VZCZCXRO5806
PP RUEHAG RUEHDBU
DE RUEHKB #0540/01 0971155
ZNY CCCCC ZZH
P 071155Z APR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0094
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000540 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/07/2016 
TAGS: ECON EPET ENRG PREL PGOV KDEM AJ
SUBJECT: PRESIDENT ALIYEV N ENERGY SECURITY, TRANSCASPIAN 
PIPELINE 
 
 
Clasified By: Ambassador Reno L. Harnish III per 1.4 (b,d). 
 
¶1.  (C) Summary:  In an April 3 meeting with S/P Director 
Krasner and EUR DAS Bryza, President Aliyev said he looked 
forward to further development of Azerbaijan's gas reserves 
and creation of a new TransCaspian pipeline to export Central 
Asian gas to European markets as an important "second stage" 
in Azerbaijan's development.  In order for Azerbaijani and 
Central Asian gas to reach European markets, however, Aliyev 
said that he needs strong political support from the USG.  He 
also welcomed USG help in resolving Caspian demarcation 
issues.  Krasner and Bryza urged Aliyev to ensure that the 
May 13 parliamentary rerun elections are conducted in a free 
and transparent manner.  Aliyev agreed that further 
democratic reform was needed but cautioned that democratic 
development must be viewed in a broad regional context.  End 
summary. 
 
¶2.  (SBU) S/P Director Stephen Krasner and EUR DAS Matt Bryza 
paid a call on Azerbaijani President Ilham Aliyev on April 3. 
Aliyev, in his usual fashion, was accompanied only by Foreign 
Policy Advisor Novruz Mammadov.  Ambassador Harnish and 
Pol/Econ chief (notetaker) also attended the meeting. 
 
ENERGY SECURITY:  TRANSCASPIAN PIPELINE 
--------------------------------------- 
 
¶3.  (C) Noting that Azerbaijan had been a pioneer in Caspian 
energy development, Aliyev said that construction of the BTC 
and SCP pipelines did not indicate that Azerbaijan's energy 
mission had been accomplished.  On the contrary, because 
recent events demonstrated that energy has become "a tool in 
other countries' hands," Azerbaijan now had an opportunity to 
counter Russia's monopoly and explore new European markets. 
In order to do so, however, Azerbaijan needs the support of 
the United States.  "This will not work without a 
coordinating role played by the United States," Aliyev said. 
 
¶4.  (C) Bryza cautioned that Italy and Greece -- potential 
new energy markets for Azerbaijan -- were being told by 
Gazprom that Azerbaijan had no surplus gas to supply to 
Europe.  Bryza urged Aliyev to act quickly or risk losing 
this new market.  The GOAJ should accelerate investments and 
explain to the Europeans the production expected from Shah 
Deniz development, 8-10 bcm expected by 2012 from phase 2 
alone. 
 
¶5.  (C) Aliyev responded that this was a new phase for 
Azerbaijan.  When the GOAJ first developed plans to exploit 
the Shah Deniz gas field, production was expected only to 
cover the needs of Azerbaijan and Georgia, with an additional 
2-3 bcm to export to Turkey.  With an estimated 1 trillion 
bcm in new untapped gas reserves (expected to be proven soon 
by geologists, according to Aliyev) as well as large volumes 
of condensates and non-associated gas from the ACG field, 
Azerbaijan needs to change its thinking and consider exports. 
 Azerbaijan could not decide this on its own, Aliyev said. 
Azerbaijan must take steps and the Europeans must provide 
market guarantees.  Then, he continued, Azerbaijan can think 
about bringing Kazakh and Turkmen gas into the network.  As 
part of this equation, however, Azerbaijan must end its own 
dependence on Russian gas. He worried that Russia might raise 
prices for gas shipped to Azerbaijan to apply political and 
commercial pressure on Baku. 
 
¶6.  (C) Aliyev urged the United States to play a role in 
helping Azerbaijan secure new gas markets in Europe.  Aliyev 
had meetings on this issue in Brussels two years ago, he 
said, but the discussions never moved beyond the theoretical. 
 Azerbaijan needs USG help to move beyond theoretical 
discussion to practical measures to diversify Europe's energy 
supplies.  A U.S. role also would help Kazakhstan, Aliyev 
continued, as it has 100 bcm in gas reserves but no way to 
export to Europe without transiting Russia.  Aliyev said that 
he had spoken to Kazakh President Nazarbayev recently, and 
Nazarbayev agreed that a new TransCaspian pipeline to bring 
Central Asian gas into Azerbaijani pipelines was a real 
possibility.  Aliyev estimated the export capacity of this 
new pipeline at 90 bcm, as Azerbaijan would be able to feed 
25-30 bcm into the system, while Kazakhstan could deliver 
50-60 bcm.  Aliyev noted that the TransCaspian pipeline could 
then cross the Black Sea through a "new Blue Stream" 
pipeline, transiting into Ukraine and Poland. 
 
