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DE RUEHKB #0431/01 0801313
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P 211313Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 9901
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 1547
RUEKJCS/SECDEF WASHDC PRIORITY
RUEKJCS/JOINT STAFF WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RHMFISS/CDR USEUCOM VAIHINGEN GE PRIORITY
RHMFISS/CDR USCENTCOM MACDILL AFB FL PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000431 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SNEC AND EB/ESC 
USDOE FOR FE - SWIFT AND OS - WILLIAMSON 
 
E.O. 12958: DECL: 03/16/2016 
TAGS: ENRG ECON EPET AJ KZ GG TR TX
SUBJECT: EUR A/S FRIED DISCUSSES ENERGY SECURITY ISSUES IN 
BAKU 
 
Classified By: Ambassador Reno L. Harnish, III, reasons 1.4 (b), (d) an 
d (e). 
 
¶1. (C) SUMMARY.  EUR A/S Fried discussed the role of the 
Caspian in European energy security with GOAJ, BP, TOTAL, 
Statoil and ConocoPhillips officials in Baku on March 14. 
The consensus opinion was that Caspian energy resources, 
particularly natural gas, could play an important role in 
meeting future European energy needs.  While the lack of 
final agreements on Caspian demarcation may not prevent 
future projects, EU anti-competition laws could pose serious 
obstacles to bringing Shah Deniz gas into Europe.  The GOAJ 
representative strongly argued for bringing Turkmenistan's 
gas across the Caspian and into Europe.  The GOAJ's 
optimistic prediction of an early signature on an agreement 
to bring Kazakhstan's oil into the BTC oil pipeline was 
privately disputed by company representatives.  Delays in 
Turkey over the completion of the BTC oil and SCP gas 
pipelines were also discussed.  END SUMMARY. 
 
¶2. (U) On March 14, Ambassador hosted a lunch for EUR A/S 
Daniel Fried on the theme of energy security.  Ambassador, 
EUR/SNEC Special Negotiator Ambassador Mann, EUR/CARC 
Director Rood, EUCOM J5 Eurasia chief COL Anderson and 
Embassy Baku energy officer were also present.  Attendees 
were: 
 
--David Woodward, BP Azerbaijan 
--Thierry Normand, TOTAL 
--John Dabbar, ConocoPhillips 
--Jan Heiberg, Statoil 
--Araz Azimov, Deputy Foreign Minister of Azerbaijan 
 
¶3. (C) A/S Fried began the lunch by noting how energy 
security and diversification of supply had become topical in 
Europe and the United States following the Ukrainian gas 
crisis.  The United States government does not build 
pipelines or choose their routes, Fried noted, but does want 
to support projects that increase diversity of supply and 
that make commercial sense.  The United States discusses 
energy security with the EU and would discuss it at NATO on 
March 16.  He asked the assembled guests how they see Caspian 
energy resources fitting into this picture. 
 
-------------------- 
EU REGULATORY ISSUES 
-------------------- 
 
¶4. (C) David Woodward sketched a general picture of Europe's 
gas needs in the future -- something like 800 bcma will be 
required by 2025.  Much of this will come from North Africa, 
from imported LNG, from Russia and from Norway, but there is 
a gap of about five to ten percent which Caspian resources 
could fill.  Azerbaijan would be a part of this, but so would 
other Caspian states.  Woodward estimates that Shah Deniz 
could provide as much as 20 bcma to European markets, but the 
EU's anti-monopoly regulations would make this difficult. 
These regulations would prohibit the Shah Deniz partners from 
selling their gas jointly.  Jan Heiberg echoed this, stating 
that breaking the Shah Deniz partnership into seven 
individual gas streams to send all the way to Europe is 
"crazy" and this may prevent Shah Deniz gas from getting into 
Europe at all. 
 
