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PP RUEHAG RUEHDBU
DE RUEHKB #0736/01 1390606
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P 190606Z MAY 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0366
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C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000736 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SNEC AND EB/ESC 
USDOE FOR FE - SWIFT AND OS - WILLIAMSON 
 
E.O. 12958: DECL: 05/19/2016 
TAGS: ENRG ECON EPET AJ KZ RU TR
SUBJECT: EXPORTING GAS: EB/CBA SPECIAL REPRESENTATIVE 
MERMOUD MEETS WITH AZERBAIJAN STATE OIL COMPANY 
 
Classified By: Charge d,Affaires Jason P. Hyland, reasons 1.4 (b), (d) 
and (e). 
 
¶1. (C) SUMMARY.  Charge and EB/CBA Special Representative 
Frank Mermoud met May 5 with Elshad Nasirov, Vice President 
of Azerbaijan's State Oil Company (SOCAR).  Nasirov argued 
that Kazakhstan is unhappy with Gazprom and is looking at 
alternate methods to get its gas to world markets.   Nasirov 
outlined a plan under which Kazakhstan would send its gas via 
subsea pipeline to Azerbaijan, there to be combined with 
Azerbaijani resources for onward sale to Europe. 
Turkmenistan, he said, might or might not join such a system 
later on.  Nasirov said that SOCAR had discussed this plan 
informally with Kasakhstan.  He admitted that Russia would 
put pressure on Kazakhstan not to participate in any such 
project, so it would have to be established in a low-key 
fashion.  Nasirov also alleged that Turkey is considering 
adopting a Gazprom-like model of buying Azerbaijan gas at low 
rates and then reselling it at world market rates.  He asked 
for U.S. help in convincing Turkey to charge Azerbaijan a 
transit fee and to allow Azerbaijan to be paid directly by 
end-users, in accordance with the liberalization of the 
European gas market.  END SUMMARY. 
 
--------------------------------------------- ----- 
POSSIBLE KAZAKHSTAN-AZERBAIJAN SUBSEA GAS PIPELINE 
--------------------------------------------- ----- 
 
¶2. (C) In a May 5 meeting, SOCAR Vice President Elshad 
Nasirov told visiting EB/CBA Special Representative Frank 
Mermoud that he believes that necessary agreements for a gas 
export project to Europe could be signed this year.  Nasirov 
envisions Azerbaijan joining its gas resources to volumes 
from Central Asia, specifically Kazakhstan but potentially 
also Turkmenistan.  Nasirov advocates the construction of a 
sub-sea pipeline across the Caspian from Kazakhstan to 
Azerbaijan.  Kazakhstan, Azerbaijan and Russia have signed a 
trilateral delimitation agreement for the north Caspian, he 
noted.  However, as it would be "difficult" to get agreement 
from the Russians for such a project, the proposed pipeline 
would pass through the Azerbaijani and Kazakhstani sectors 
only.  There have been no formal talks on this project, said 
Nasirov, just "telephone calls" on the subject between the 
two countries.  Azerbaijan is willing to assist in 
subsidizing the construction of a Kazakhstan-Azerbaijan gas 
pipeline and would provide political support for the project, 
says Nasirov. 
 
¶3. (C) Mermoud asked if the Inter-Governmental Agreement 
(IGA) currently being negotiated between Azerbaijan and 
Kazakhstan might have a clause that would cover gas shipments 
as well as oil.  Nasirov said that it does not, but that 
SOCAR sees this IGA as a "prototype" for future such 
agreements.  Once this IGA is completed and signed, a similar 
one covering gas transport will be much easier, he said. 
 
¶4. (C) Nasirov believes that Kazakhstan is interested in 
trans-Caspian gas projects because of difficulties with 
Gazprom, currently their only avenue for gas export.  Gazprom 
is buying Kazakhstan's gas at a cheap rate, he said, and then 
reselling it at world market prices.  Nasirov said that 
Kazakhstan has recently given Gazprom an "ultimatum," 
demanding access to world markets for half of the gas it 
sells them - in other words, for Gazprom to let the 
Kazakhstani gas transit its pipeline network and for the 
end-user to pay Kazakhstan directly at the world market rate. 
 Gazprom has not yet replied to Kazakhstan, said Nasirov. 
 
