AZERBAIJAN: GAS TRANSIT TALKS REMAIN A STRUGGLE

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000916 SIPDIS DEPT FOR EB/ESC, EUR/CARC DEPT FOR EB/ESC, EUR/CARC DEPT FOR S/EEE AMB MORNINGSTAR AND DSTEIN DEPT FOR EB/ESC DAS DOUG HENGEL DEPT FOR S/CT FOR GROBERTSON, DKURSCH, CLARKS DOE FOR LEKIMOFF, MBURPOE, AND DGOTTFRIED E.O. 12958: DECL: 11/25/2019 TAGS: ENRG EPET ECON PREL TU AJ SUBJECT: AZERBAIJAN: GAS TRANSIT TALKS REMAIN A STRUGGLE REF: A. BAKU 838 ¶B. BAKU 754 BAKU 00000916 001.2 OF 003 Classified By: Charge Don Lu Reasons 1.4 (B,D, E) Summary -------------- ¶1. (C) In a series of meetings over the last two weeks with Dan Stein, Senior Advisor to the Eurasian Energy Envoy, SOCAR and GOAJ interlocutors reported surprising and hopeful progress on Azerbaijan,s gas negotiations with Turkey. However, much-anticipated November 24 Azerbaijani-Turkish transit negotiations did not go well, dimming hopes which were all too briefly raised in recent weeks. Azerbaijan still aspires to sell a large portion of its gas to Europe via Turkey, GOAJ representatives reassure. However, much work remains before Prime Minister Erdogan,s December 7 meeting with President Obama. While Turkish energy giant BOTAS is under substantial pressure from the country's political leadership to cut a deal, Azerbaijani national oil company SOCAR assesses that BOTAS negotiators lack authority to finalize an agreement. The development of Shah Deniz II anytime this decade hangs in the balance of the December meetings. End summary. Dan Stein Baku Meetings -------------- ¶2. (C) Dan Stein, Senior Advisor to Eurasian Energy Envoy Richard Morningstar, met with Foreign Minister Mammadyarov, Industry and Energy Minister Natig Aliyev, SOCAR Vice President Elshad Nassirov, Deputy Vice President Vitaliy Baylarbayov, and various private sector executives during two recent visits to Baku (November 13 and 18-20). Charge D'Affaires also met with BP President Rashid Javanshir on November 24. Progress with BOTAS -------------- ¶3. (C) In a November 19 meeting with Dan Stein, SOCAR VP Nassirov was upbeat, noting a significant improvement in the Turkish negotiators' attitude and flexibility on gas discussion. Nassirov gleefully noted that Turkish Energy minister Yildiz had admitted that the low price Azerbaijan received for its Shah Deniz I gas was "not fair." However, after the November 24 session with BOTAS representatives, Nassirov reported that the negotiation format appeared not to work, and he reverted to his more typical pessimism. Possible Fly in the Ointment: BOTAS Negotiating Authority Suspect -------------- ¶4. (C) SOCAR's remaining doubts on a potential transit deal concern whether the Turkish negotiators enjoy full negotiating authority, and can make their commitments stick after review by BOTAS management. The outcome of the 24 November negotiating session appears to have validated VP Nassirov's concerns. While Nassirov noted he himself was empowered to sign MOUs or commercial contracts, he doubted whether Selcuk Advan, (BOTAS,s Head of Natural Gas Purchasing and Contract Release Department and Nassirov's negotiating partner),enjoyed such full authority. After the November 24 session, Nassirov firmly assessed and informed Senior Advisor Stein that Advan lacked requisite negotiating authority to complete the deal. Transit Talks: Closer Than They Knew? -------------- ¶5. (C) At issue now in SOCAR-BOTAS discussions are Interconnector Turkey-Greece-Italy (ITGI) transit costs, the BAKU 00000916 002.2 OF 003 basis for calculating the final ITGI transit fee. In the mid-November negotiation, Nassirov told us that the negotiating parties recognized that the Turkish transit fee proposal, in the mid-forty dollar range, included $7-8 for fuel gas to run the pipeline system, while the Azerbaijani proposal (in the low thirties),ostensibly did not. (Transit proposals are for transporting one thousand cubic meters (tcm) of gas 100 km.) On November 19, Nassirov believed this might offer an opening for agreement, as the parties were then just $5/tcm away from a transit price agreement. This view seems to have disintegrated in the wake of the November 24 negotiating session. Face-Saving Option: Automatic Arbitration Clause -------------- -------------- ¶6. (C) Nassirov also told us about a second potential breakthrough with BOTAS on pricing for Shah Deniz II gas. Nassirov outlined a gas pricing schedule in which prices would increase step by step until 2011. If there is a disagreement on gas prices which is not resolved within 180 days, the dispute would automatically go to arbitration, sidestepping a politically difficult decision by either party. By this mechanism, the Azerbaijanis hope to avoid a repeat of the Shah Deniz I contract, under which Turkey deferred final agreement on updating gas prices until they had accumulated an enormous arrears. Nassirov emphasized he viewed this breakthrough as "face-saving" for BOTAS. Nassirov