¶5. (C) Woodward noted that the regulations can theoretically 
be waived if it can be demonstrated that there are "no 
alternate means" to getting the gas into Europe, but that 
this is a very arduous test to meet.  Changing this 
regulation would have "huge implications" and is not 
something that would be done lightly.  The regulation has 
been applied in the past to derail or substantially rework 
projects aiming at the import of Norwegian gas and of 
Algerian gas.  TOTAL's Thierry Normand said that this is 
true, but pointed out that in a case of diminishing supply 
and increasing need, perhaps the EU's attitude would change. 
 
--------------------------- 
CASPIAN DELIMITATION ISSUES 
--------------------------- 
 
BAKU 00000431  002 OF 003 
 
 
 
¶6. (C) John Dabbar noted that accessing Central Asian gas 
resources will require subsea pipelines in the Caspian, but 
that runs into the issue of Caspian delimitation.  The 
absence of final agreement on same would prevent the 
construction of such pipelines, he said.  However, Central 
Asian gas could be a substitute for Russian gas -- the 
Russians could buy Central Asian gas cheap and then resell it 
at a huge markup to European markets, saving themselves the 
considerable expense of developing gas resources in the far 
north of Russia. 
 
¶7. (C) Ambassador Mann pointed out that Caspian delimitation 
issues need not block projects -- the USG position is that 
only the consent of the participating countries is necessary 
to move a project forward.  In 1998, the ultimately ill-fated 
Turkmenistan-Azerbaijan gas pipeline project (TCP) was ready 
to proceed with only Turkmenistani and Azerbaijani assent. 
The Russians, Mann added, built Blue Stream after consulting 
only with Turkey.  The Caspian has been delimited, said Mann, 
it's just that Turkmenistan and Iran refuse to acknowledge 
this fact.  Deputy Foreign Minister Azimov agreed and pointed 
out that Turkmenistan came close to agreeing with Azerbaijan 
on Caspian delimitation in 1996-1997, but while it never 
signed the agreement, it never rejected it either. 
 
---------------------------- 
ACCESSING TURKMENISTAN'S GAS 
---------------------------- 
 
¶8. (C) Woodward noted that Turkmenistan could ship its gas 
eastward as easily as westward, and that no foreign companies 
are currently engaged in developing Turkmenistan's gas.  Most 
of Turkmenistan's gas volumes appear committed to Russia now, 
but, Woodward noted, these kind of contracts with 
Turkmenistan often don't last.  Ambassador Mann noted that 
Turkmenistan tends to write thirty-year contracts that 
involve renegotiations of price every eighteen months. 
 
¶9. (C) Deputy Foreign Minister Azimov argued that there is a 
strong strategic case for bringing Turkmenistan's gas into 
Europe.  While Turkmenistan may want to send its eastern gas 
to Asian markets, this will not prevent efforts to bring its 
western gas to Europe.  Using the Azerbaijan-Georgia 
corridor, said Azimov, several routes are possible.  Through 
Turkey and Greece to Italy, for example, or across the Black 
Sea to Romania and Bulgaria.  Most interesting, said Azimov, 
is the idea to get Turkmenistan's gas into Ukraine, and 
thence onward to Poland and Germany.  As Russia's gas policy 
is not likely to change, said Azimov, it is vital to bring 
Turkmenistan back into the game. 
 
---------------------------------- 
ACCESSING KAZAKHSTAN'S GAS AND OIL 
---------------------------------- 
 
¶10. (C) The issue of bringing Kazakhstan's gas across the 
Caspian was also raised, but the quick consensus from 
industry representatives was that this is unlikely in the 
near-term.  David Woodward noted that Kazakhstan's gas 
reserves are mainly associated gas linked to large oil or 
oil-and-gas fields with high levels of hydrogen sulfide. 
Much of this gas is planned to be reinjected to boost oil 
production, he added, although it is possible that as the oil 
fields reach the ends of their operational lifetimes, someone 
will think about exporting the gas.  However, this would 
require Kazakhstan to "shift from seeing gas as a nuisance to 
seeing it as a commodity." 
 
