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DE RUEHKB #0728/01 2180442
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P 050442Z AUG 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 5768
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEKDIA/DIA WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
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C O N F I D E N T I A L BAKU 000728 
 
SIPDIS 
 
EUR FOR MATT BRYZA; EEB FOR BOYDEN GRAY AND STEVE MANN 
 
E.O. 12958: DECL: 08/03/2018 
TAGS: ECIN ECON ENRG EPET PGOV PINR PREL AZ TU
SUBJECT: SOCAR VP, SE GRAY DISCUSS NEXT STEPS RE TURKEY 
 
REF: A. BAKU 719 
     ¶B. BAKU 721 
     ¶C. BAKU 726 
     ¶D. ANKARA 1286 
 
Classified By: Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b, 
d) 
 
¶1.  (C) SUMMARY:  SOCAR Marketing Vice-President Elshad 
Nassirov, one of President Aliyev's key energy advisors, told 
SE Gray that selling any more than four billion cubic meters 
(bcm) of Shah Deniz Phase Two gas (SD2) to Turkey would "kill 
the Southern Corridor project."  He said Turkey sought eight 
bcm of SD2 gas to kill the project and to gain the ability to 
force Azerbaijan to sell it gas at submarket prices.  He said 
Turkey should be made to realize that Azerbaijan has 
alternatives for selling Shah Deniz Phase Two gas, to include 
Russia, Iran, and "Nabucco without Turkey," i.e. a Black Sea 
pipeline from Georgia to Bulgaria that would deliver at least 
10 bcm of Azerbaijani gas to Europe.  He urged the USG to 
work to encourage Greece to accept a deal whereby SOCAR would 
take over an existing Botas contract for gas sales to Greece. 
 Nassirov, the main GOAJ point person for SD2 marketing, is 
focused on finding alternatives to transit through Turkey, 
partly to prepare the GOAJ for alternatives, but primarily as 
a way to convince Turkey that the GOAJ has options.  END 
SUMMARY. 
 
¶2.  (C) On July 14 Special Presidential Envoy for Eurasian 
Energy C. Boyden Gray, Eurasian Energy Coordinator Ambassador 
Steven Mann and Ambassador Derse met with SOCAR Marketing 
Vice-President Elshad Nassirov.  Also present were (on the 
U.S. side) U.S. Trade and Development Agency Regional 
Director Dan Stein, Department of Energy Director of Russian 
and Eurasian Affairs Lana Ekimoff, and Embassy Energy 
Officer, and (on the SOCAR side) SOCAR Presidential Advisor 
Murat Heydarov. 
 
TURKEY 
------ 
 
¶3.  (C) SE Gray gave Nassirov a readout of his GOT meetings 
(reftel A), highlighting the divergence in priorities between 
the PM and MFA on the one hand, seemingly eager to cooperate 
on the Southern Corridor, and the Energy Minister, who seemed 
exclusively focused on getting eight bcm/a from Azerbaijan. 
Nassirov said that the GOAJ seems to share the same vision 
with the GOT MFA, adding that even the Energy Minister Gular 
has always been "positive" in discussions, with Botas 
leadership less so. 
 
8 BCM = TURKISH TRICK 
--------------------- 
 
¶4.  (C) Nassirov doubted that Turkey actually needed 8 bcm/a 
from SD2, and said that its demands were a ploy to kill the 
Southern Corridor Project and allow itself the right to 
impose a price on Azerbaijan.  He said that if Azerbaijan 
were to sell 8 bcm/a of SD2 to Turkey, only 2.5 bcm/a would 
be left, after having also accounted for Georgian and 
Azerbaijani needs.  This amount would be too small to 
sanction any pipeline.  Turkey, then being the dominant 
customer for SD2 gas, would seek to unilaterally impose a 
submarket price for SD2 on Azerbaijan a few years into the 
contract. 
 
¶5.  (C) Nassirov said SD2 production would be approximately 
13.8 bcm/a.  Of that, 3 bcm/a would go to Azerbaijan and 
Georgia, leaving approximately 10.5 to 11 bcm/a for Turkey 
and beyond.  The SD Consortium position is to sell a maximum 
of 4 bcm/a to Turkey so that 6 bcm/a is left, enough to 
sanction one pipeline project -  "if Turkey needs more than 4 
bcm/a, it can get it from Russia, Iraq or Iran; we need 
European access."  Nassirov stressed that if Turkey were to 
buy more than 4 bcm/a of SD2, "there would be no European 
pipeline, and Turkey would be able to impose gas prices on 
Azerbaijan." 
 
¶6.  (C) Nassirov said that the SD Consortium was almost done 
fashioning a working group to market SD2 gas  (COMMENT: 
According to SD Consortium member StatoilHydro, this SD 
working group is composed of representatives from BP, 
Statoil, SOCAR and Total.  After contracts are signed, the 
Consortium will create a Special Purpose Vehicle ) SPV, to 
administer the contracts.  END COMMENT).  BP and Statoil on 
the one hand and SOCAR on the other are still discussing the 
exact decision-making mechanism, with each side wanting 
"negative control" over the other's decisions. 
 
