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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000368 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/CARC AND EB/ESC 
DEPT OF ENERGY FOR FE - SWIFT AND OS - WILLIAMSON 
 
E.O. 12958: DECL: 03/07/2016 
TAGS: EPET ENRG PREL AJ KZ
SUBJECT: STATUS OF THE KASHAGAN-BTC IGA -- THE VIEW FROM 
AZERBAIJAN 
 
REF: A. A. 05 BAKU 1960 
 
     ¶B. B. 05 BAKU 1823 
     ¶C. C. 05 BAKU 1059 
 
Classified By: Ambassador Reno L. Harnish, III, reasons 1.4 (b), (d) an 
d (e). 
 
¶1. (C) SUMMARY.  International energy companies in Baku 
believe Azerbaijan is holding out for better terms in the 
draft Inter-Governmental Agreement (IGA) with Kazakhstan over 
trans-Caspian oil transport.  Parliament Deputy Speaker 
Valekh Alasgarov appears to be leading the charge for 
President Aliyev, arguing that the IGA and the associated 
Host Government Agreements (HGAs) need to be negotiated 
simultaneously and that Azerbaijan deserves more from the 
project.  The IGA in its current form will not be approved by 
Azerbaijan's Parliament, says Alasgarov.  The GOAJ appears 
willing to exploit Azerbaijan's role as a transit country to 
the project in order to get the IGA language it wants. 
Industry sources confirm that an IGA is necessary for a 
project of this scale to proceed.  END SUMMARY. 
 
----------------------------------------- 
COMPANIES: AZERBAIJAN WANTS A BETTER DEAL 
----------------------------------------- 
 
¶2. (C) Sources in the international energy community in Baku 
believe that the reason an IGA has not yet been signed for 
the Kashagan-BTC project is because Azerbaijan wants better 
terms.  Reportedly, President Aliyev feels that Azerbaijan 
deserves more because of its emerging role as a vital transit 
country.  Additionally, there are supposedly still bitter 
feelings over what is seen as President Nazarbayev's 
last-minute decision not to sign the draft IGA during the BTC 
First Oil Ceremonies in May 2005.  Finally, the recent 
changes in Azerbaijan's energy establishment (Ref A) have 
slowed Baku's energy decision-making process in general. 
 
¶3. (C) The persistent failure to come to closure on the IGA 
is beginning to cause some concern among Baku-based 
international oil companies.  The chairman of TOTAL, which 
has the lead on transportation issues for the north Caspian 
producers, met with President Aliyev on the margins of the 
latter's recent meetings in Paris.  In this meeting, which 
was conducted with a minimum of publicity, TOTAL urged that 
the IGA be concluded soon.  Perceptively, both TOTAL and 
Chevron executives in Baku have characterized Azerbaijan as 
attempting to behave in the context of the Kashagan-BTC 
project similarly to the way Georgia is accused of having 
behaved during the BTC project itself -- using its status as 
a transit country to extract concessions from producing 
countries.  Representatives of international energy companies 
in Baku agree that the main force behind the Azerbaijani side 
in the negotiations is Valekh Alasgarov, formerly the head of 
SOCAR's Foreign Investments Division, now a deputy speaker of 
parliament and chairman of parliament's energy committee. 
Alasgarov is supposedly getting his instructions directly 
from President Aliyev and will present proposed changes to 
the IGA in the near future. 
 
------------------------- 
VALEKH ALASGAROV ON POINT 
------------------------- 
 
¶4. (C) For his part, Alasgarov denies any role in the IGA 
negotiations and claims to know nothing about them.  When 
asked if he has any opinions on the matter, however, he 
responds with detailed and emphatic ones.  Alasgarov firmly 
rejects the term "Kasghagan-BTC IGA" for the document, even 
informally.  The IGA, he says, is about transporting any oil 
from Kazakhstan through any infrastructure in Azerbaijan -- 
not limited to Kashagan oil and not exclusive to BTC either. 
This is reflected in the current draft of the IGA.  Alasgarov 
supports this, apparently wanting to preserve the option of 
sending Kazakhstan's oil via other routes like Baku-Supsa, 
Baku-Novorossiysk, or even rail.  This point, however, is the 
only aspect of the current draft IGA that he likes. 
 
