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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000688 
 
SIPDIS 
 
DEPT FOR EUR/CARC, SCA/CEN, S/E MORNINGSTAR 
 
E.O. 12958: DECL: 08/31/2019 
TAGS: ENRG EPET AJ TU TX
SUBJECT: AZERBAIJAN: SPECIAL ENVOY MORNINGSTAR, PRESIDENT 
ALIYEV DISCUSS NABUCCO, TURKEY GAS TRANSIT 
 
REF: A. BAKU 646 
     ¶B. BAKU 605 
 
Classified By: Charge d'Affaires Donald Lu, Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary:  Suggesting that Turkey is putting 
short-term gas needs for its domestic market ahead of 
longer-term objectives to transport gas to Europe, PresidentAliyev questioned Turkey's commitment to constructng 
Nabucco.  In a conversation with Special Envo Morningstar on 
August 27, Aliyev referred to recent talks with the Turks as 
a failure and lamented a loss of momentum in negotiations. 
Increasing Russia-Turkey cooperation on energy, including a 
possible nuclear deal, is troubling, he said.  Pricing 
disputes over Shah Deniz Phase I and II gas continue, as do 
continuing differences on the volume of Phase II gas to be 
sent to Turkey and Europe.  Should gas pricing and transit 
talks continue to fail, President Aliyev suggested he might 
make a public statement this fall to place full blame on 
Turkey.  This statement, intentionally or not, could come 
around the time of the proposed Turkey-Armenia soccer match, 
and thus affect or be affected by border and reconciliation 
talks.  On a positive note, Aliyev suggested that the Shah 
Deniz Production Sharing Agreement would be extended for five 
years.  End Summary. 
 
¶2.  (C) In an August 27 meeting with Special Envoy for 
Eurasian Energy Ambassador Richard Morningstar, PresidentQAliyev characterized 
again (ref a) Azerbaijan's August talks 
on natural gas prices and transit with Turkish counterparts 
in Nakhchivan Province as a "failure."  Turkey in particular 
is not being constructive on transit tariffs, he said, still 
"demanding two times normal tariff levels."  The President 
speculated that in the near-term, at least, the Turks may not 
want a larger deal on Nabucco, which would carry Azerbaijan's 
and perhaps Central Asia's gas to Central Europe.  "This is a 
signal, perhaps, that the Turks are not serious," he said. 
 
¶3.  (C) Rather, Turkey's short-term goal, the President 
suggested, is to lower the average price on imports and 
provide cheaper gas to the domestic market.  Unfortunately, 
he added, the Turks still hold the impression that Azerbaijan 
does not have any alternatives and that over the longer-term 
Turkey must be the hub for natural gas transit from 
Azerbaijan, Central Asia, Iraq and Iran to Europe.  This 
cable covers President Aliyev's comments on Turkey and gas 
transit issues; the President's comments on Turkmenistan and 
Kazakhstan are reported septel. 
 
Momentum Lost on Summer Transit Breakthrough 
-------------------------------------------- 
 
¶4.  (C) Russian Prime Minister Putin's early August visit to 
Ankara, where he met with Prime Minister Erdogan, was a clear 
signal that Russia intends to undermine Nabucco, President 
Aliyev said.  The visit, in his view, worked to reverse 
momentum in Azerbaijan's discussions with Turkey on transit. 
Prior to the Putin visit -- especially in the aftermath of 
the appointment of Taner Yildiz as Turkey's Minister of 
Energy -- Turkey had shown signs of cooperation.  This was 
particularly the case in the weeks that followed 
Azerbaijan/SOCAR's spring discussions with Russia/GazProm on 
natural gas exports to Russia.  That momentum, however, now 
seems to be lost, the President reflected. 
 
¶5.  (C) Several factors could be at play, the President said. 
 Aside from possible Turkish ambivalence on the Nabucco 
project related to cheaper gas for the domestic market, 
Turkey's greater European agenda also affects transit issues, 
and Nabucco in particular.  Foreign Minister MammadQov 
separately emphasized this point to Ambassador Morningstar in 
a meeting earlier in the day.  President Aliyev also made 
reference to the civilian nuclear deal that Russia and Turkey 
are discussing, and wondered aloud if that project had 
influenced Turkey's thinking on South Stream.  President 
Aliyev and Foreign Minister Mammadyarov separately noted huge 
volumes of Russian investment moving into Turkey in a range 
of sectors. 
 
