President Vitaliy Baylarbayov. SOCAR Seeks Financial Information for "Apple to Apple" Comparison -------------- ¶3. (C) Nassirov noted SOCAR was seeking clarification on transit issues on several points, so that SOCAR would be able to better compare transit costs for Nabucco (terms of which are generally outlined in the Intergovernmental Agreement (IGA)),with corresponding costs for an alternative project, the proposed ITGI. Nassirov pointed out that every project has "merits and demerits," and the respective tariffs - among other many factors - will help SOCAR to decide whether to move forward on Nabucco or ITGI. Currently, SOCAR is lacking several data points to make an "apple to apple" comparison: Will Nabucco Consortium Pro-Rate Transit for Half Empty Pipeline? -------------- ¶4. (C) Discussing transit rates for transporting Azerbaijani gas via the Nabucco Pipeline, Nassirov indicated that "$112 (per tcm, thousand cubic meters) is the whole route to Baumgarten," (the terminus point for the Nabucco Pipeline),an amount he considered "big but affordable." SOCAR is seeking resolution from the Nabucco Consortium concerning pro-rating of transit if the pipeline is not at full capacity, since the $112 figure assumes 31 bcm (billion cubic meters per year),and the figure would be much larger if the pipeline is operating at less than that capacity. If no other producing countries join Azerbaijan in the initial phase of Nabucco, (or if others do, but the volume is still below 31 bcm),SOCAR wants to know what its maximum transit tariff would be. "We want RWE and others to share risks if we are alone," (e.g., if Azerbaijan alone provides gas for the first phase of Nabucco, rather than Turkmenistan or Iraq also joining.) If Azerbaijan kicks off Nabucco on its own and there is no adjustment to the transit structure, Nassirov indicated that in essence SOCAR would bear the 8 billion Euro cost of Nabucco, as well as the $20 billion USD cost of developing Shah Deniz II. He underscored, "The tariff through Turkey can stimulate Shah Deniz II, or prevent Nabucco." The same question fundamentally applies if Nabucco launches with 15 bcm, which could include gas volumes from Iraq or Turkmenistan. With these heavy financial burdens to bring gas to market, Nassirov underscored the need for Nabucco consortium members to share the additional risk with SOCAR. ¶5. (C) Nassirov also explained additional gas marketing issues emerging from a 9 September meeting in Hanover with Nabucco promoter RWE. Nassirov indicated SOCAR is not happy with RWE's proposal to provide priority for companies transporting gas the full distance to Baumgarten. Nassirov stated that such a proposal "is not an equilibrium for us, the first in the pipeline needs the right to choose the nearest market." SOCAR specifically wants the right to sell into the eastern European markets. Nassirov pointed to the strategic competition between Nabucco and South Stream, explaining, "If we're deprived of the right to sell into Bulgaria, Romania and Greece, then South Stream will dominate." ITGI: SOCAR Negotiates with BOTAS for Better Transit Terms -------------- ¶6. (C) Another option for SOCAR to bring Azerbaijani gas to the European market remains the less ambitious Italy Turkey Greece Interconnector (ITGI). Within Turkey, ITGI would use existing Turkish pipelines. However, SOCAR continues to go in circles with Turkish energy firm BOTAS over transit pricing. Nassirov told us that SOCAR had commissioned an independent consultancy to study the basis for calculating transit costs within Turkey for ITGI. As laid out in ref B, the SOCAR study indicated that a reasonable transit fee would be $32 USD per tcm, which Nassirov explained would cover both capital expenditure, operating expenditures, and a "reasonable profit." He stated BOTAS countered with an offer of $45 per tcm, but refused to share their financial analysis with SOCAR, claiming it was confidential. BOTAS senior management had finally agreed to share a summary of the document, but the document was not delivered. "We're still waiting," he noted. Nassirov indicated that SOCAR would have to take any transit terms significantly above the $32 back to the Shah Deniz board for approval. Nassirov remarked, with an exasperated tone that somewhat belied his words, "We're not complaining, we know it's in Turkey's interest too to conclude this quickly." SOCAR: Turkey Stalls, Plays Russia and Armenia off Azerbaijan -------------- ¶7. (C) Nassirov indicated some progress with Turkey in recent months, but also frustration at their slow pace in dealing with transit terms. He noted with approval that recently-appointed Turkish Energy and Natural Resources Minister Yildiz had acknowledged "the producers have to decide the transit route, or production will not take place." Nonetheless, he complained, "The Turks are playing games to make us agree to the current tariff offer. The Russians are also a factor. The Turks are trying to gain from the Russians." On the issue of possible Turkish rapprochement with Armenia, Nassirov downplayed its importance, quipping, "Even if Turkey opens the border, it won't change the relationship between Turkey and Armenia, it will still be horrible." Comment: Waiting Game Continues -------------- ¶8. (C) After the summer signing of the Nabucco IGA, the waiting game in Baku continues. Expressing frustration with the Europeans for not moving faster on Nabucco, Nassirov stated, "I don't know an empty pipeline in this region. If there is a pipeline, there will be gas." RWE and OMV also believe the time for Nabucco to be finalized is drawing short. On ITGI, Turkey, in SOCAR's view, continues to stall on resolving transit terms, with the hopes of playing Azerbaijani and Russian interests off against each other, thereby softening SOCAR demands for low transit rates. Incremental progress, at best, appears to be the path forward for now. ¶9. This cable was cleared by Senior Advisor Dan Stein. END SUMMARY. LU