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DE RUEHKB #0671/01 1930930
ZNY CCCCC ZZH
O 110930Z JUL 08
FM AMEMBASSY BAKU
TO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUCNMEM/EU MEMBER STATES IMMEDIATE
RUEHAK/AMEMBASSY ANKARA IMMEDIATE 2922
RUEHIT/AMCONSUL ISTANBUL IMMEDIATE 0125
RUEHC/SECSTATE WASHDC IMMEDIATE 5694
INFO RUEAIIA/CIA WASHINGTON DC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC
Friday, 11 July 2008, 09:30
C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000671
ANKARA OR ISTANBUL - PLS PASS TO SE GRAY
EO 12958 DECL: 07/13/2018
TAGS PGOV, PREL, AJ, ENRG, TU
SUBJECT: AZERBAIJAN SCENESETTER FOR JULY 14 VISIT OF
SPECIAL ENVOY C. BOYDEN GRAY
REF: A. A) BAKU 494 B. B) ASHBABAT 817 C. C) ANKARA 1172
Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d)
1. (C) Your second visit to Baku comes on the heels of your early June participation in the Fifteenth Annual Caspian Oil
and Gas Exhibition and Conference (ref A), and your subsequent early July letter to President Aliyev providing input for
next steps we can take together to pursue joint USG-GOAJ energy goals of a viable gas transit regime through Turkey,
enhanced GOAJ-GOTX energy cooperation, and effective EU outreach to Azerbaijan. The GOAJ is pleased with the increased
USG engagement on energy. We have heard that President Aliyev was very pleased with the congratulatory letter from
President Bush that you read during the opening COGS ceremony. SOCAR Vice-President Elshad Nassirov, a key energy
advisor to President Aliyev with whom you will meet in the absence of SOCAR President Rovnag Abullayev, relayed
Azerbaijan’s enthusiasm about the “next steps” letter you sent to President Aliyev, and is working with the President to
discuss it with you.
TURKEY
---------
2. (C) President Aliyev will be very interested in your just completed visit to Turkey. As you are aware, Azerbaijan’s
desire to conclude sales and purchase agreements for Shah Deniz Phase Two (SD2) gas with European customers has been
held up for over a year by an inability to secure gas transit through Turkey. Solving transit for SD2 gas through Turkey
is also linked both to selling volumes of SD2 gas to Turkey, and to renegotiations for the price of Shah Deniz Phase One
gas currently being sold to Turkey. Turkey has said it seeks “all” of SD2’s approximately 13 billion cubic meters
annually (bcm/a) for its domestic needs, but will settle for 8 bcm/a. However, Azerbaijan wishes to sell it no more than
4 bcm/a so that 6 bcm/a of SD2 gas remains to sell to Europe, enough to sanction one pipeline project (SOCAR assumes
that 3 bcm/a of SD2 will go for domestic use and/or Georgia).
3. (C) The Shah Deniz Consortium’s commercial negotiations with the three pipeline projects competing for SD2 gas (TAP,
Nabucco TGI) are at a standstill until transit through Turkey is solved, and the GOAJ continues a policy of seeking to
persuade intermediaries such as the EU, USG and various commercial companies vying for SD2 gas to put pressure on Turkey
to provide commercially viable transit. In this regard, Azerbaijan seeks to persuade Turkey that “Azerbaijan has
options” for SD2 gas that don’t require transit through Turkey, to include Russia, Iran, and a “Nabucco without Turkey”
option that re-routes Nabucco from Georgia across the Black Sea to Bulgaria.
TURKMENISTAN
----------------------
4. (C) Although bilateral relations between the two countries have improved significantly due to Azerbaijan’s diplomatic
outreach to President Berdimuhamedov since the latter’s accession, currently joint cooperation over offshore energy
development seems dependent upon resolving the status of the offshore Serder-Kyapaz field. The GOTX seeks GOAJ
acknowledgement of full Turkmen ownership of this field in exchange for the GOTX dropping its claims on the ACG field.
