VZCZCXRO9100
RR RUEHDBU
DE RUEHKB #0450/01 0821048
ZNY CCCCC ZZH
R 231048Z MAR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 9937
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1560
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000450 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EB/ESC 
ENERGY FOR FE - SWIFT AND OS - WILLIAMSON 
ANKARA FOR FCS 
 
E.O. 12958: DECL: 03/23/2016 
TAGS: EPET ECON ENRG AJ RU KZ
SUBJECT: AZERBAIJAN ENERGY OUTLOOK 
 
REF: BAKU 370 
 
Classified By: Ambassador Reno L. Harnish III, Reasons 1.4(b,d). 
 
¶1. (C) SUMMARY.  Representatives from energy sector companies 
operating in Azerbaijan discussed the Barmek crisis, Caucasus 
gas needs, changes in pipeline security agencies, 
trans-Caspian oil transport and offshore gas development at 
the Ambassador,s March Energy Forum.  Participants reported 
that businesses linked to deposed Minister of Economic 
Development Farhad Aliyev continue to face severe 
difficulties.  They also said that Azerbaijan is beginning to 
redefine itself as a transit country.  For this reason 
Azerbaijan seeks changes in the Inter-Governmental Agreement 
(IGA) required for a trans-Caspian oil transport deal with 
Kazakhstan, which may be difficult to get.  A duty-free port 
would help Azerbaijan enormously in terms of maritime 
construction, but if the GOAJ does not grant one the GOKZ 
might.  Although the companies believe that commercial 
negotiations should go ahead for full-field development of 
the Shah Deniz gas field, they caution that the amount of 
recoverable gas remains uncertain, and will not be known 
until current appraisal wells are completed.  If current 
projections hold true, and Azerbaijan really can become a 
major supplier to European markets, new transportation 
infrastructure and perhaps new EU regulations, will be 
necessary.  END SUMMARY. 
 
¶2. (SBU) The Ambassador,s monthly energy forum took place on 
March 6.  In attendance were representatives from: 
 
--Chevron 
--Devon Energy 
--Statoil 
--McDermott Caspian Construction 
--ConocoPhillips 
--TOTAL 
--BP 
--Amerada Hess 
 
Opinions expressed by corporate representatives are not 
necessarily the official positions of their companies. 
 
-------------------------------- 
DIFFERENT VIEWS OF BARMEK CRISIS 
-------------------------------- 
 
¶3. (C) The Chevron representative said that the recent case 
of Barmek is similar to those of Fondel or Alumina. 
Businesses connected to former Minister of Economic 
Development Farhad Aliyev are being attacked and Russian 
businesses are taking over chunks of the non-energy industry. 
 The GOAJ, the Chevron rep believes, is now focused on 
Azerbaijan,s role as a transit corridor and believes it can 
demand better deals from those, like Kazakhstan, who want to 
use that corridor.  The Chevron rep feels that Natik Aliyev, 
despite his public statements, still wants to be involved 
with energy, views himself as having been sidelined, and is 
not happy about it. 
 
¶4. (C) The Devon representative pointed out that there is 
more to the Barmek story - after all, he noted, in 2000, 
Barmek was a virtually unknown Turkish company that 
mysteriously managed to beat Siemens for the electricity 
tender, and which was somehow granted some legal concessions 
that the GOAJ was unwilling to grant to Siemens.  "What goes 
around comes around," he said.  The Devon representative 
feels it unlikely that UES will move into the market as in 
his view UES chief executive Anatoliy Chubays does not get 
along well with President Putin.  The Devon representative 
also believes that Russia will block the construction of 
large tankers in the Caspian by refusing access to the Don 
Volga canal, and pointed out that giant tankers carry a 
serious environmental risk.  Natik Aliyev, in the view of the 
Devon rep, won,t be able to make a comeback.  In the Devon 
rep,s opinion, President Aliyev is trying to replace his 
father,s team with his own team, but he has to do this 
slowly so that it does not look like criticism of his father. 
 
 
---------- 
GAS ISSUES 
---------- 
 
BAKU 00000450  002 OF 003 
 
 
 
¶5. (SBU) In discussing Shah Deniz, the Statoil representative 
said that Azerbaijan will insist on satisfying its domestic 
needs before looking at further export deals.  Any look at 
full-field development must keep this in mind.  The EU is 
getting more pragmatic regarding its laws on competition that 
complicate the importation of Azerbaijani gas into Europe and 
is "waking up" to the possibilities.  Critical is the test 
well at Shah Deniz, the results of which will be known in 
September.  In the meantime, Statoil has appointed a new VP 
for downstream gas issues.  On the issue of exploitation of 
the non-associated deep gas at ACG, SOCAR,s Yusufzade has 
said that on the one hand he would like to see a new PSA, but 
that on the other hand he would like AIOC to be the 
consortium that exploits the field.  The Amerada Hess 
representative said that Amerada Hess is very interested in 
exploitation of the deep gas well at ACG.  The BP 
representative said that BP is still working on the issue of 
satisfying Georgian gas demands. 
 