---------------------------- 
TURKMENISTAN'S POSSIBLE ROLE 
---------------------------- 
 
¶5. (C) Turkmenistan, Nasirov noted, does not support the 
trilateral delimitation agreement, and indeed both Azerbaijan 
and Turkmenistan claim the Kyapaz-Serdar field in the central 
Caspian.  If Turkmenistan wants to join this gas export 
project, said Nasirov, it can send its gas over land 
pipelines to Kazakhstan, where it can then join Kazakhstan's 
gas and the pipeline to Azerbaijan.  The lack of overall 
Caspian delimitation is not an obstacle to this project, 
asserted Nasirov.  It is Azerbaijan's position that only the 
approval of Caspian states participating in a project is 
necessary, said Nasirov, and nonparticipating Caspian states 
 
BAKU 00000736  002 OF 002 
 
 
do not have a veto. 
 
--------------------------- 
"GAZPROM CANNOT BE TRUSTED" 
--------------------------- 
 
¶6. (C) Echoing the view of many in Azerbaijan, Nasirov said 
that "Russia has a lot of leverage over Kazakhstan." 
Pointing at a map, he noted that Kazakhstan currently has a 
joint venture with Russia, KazRozNeft, to sell some 
quantities of gas to Ukraine via a land pipeline across 
Russian territory.  If the Russians see Kazakhstan and 
Azerbaijan beginning to build a pipeline together, said 
Nasirov, they will put two and two together and pressure 
Kazakhstan through the KazRozNeft project.  For this reason, 
he said, a good idea would be for a consortium of 
international investors to build the proposed 
Kazakhstan-Azerbaijan line on a speculative basis, and that 
it be built initially for small volumes.  Nasirov seemed to 
believe this would mitigate the inevitable negative reaction 
to the project by Russia.  Mermoud pointed out that the 
international investors would need assurances from both 
countries before beginning such a project. 
 
¶7. (C) "Gazprom cannot be trusted," said Nasirov.  He told 
the story of how, in 2005, SOCAR representatives had been 
invited to Moscow where Gazprom officials summarily informed 
them that Russia was unilaterally altering its negotiated gas 
sale agreement with Azerbaijan from charging USD 60 per cubic 
meter to charging USD 110 per cubic meter. "International 
agreements with Gazprom mean nothing," Nasirov said. 
Frankly, he added, with its dogged efforts on Caspian 
delimitation and the IGA, "Azerbaijan is the only country in 
the region bound by international agreements." 
 
-------------------------------------- 
CONCERNS ABOUT TURKISH GAS SALES MODEL 
-------------------------------------- 
 
¶8. (C) Nasirov expressed concern about recent developments 
with Turkey in regards to onward sales of gas from 
Azerbaijan's Shah Deniz field.  There are indications that 
Turkey will move to a Gazprom-style model, said Nasirov.  In 
other words, Turkey will buy Azerbaijan's gas at the 
negotiated rate and then resell it to Europe at the market 
rate.  Nasirov says that Azerbaijan wants its gas to transit 
Turkey, with customers paying Azerbaijan market rates 
directly and with Azerbaijan then paying Turkey a transit 
fee.  Nasirov pointed out that such a system would be in 
accord with the lieralization of the European gas market, 
and the reselling" arrangement Turkey seems interested in i 
a step backwards.  Nasirov asked for U.S. support on this 
issue. 
 
--------------------------------------------- ------------- 
SUCCESSFUL ALIYEV VISIT TO DC; NON-ENERGY SECTOR IMPORTANT 
--------------------------------------------- ------------- 
 
¶9. (C) On other matters, Nasirov (who accompanied President 
Aliyev to Washington) told Mermoud and Charge that Aliyev's 
visit to Washington had "exceeded expectations."  Mermoud and 
Nasirov agreed on the importance of developing the non-energy 
sectors of Azerbaijan's economy, and Mermoud recalled that 
President Aliyev had made this point during one of his 
official lunches in Washington.  They also both agreed on the 
importance of oil revenue management.  "Everyone is talking 
about oil revenues," said Nasirov. 
 
¶10. (U) EB/CBA Frank Mermoud has cleared this cable. 
HYLAND