Given such acknowledgement, the GOTX would be willing to ship S-K production through Azerbaijan. However, Azerbaijan
seeks at least minority S-K ownership, while repeating its assertion that any discussion of ACG status is “off the
table.”
5. (C) There is ongoing cooperation between the two countries in preparation for an early September joint Energy
Exhibition and Conference focusing on joint reserves to be held in Baku. This is a seminal event in growing
Azerbaijan-Turkmen relations, and we will want to be as supportive as possible. In this regard, SOCAR has asked whom
from the US Government should be invited to this joint exhibition and conference, asking if it would be possible for
Secretary Rice to come. SOCAR has also asked for USG input as to what US-based organizations should be invited to this
joint GOAJ-GOTX September conference (mentioning OPIC as one possibility).
EU
---
6. (C) SOCAR has expressed concerns about European Commission (EC)proposals it has indirectly heard about, to include EC
attempts to link gas transit through Turkey with energy sector development in Turkmenistan (ref C - “Caspian Development
Corporation.” SD Consortium member StatoilHydro also expressed grave misgivings about such reftel plans during a July 10
meeting with Ambassador Derse-septel.) On another matter, SOCAR (along with SD Consortium member StatoilHydro) have
expressed a “level of comfort” with EU verbal assurances to allow joint marketing of SD2 gas into Europe, so while they
would also welcome a written guarantee, they don’t deem it essential.
TRANSIT OF KAZAKH OIL
----------------------
7. (C) Much as a transparent and commercially viable gas transit regime through Turkey is essential to attract both
Azerbaijan and eastern Caspian gas westwards, so too is a transparent and commercially viable oil transit arrangement
through Azerbaijan essential to attract TengizChevroil (TCO) and expected Kashagan volumes. Azerbaijan needs to be
reminded that North Caspian shippers seek secure, safe, predictable and transparent long-term arrangements for transit
of oil through Azerbaijan before they can commit to shipping volumes westwards, and that they too have “other options.”
BP-GOAJ RELATIONS
-----------------
8. (C) Finally, you should be aware of the current status of negotiations between the AIOC Consortium headed by BP
(responsible for the ACG field, which provides the bulk of GOAJ income) and the GOAJ. The Consortium is seeking
extension of the current Production Sharing Agreement (PSA) so that it can make the necessary investments to increase
oil recovery from this mega-field. It also seeks the rights to develop “ACG Deep Gas,” which is a major source of
undeveloped gas lying under the area currently being developed by the AIOC Consortium. However, there has been no
progress on these issues for a while, as the GOAJ is unwilling to discuss them until it resolves the following issues
with AIOC:
- Zero Balance Date (ZBD): Under the current BTC PSA, after the BTC Consortium loses ownership of the pipeline in 2026,
the Consortium members still reserve the rights to ship their oil at a discount through the pipeline. Additionally,
SOCAR is sorely grieved by a PSA clause which decreases GOAJ ownership of the BTC pipeline after ZBD as Northern Caspian
(Kazakh) crude volumes through BTC increase. SOCAR wants full ownership of BTC after ZBD, with the right to charge
whatever tariffs it wishes.
- Total Transportation Costs (TTC): In the current PSA there is a link between the cost of transportation and the split
of profit oil, which can swing the profit split at most five percent. TTC calculations stretched out until 2016 make a
significant potential difference in revenue split, and SOCAR wants to revisit this issue. SOCAR President Rovnaq
Abdullayev has been emboldened by his success in handling of the “rate of return” dispute, which dealt with the timing
of when the various shifts in splitting profit oil were to occur. XXXXXXXXXXXX
- Baku-Supsa: The Baku-Supsa pipeline, with a capacity of 100 to 150 thousand barrels a day, is currently under AIOC
Consortium ownership and control, but SOCAR and the GOAJ want it for themselves so that they can set tariffs and ship
volumes as they see fit. DERSE