--------------- 
SECURITY ISSUES 
--------------- 
 
¶6. (C) The BP rep noted that the first hot-tap on BTC has 
been discovered.  The tap was in Turkey, at a point that the 
oil had not yet reached.  Reportedly, changes are taking 
place in pipeline security.  In Georgia, the BP rep said that 
some of the SPSS units involved in pipeline security have 
been transferred to the Interior Ministry.  On the Azerbaijan 
side, the new Ministry of Emergency Situations has said that 
it is taking over pipeline security, which is demoralizing to 
the Pipeline Protection Division of Azerbaijan,s SPSS, with 
which BP has had a good relationship. 
 
---------------------- 
TRANS-CASPIAN PROJECTS 
---------------------- 
 
¶7. (C) The McDermott representative said that McDermott is 
very interested in the potential full-field development of 
Shah Deniz, and that they have been working closely with the 
new SOCAR leadership.  In terms of recent labor unrest (over 
managers removing graphic pictures of the Khojaly massacre 
from a company bulletin board), the McDermott rep speculated 
that the situation could have been a setup as the press 
seemed to know everything before it happened.  McDermott is 
looking for opportunities to keep its yards working. 
Elsewhere in the world, McDermott yards are located in 
duty-free ports and McDermott hopes for a similar arrangement 
here.  If Azerbaijan doesn,t establish duty-free ports, the 
McDermott rep pointed out, Kazakhstan will, and Azerbaijan 
will lose out.  Meanwhile, there seems to be movement on the 
long-dormant Trans-Caspian gas pipeline project (TCP) to 
bring Turkmenistan,s gas to Azerbaijan - the McDermott rep 
reports that a company called Prime Engineering (based in 
Atlanta) has done preliminary work on construction 
feasibility.  However, the McDermott rep added that the 
Russians are apparently now raising the issue of whether the 
Caspian is a lake or a sea again, arguing that it is a lake 
and thus TCP can,t proceed without their clearance.  This, 
as many attendees noted, contradicts the basis of Russia,s 
acceptance of the trilateral agreement with Kazakhstan and 
Azerbaijan delimiting the north Caspian, an agreement which 
accepted ocean formulas for delimitation. 
 
¶8. (SBU) The ConocoPhillips representative said that 
ConocoPhillips is still interested in exploration projects. 
On trans-Caspian shipping, the ConocoPhillips representative 
reported that there are rumors that SOCAR Financial Affairs 
VP Shahin Mustafayev is seeking to establish a relationship 
with a new company to handle shipping, to outflank state 
shipping monopoly CASPAR.  Meanwhile, AzerTrans, the 
transportation unit of the former Azpetrol, has lost its 
senior management and a new, SOCAR-linked chief has been 
installed. 
 
¶9. (C) The TOTAL representative pointed out that the shifting 
Russian view on the Caspian being a lake or a sea is one 
major reason why the KCTS (Kashagan-BTC) project is 
proceeding with tankers and not a pipeline.  On the question 
of tanker risk, the TOTAL rep noted that risk is not based 
only on size, but on training, maintenance, and frequency of 
 
BAKU 00000450  003 OF 003 
 
 
sailing - giant tankers sail less often than smaller ones. 
CASPAR would prefer smaller tankers so their existing 
infrastructure would be used, but the new Maritime Authority 
is chipping away at CASPAR,s authority.  With regard to the 
Kashagan-BTC IGA issues, the TOTAL rep feels that many of 
these relate to internal disputes in Azerbaijan.  Two weeks 
ago, the IGA was to be substantially modified - now it looks 
like the modifications will be less.  The difficulty is that 
Kazakhstan,s draft is the product of painstaking internal 
deliberations within the GOKZ - altering even "a single 
comma" will prove difficult.   The TOTAL rep feels that the 
Farhad Aliyev affair was all about destroying Azpetrol, 
perhaps so that Middle East Petroleum could move in. 
 
¶10. (SBU) On Shah Deniz, TOTAL advises caution.  Full-field 
development of Shah Deniz will involve tapping into a 
high-pressure structure deeper than the source for Phase II 
gas.  It may well be that the high pressure will make it too 
difficult to extract the gas economically.  When the first 
appraisal well is completed in September there will be some 
news, and in 2007, after the second appraisal well is 
complete, the picture will be clear.  TOTAL and Statoil both 
agree that the commercial process has to be set in train now, 
however.  Also, assuming full-field development will yield 
the volumes we hope, new infrastructure (new pipelines) will 
be necessary to properly exploit it. 
HARNISH