¶11. (C) The question of cross-Caspian transport of 
Kazakhstan's oil is of much greater saliency.  Deputy Foreign 
Minister Azimov asserted that Kazakhstan had brought its 
final version of the Inter-Governmental Agreement (IGA) for 
this project to Baku and that differences between the two 
sides are very slight.  Azimov added that Kazakhstan was 
showing interest in the GUAM organization as a way to bring 
its energy resources westward.  John Dabbar asked Azimov if 
Azerbaijan has changes of its own to propose to the IGA. 
Azimov replied that Azerbaijan's Ministry of Energy has 
 
BAKU 00000431  003 OF 003 
 
 
already responded to Kazakhstan and that there are only a few 
changes.  Thierry Normand said that he hopes this is a sign 
that the IGA will be signed soon.  When asked, Dabbar said 
that the north Caspian producers expect Kazakhstan's Kashagan 
field to begin producing by the end of 2008 or early 2009. 
If the legal and physical infrastructure for transport of 
this oil to BTC is not ready by then, the north Caspian 
producers will either send the oil through CPC or through the 
Aterau-Samarra line, with a final backup plan of sending the 
oil by rail to the Black Sea.  NOTE: Immediately following 
the lunch, both Dabbar and Normand pulled energy officer 
aside and told him with great urgency that they feel Azimov 
is extremely optimistic in his assessment of progress on the 
IGA.  In their view, Azerbaijan and Kazakhstan are still very 
far apart on key issues and a signature in the near future is 
very unlikely. 
 
--------------------------------------------- --- 
PROGRESS AND PROBLEMS WITH BTC AND SCP IN TURKEY 
--------------------------------------------- --- 
 
¶12. (C) A/S Fried asked about progress and problems with the 
BTC and SCP projects.  Woodward was extremely critical of 
Turkey and said that BTC has suffered a 400-day delay in 
completion.  The key factor, said Woodward, is that when the 
BTC project was negotiated, Turkey asked for a very low cost 
ceiling, and when BP demurred, the lump-sum turn-key 
agreement was created under which the Turkish state pipeline 
concern BOTAS would complete the BTC line for that amount, 
with completion guarantees issued by the Government of 
Turkey.  However, says Woodward, BOTAS has now taken the 
position that these guarantees were issued by a previous 
government and are no longer valid, therefore BP must pay for 
the cost overruns.  Woodward says there have been huge and 
repeated changes in the senior management of BOTAS, serious 
questions of managerial competence, and criminal charges 
against executives appointed by earlier governments.  The 
result has been what Woodward terms a hypercautious attitude 
by current management that 
contributes to further delays. 
 
¶13. (C) The picture, according to Woodward, is unfortunately 
not much better with regards to completion of the SCP gas 
pipeline.  SCP was structured differently from the way BTC 
was, in that the Shah Deniz partners sell the gas to Turkey 
at the Turkish-Georgian border.  It is up to Turkey to 
construct its own pipeline to Erzerum and construct a 
compression station there, said Woodward.  There have been 
serious delays with both these projects as well, prompting 
both Azerbaijan and Georgia to propose taking the gas 
themselves for domestic use.  This is not realistic, says 
Woodward, as the gas was sold to Turkey at extremely 
competitive rates.  It is difficult for BP to know where the 
decisions are really being made in Turkey.  Energy Minister 
Guler has been supportive as an individual but this has 
rarely translated to progress, Woodward says, as the BOTAS 
project director often does not follow the direction of the 
Minister.  Woodward opined that the BOTAS project director 
fears liability and does not trust the 
Ministry to protect him in the event of future legal action. 
Woodward says that Turkey should be using these projects to 
demonstrate its reliability as a energy-transit country, but 
so far this perspective has not been enough to motivate 
change. 
 
¶14. (C) In concluding the lunch, A/S Fried thanked the 
participants for attending and for their thoughts.  The 
United States wants to see multiple, competitive routes for 
energy into Europe in order to assure diversity of supply, he 
said.  The United States will continue to work with Europe to 
bring this about. 
 
¶15. (U) A/S Fried has cleared this cable. 
HARNISH