nonetheless warned that SOCAR and BOTAS would "have to make substantial progress by the end of the year." Turks Under Pressure to Produce a Deal -------------- ¶7. (C) In advance of Prime Minister Erdogan's December 7 meeting with President Obama, BOTAS appears under substantial pressure from Turkish political leadership to finally cut a deal. The President of BP in Azerbaijan, Rashid Javanshir, told the Charge in a November 24 meeting that, "The Turks are feeling exposed before the (December 7) Obama meeting." Echoing Nassirov's comments, Javanshir highlighted "clear changes in behavior" by the Turkish BOTAS negotiators. Relations with Turkey: Azerbaijanis Hope to Patch Up -------------- -------------- ¶8. (C) Reflecting a common Azerbaijani view, Javanshir, as the first Azerbaijani President of BP's Azerbaijan operations, appeared visibly relieved at the recent warming of Azerbaijani-Turkish relations. His relief seems to extend beyond business issues, as Azerbaijanis feel themselves bereft in a difficult neighborhood without Turkey. Javanshir explained, "We know we can't rely on the U.S. or Russia; the only real friendship or support is Turkey. Pointing to recent polls in Turkey staunchly that show the public opposes restoring relations with Armenia, Javanshir explained, "I don,t think the U.S. can solve NK, unless the Russians want to do it. What I hear is that it is easier for Turkey to handle worsening relations with the West than with Azerbaijan." President Still Wants European Market -------------- ¶9. (C) In spite of obstacles, Azerbaijani leaders continue to reassure us that they aim to sell gas to Europe via Turkey. EU Commission Ambassador Kobia told Dan Stein that in his recent conversation with President Aliyev, Aliyev told him he wanted to sell gas to the EU. President Aliyev remarked that he was tired of "impulsive" buyers to the North, e.g., Russia, and told Ambassador Kobia that he wanted "predictable, solvent, and rich buyers," and he did not want Azerbaijan to be held hostage to its gas buyers. Azerbaijan Still Willing to Sign BAKU 00000916 003.2 OF 003 -------------- ¶10. (C) Dan Stein asked both the FM Mammadyarov and VP Nassirov, in separate meetings: In ligt of recent disagreements between Azerbaijan andTurkey regarding the Turkey's rapprochement with rmenia, is it now politically possible for Azerbaijan to sign a gas agreement with Turkey? Both FM Mammadyarov and SOCAR VP Nassirov were clear that Azerbaijan could, in fact, still sign such a deal. (Note: President Aliyev, under more pressure on the Nagorno Karabakh issue, may not agree. End note.) Senior Advisor Stein assured FM Mammadyarov that the USG continued to push the Turks as hard as possible on the gas transit issue. FM: ITGI Most Viable -------------- ¶11. (C) Discussing broader questions of Turkish transit on 18 November, FM Mammadyarov stated that Turkish transit remained Azerbaijan's best option, and within this framework, ITGI was most viable project. Turning to the issue of the Nabucco pipeline, he stated that "for Nabucco, we need strong support from the Europeans," and (Turkmen President) Berdimuhamedov needs a clear understanding from the Europeans. FM Mammadyarov looks for resolution of the transit issues after December. "There are still a lot of questions," he noted. He also pointed out that "Shah Deniz is important to develop our economy. Every energy dollar is multiplied by three in the larger economy; it's very helpful to development." In line with this, FM Mammadyarov indicated that Azerbaijan had decided to support with the EU-proposed Caspian Development Corporation (CDC). Shah Deniz Deadlines Breathing Down Azerbaijan,s Neck -------------- ¶12. (C) SOCAR Deputy Vice President (DVP) Baylarbayov pointed out that, hemmed in by the 2025 expiration (2030 with a five year extension) of the Shah Deniz production sharing agreement (PSA),BP was facing imminent deadlines to move the project forward. Baylarbayov told us that even now, the company was dis-banding some Shah Deniz II working teams. These teams have been in place for many months, and they will move on to other projects if Shah Deniz II is not sanctioned, or if the sanctioning process is overly drawn out. Comment -------------- ¶13. (C) The next few weeks are critical for the future of Azerbaijan's gas resources. Azerbaijan and Turkey appear closer to a deal than they have been in the last two years, but there are indications the negotiation process continues to falter. We should keep the pressure on the Turks to finalize this project, or development of Shah Deniz gas field could face long delays, putting into jeopardy the whole concept of a Southern Energy corridor to Europe. Prime Minister Erdogan's December 7 meeting with President Obama offers an opportunity to congratulate Turkey if the countries have struck a deal, or strongly urge it to redouble efforts if not. ¶14. Senior Advisor Dan Stein did not clear this cable. LU