¶7.  (C) Aliyev said he would appreciate the USG's help in 
 
BAKU 00000540  002 OF 002 
 
 
resolving Caspian demarcation issues.  Aliyev welcomed 
Bryza's news that Turkmen President Niyazov had asked for USG 
help in this issue, noting that Azerbaijan had very little 
contact with Turkmenistan and found Niyazov's behavior 
difficult to predict.  His own recent contact with the 
Government of Turkmenistan, Aliyev wryly noted, had come 
through two letters of complaint written by Deputy Ministers. 
 Cooperation with Turkmenistan and agreement on Caspian 
demarcation is key to moving forward on regional energy 
issues.  For example, Aliyev said, if Turkmenistan would 
agree on joint ownership and development of the Kapaz field, 
Azerbaijan would be ready to move forward on production, 
giving Turkmenistan a majority share.  If the Turkmen want 
U.S. involvement, Aliyev concluded, "we'll support that." 
Bryza replied that Niyazov still wanted all of Kapaz and 
joint exploration of the ACG fields under production by 
Azerbaijan and its international partners. 
 
¶8.  (C) Ambassador Harnish reminded Aliyev that further 
exploitation of Caspian energy resources also could lead to 
the development of Azerbaijan's construction and shipping 
industries.  U.S. firm McDermott already was well-positioned 
to provide construction services throughout the Caspian; all 
that it needs is a duty-free zone in Azerbaijan.  Aliyev 
agreed that promotion of a construction export business was 
in Azerbaijan's interest and said he already had instructed 
SOCAR and the Ministry of Economic Development to begin work 
on a "special tax situation."  Aliyev added that he is 
considering the creation of a general tax-free zone in 
Azerbaijan.  In general, Aliyev said, Azerbaijan must forget 
that it has oil and think about it what it must do to develop 
its non-energy sectors. 
 
DEMOCRACY AND TRANSPARENCY 
-------------------------- 
 
¶9.  (C) Krasner cautioned Aliyev to guard against the dangers 
of energy revenue, urging him to take concrete measures to 
ensure transparency and development of non-energy sectors. 
Aliyev said the GOAJ recognized those dangers and had taken 
steps early on to counter them.  The GOAJ was one of the 
first to join the Extractive Industries Transparency 
Initiative; its State Oil Fund is internationally audited and 
all expenditures of energy revenue are included in the GOAJ's 
consolidated budget and approved by parliament.  To date, the 
GOAJ has used its oil revenues to build schools, medical 
centers and housing for citizens who have been displaced by 
the Nagorno-Karabakh conflict.  New initiatives for 2006 
include a water project, and the creation of an investment 
fund to stimulate growth in the non-oil sectors.  Aliyev 
added that the GOAJ also has used oil revenue to increase 
salaries and pensions, all the while keeping a careful eye on 
inflationary pressures.  Aliyev's goal is to eliminate 
poverty by the end of 2008. 
 
¶10.  (C) Krasner urged Aliyev to take greater steps on 
democratic reform, noting that the USG expects the May 13 
parliamentary rerun elections to go well.  Aliyev agreed that 
further reform was needed, but cautioned that Azerbaijan's 
development must be viewed within a broader regional context. 
 Azerbaijan's geography and regional threats -- including 
Iran, the spread of Islamic extremism, and the unresolved 
Nagorno-Karabakh conflict -- pose unique challenges and 
dictate that Azerbaijan must have realistic reform goals. 
However, Azerbaijan's top priority is to strengthen its 
independence; the development of strong institutions and an 
active political process is critical to Azerbaijan's 
independence.  The U.S. plays a key role as a "guarantor" of 
Azerbaijan's independence, Aliyev said, and to that end, 
Azerbaijan seeks to maintain strong ties to the West, 
including through integration into the Euro-Atlantic 
structure. 
 
¶11.  (U) S/P Director Krasner and EUR DAS Bryza cleared this 
message. 
HARNISH