BAKU 00000368  002 OF 003 
 
 
 
¶5. (C) Alasgarov points out that negotiations over this IGA 
have taken three years.  By contrast, he says, in seventeen 
months the BTC project signed one IGA, three Host Government 
Agreements (HGAs), and the lump-sum turn-key construction 
agreement with BOTAS.  The HGAs associated with this project 
must be negotiated simultaneously with the IGA, says 
Alasgarov, as the BTC HGAs were negotiated simultaneously 
with the BTC IGA.  Otherwise, he says, Azerbaijan is 
undertaking commitments in the IGA that are not defined.  For 
example, the IGA calls for granting "any necessary privileges 
to investors."  What does this mean, asks Alasgarov 
rhetorically.  We won't know, he says, until the HGA is 
negotiated.  At an earlier meeting with Ambassador, Alasgarov 
argued that the IGA is essentially deciding the shape of the 
follow-on HGAs.  If Azerbaijan agrees to vaguely-worded or 
unclear terms in the IGA, he said, the HGA may end up 
defining those terms in ways that force Azerbaijan to 
surrender certain rights.  Then, Alasgarov continued, 
Azerbaijan will be unable to object, because it will have 
already conceded the point in principle in the IGA, which 
will have the status of an international treaty.  For this 
reason, Alasgarov concluded, the IGA and HGA must be 
concluded simultaneously. 
 
¶6. (C) Alasgarov points to a provision in the IGA which says 
that "all necessary conditions" will be granted to investors 
"without discrimination".  Alasgarov says that investors in 
the new project will cite AIOC's rent-free occupation of the 
Sangachal terminal for the BTC project, for example, and 
demand similar rent-free access to ports in Azerbaijan.  But 
this is inappropriate, Alasgarov says.  Azerbaijan foregoes 
transit fees, rentals et cetera in BTC because Azerbaijan 
makes its profit from the oil itself.  But now, he says, 
Azerbaijan is a transit country, and Azerbaijan has to be 
able to make money from transit costs, ports and the like, or 
it will make no profit at all on the project.  Alasgarov also 
asked caustically why the Eskine-Kurik line, which will bring 
the Kazakh oil to port for shipment to Azerbaijan, is outside 
the IGA-HGA framework.  By contrast, he noted, every single 
Azerbaijani element of the transportation system is within 
the IGA-HGA framework (NOTE: ConocoPhillips characterized the 
e 
xclusion of Eskine-Kurik from the IGA-HGA framework as a key 
concession to get Kazakhstan on board with the project -- Ref 
B).  Given these issues, Alasgarov says with finality, there 
is no chance that his energy committee and Azerbaijan's 
parliament will pass the IGA in its current form. 
 
¶7. (C) In his earlier meeting with Ambassador, Alasgarov said 
he has met with SOCAR and with the GOAJ's ministerial-level 
commission negotiating the IGA to discuss his concerns.  He 
said he has also offered the views of other members of 
parliament who have experience with oil contracts.  Alasgarov 
said that he wants to cooperate with the negotiators up front 
to prevent problems later. 
 
-------------------- 
IS AN IGA NECESSARY? 
-------------------- 
 
¶8. (C) TOTAL executives in Baku continue to believe that the 
Kashagan-BTC project cannot go forward absent an IGA. 
Chevron's Tengiz-BTC project is of smaller scale and involves 
existing infrastructure (albeit with upgrades).  The 
Kashagan-BTC project, by contrast, will require as much as 
USD 4 billion of investment in infrastructure.  Much of this 
will be used for tankers and port facilites that, because of 
the geography of the Caspian, cannot be repossessed and 
relocated if the project fails.  Without an IGA (and 
follow-on HGAs), investors will not have a comfort level 
sufficient to participate.  Some way, therefore, has to be 
found to come to closure on the IGA if large-scale 
cross-Caspian oil transport is going to happen. 
 
------- 
COMMENT 
 
BAKU 00000368  003 OF 003 
 
 
------- 
 
¶9. (C) Regardless of the merits of his well-articulated 
arguments, Alasgarov seems determined to wield a veto over 
the IGA, and since informed opinion has it that he is acting 
for President Aliyev, that veto is likely to stick. 
Alasgarov, in his new capacity as an MP and one of the Deputy 
Speakers of Parliament, is also playing a role in giving 
parliament some teeth in its dealings on this very important 
issue.  Beyond simply getting a better deal for Azerbaijan in 
terms of transit fees, Alasgarov is firm that HGAs must be 
negotiated alongside the IGA.  He may feel this is the only 
way to keep the IGA negotiators from simply deferring every 
difficult issue to hypothetical later HGAs, which 
characterized the negotiations in May 2005 (Ref C).  It is 
also in accordance with what has been a steadily hardening 
attitude of Azerbaijan towards the project since the failure 
of the May 2005 talks.  There are some indicators that 
Azerbaijan may be moderating its stance slightly.  Whether it 
does or not, it still seems that if negotiators can't come up 
with what Valekh Alasgarov defines as a good deal, Alasgarov 
-- and Azerbaijan -- seems willing to shrug and say "no deal." 
HARNISH