RUSSIA 
------ 
 
¶7.  (C) Nassirov said that Russia was  getting serious, 
about blocking the Southern Corridor.  During Russian 
President Medvedev's recent Baku visit, Gazprom repeated to 
SOCAR that it wanted to buy all SD2 volumes, not just the two 
to three bcm/a that SOCAR offered.  SOCAR told them to 
prepare a commercial proposal.  Gazprom was offering 
"European prices, minus 15 percent profit for Gazprom, minus 
transit," which according to Nassirov would equal an 
unacceptably low USD 246 per thousand cubic meters.  Despite 
this low initial offering price, Nassirov categorized his 
talks with Gazprom as positive, in sharp contrast to his 
discussions with Turkish interlocutors.  Referring to a 
90-minute chat he had with Gazprom CEO Alexei Miller while 
both were at the airport waiting for the arrival of President 
Medvedev, Nassirov said that it was hard to describe how 
relaxed and self-confident the Russian was in contemplating 
Gazprom's domination of the European gas market, which Miller 
seemed to take as a fait accompli.  He said that Miller was 
very pleased with a recent Economist article pointing to 
GazProm,s influence on the Russian resurgence. 
 
ALTERNATIVES 
------------ 
 
¶8.  (C) Nassirov said that "Turkey should realize Azerbaijan 
has other options" should Turkey refuse to provide gas 
transit to Europe.  In addition to selling SD2 gas to Russia 
and/or Iran, the GOAJ could pursue a "Nabucco without Botas" 
strategy, in which the SD2 gas went from Georgia across the 
Black Sea in a pipeline to Bulgaria, enabling a minimum of 10 
bcm/a to arrive in Europe, as "the Black Sea will not ask for 
eight bcm."  (COMMENT:  When informed of technical 
limitations, relating to the inability to achieve sufficient 
compression offshore, that would limit pipeline capacity to 
approximately five bcm/a, Nassirov subsequently refined the 
idea by having the pipeline touch land, for recompression, 
south of Sevastopol in Ukraine, before continuing on to 
Bulgaria.  END COMMENT).  Nassirov said that Bulgarian 
President Parvanov had been active in forming this idea. 
Under this scenario, four of the six Nabucco members would 
vote Botas out and subsequently vote in Gas De France.  OMV 
CEO Wolfgang Ruttensdorfer and OMV Gas CEO Werner Auli were 
both "enthusiastic" about the idea, but told Nassirov it 
would be impossible for them to mention this option to Botas. 
 
GOAJ-GREEK CONTRACT? 
-------------------- 
 
¶9.  (C) Nassirov said that currently Turkey sells 750 million 
cubic meters per year of gas (mcm/a) to Greece, at USD 120 
per thousand cubic meter (mcm).  The price of this gas is 
linked to the price of SD1 gas being sold to Turkey from 
Azerbaijan, so when the SD1 price is re-negotiated upwards to 
a market price, this price will also rise.  Nassirov pointed 
out that Turkey is selling gas to Greece at USD 149/tcm (SD1 
price of USD 120/tcm, plus USD 29/bcm transportation to 
Greece) while it is buying gas from Gazprom at USD 500/tcm, 
and that Turkey has proved an unreliable supplier, cutting 
off gas to Greece when faced with domestic shortages. 
Nassirov said that in order to secure the principle of 
transit through Turkey, the GOAJ is willing to in effect take 
over the Turkish contract.  Everybody wins -- the GOT gets a 
chance to dump an economically unviable contract, DEPA gets 
guaranteed gas at low prices, and Azerbaijan gets affirmation 
of the principle of direct sales to a European customer, with 
clear transit through Turkey.  Nassirov urged the USG to 
encourage the Greeks to work for this contract with 
Azerbaijan. 
 
¶10.  (C) Ambassador Mann said that the desired end state 
should be one where Turkey gets some SD2 volumes and 
assurances concerning future supply of gas While other SD2 
gas moves onward to Europe   Referring to GOT pressure on the 
USG to cooperate on GOTX energy sector development, Mann said 
that the USG should remind Turkey that "there will be no 
Turkmen gas without Azerbaijan."  As to GOT's willingness to 
budge on transit, he observed that in this part of the world 
normally "nothing happens until right after it has to 
happen," i.e. the transit issue will get solved only when it 
needs to -- by the time when SD2 needs to enter the "define" 
phase (first or second quarter 2009).  Mann also told 
Nassirov that the more that Azerbaijan can do to make ACG 
Deep Gas a reality, the easier negotiations with Turkey will 
proceed, because the GOT will "see additional volumes coming 
available."  Nassirov countered that he doubted that 
"additional gas would make Turkey realistic," adding that 
Turkey was using the gas transit issue to enhance its 
prospects for EU accession.  He confirmed that Gazprom had 
told Turkey that it would not be able to renew its 6 bcm/a 
supply contract ending in 2011.  Mann concluded by saying 
that this was still the "horse-trading stage," and that 
current positions were not final ones.  Turkey's message has 
always been consistent:  it wants full gas supply with 
maximum flexibility, and a "cushion" for potential surplus 
energy demand. 
 
¶11.  (C) COMMENT:  Nassirov, the main GOAJ point person for 
SD2 marketing, is focused on finding alternatives to transit 
through Turkey, partly to prepare the GOAJ for alternatives, 
but primarily as a way to convince Turkey that the GOAJ has 
options.  END COMMENT. 
 
¶12.  (U) This cable has been cleared by SE Gray, Ambassador 
Mann. 
DERSE