So Much to Negotiate, So Complicated to Agree 
--------------------------------------------- 
 
BAKU 00000688  002 OF 003 
 
 
 
¶6.  (C) In the midst of this, Azerbaijan and Turkey are 
negotiating prices for gas sold directly to Turkey. 
Azerbaijan has continued to supply Shah Deniz Phase I gas to 
Turkey for many months, despite the fact there has been no 
agreement on a new price.  The initial price on that gas -- 
USD 120 per thousand cubic meters (tcm) -- remains far below 
the "market" price in Europe and even farther below the very 
high price that Turkey has paid GazProm for imports through 
the (Black Sea) Blue Stream pipeline.  Azerbaijan and Turkey 
meanwhile are discussing a pricing formula for sales of Shah 
Deniz Phase II gas, which has not yet been sanctioned. 
Volumes from Shah Deniz Phase II are also in dispute, i.e., 
how much of Azerbaijan's gas would go to the Turkish market 
and how much would be shipped onward to Europe.  On a 
positive note, Aliyev suggested that the Shah Deniz 
Production Sharing Agreement would be extended for five 
years. 
 
¶7.  (C) SOCAR Vice President for Marketing Elshad Nasirov, 
who joined the President for the meeting with Ambassador 
Morningstar, said that he and other Shah Deniz consortium 
members (BP, Statoil, Total/France, etc.) are meeting this 
week and next to work out a counter-offer (following the 
Nakhchivan meeting) to the Turks.  Nasirov stated that Turkey 
offered at Nakhchivan a "tiered" structure of transit fees, 
which curiously increase with greater volumes.  Turkey's 
BOTAS allegedly put forth fees of USD 45 per tcm per 100 
kilometers for volumes up to 1 billion cubic meters (bcm), 
USD 52 per 1 tcm per 100 km for volumes up to 7 bcm, and USD 
57 per 1 tcm per 100 km for volumes up to 10 bcm.  Higher 
prices for higher volumes, the Turks said, reflect greater 
capital expenditures and operating expenses.  The consortium 
must also address the issue of Shah Deniz Phase II volumes 
for Turkey and Europe.  After SOCAR proposed a non-tiered 
transit fee of USD 32 per tcm per 100 kms., BOTAS countered 
with a lower rate (USD 35 per tcm per 100 kms. for volumes up 
to 1 bcm and USD 45 per tcm for 100 kms. for volumes up to 7 
bcm). 
 
Politics Always Play a Role 
--------------------------- 
 
¶8.  (C) President Aliyev suggested that Azerbaijan might make 
a tough public statement this fall, should the next round of 
talks with Turkey fail.  The objective, he said, would be to 
point out that Turkey is not being constructive and is 
blocking Caspian gas exports to Europe.  (Comment:  The 
timing of this would be interesting, should it happen, as the 
Azerbaijan-Turkey gas talks could come at about the same time 
as the proposed Turkey-Armenia soccer match ) and thus be 
affected by border and reconciliation talks on that front. 
End Comment.) 
 
President Eyes Bulgaria, Greece 
------------------------------- 
 
¶9.  (C) The Azerbaijanis acknowledged that should talks with 
Turkey ultimately fail, there are few, if any, options.  The 
Turks may be hoping, the President speculated, that the Shah 
Deniz partners would then have to sell all gas to Turkey. 
President Aliyev discussed opportunities to strike supply 
deals with Bulgaria and perhaps Greece, hoping aloud that the 
Bulgarians in particular might be able to persuade Turkey to 
accept transit terms.  Currently, Russian gas transits 
Bulgaria on its way to Istanbul.  This counter-arrangement, 
he surmised, might be used as leverage.  The President was 
also eager for the United States to make more noise about the 
possibility of an under-the-Black Sea pipeline to Bulgaria or 
Romania and/or a Black Sea LNG project.  He suggested U.S. 
funded feasibility studies to support these proposals.  In 
meetings later with SOCAR, its management was less receptive 
to the idea for a variety of reasons (septel). 
 
Comment:  Energy Combines Economics and Politics 
--------------------------------------------- --- 
 
¶10.  (C) Gas purchasing agreements and transit tariffs are 
difficult to negotiate in the best of circumstances; 
political stalemates over complex issues like 
Nagorno-Karabakh only serve to further muddy the waters.  In 
 
BAKU 00000688  003 OF 003 
 
 
separate talks ahead of SE Morningstar's visit, BP officials 
suggested that some progress was made at Nachkhivan, and 
praised the two sides for "actually talking about numbers." 
Other accounts are mixed at best.  Still, President Aliyev's 
words last week were nothing short of gloomy, and his threat 
to lambast the Turks publicly this fall seems rash.  While it 
is apparent at times that Turkey is not constructive on 
transit talks -- and President Aliyev's point about the 
Turks' focus on the domestic gas market is well taken -- it 
also seems likely that Azerbaijan sees Turkey-Armenia 
reconciliation and the impact on Nagorno-Karabakh as factors 
in the gas transit and pricing talks.  How that discussion 
proceeds will likely influence Azerbaijan at the energy table 
with Turkey. 
 
¶11. (U) This cable was cleared by Ambassador Morningstar's 
staff. 
LU