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RUEHBS/USEU BRUSSELS PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000582 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/04/2016 
TAGS: EPET ENRG PREL PGOV KZ TU TX AJ
SUBJECT: DAS BRYZA DISCUSSES TRANS-CASPIAN GAS PIPELINE IN 
AZERBAIJAN 
 
 
Classified By: RENO L. HARNISH III; REASONS 1.4 (B,D) 
 
¶1. (C) SUMMARY: During an April 3 visit to Azerbaijan, EUR 
DAS Bryza heard GOAJ interest in a possible "Southern 
Corridor" of gas pipelines to export gas from Azerbaijan, and 
perhaps Central Asia through a trans-Caspian gas pipeline 
(TCP), via Georgia and Turkey to help Europe diversify its 
gas supplies.  Deputy Speaker of Parliament and former 
Azerbaijani state oil company (SOCAR) executive Valeh 
Alasgarov supported the idea including TCP, but lamented that 
such an effort faced obstruction from many European 
officials, who pursued their own narrow personal interests, 
including corrupt relationships with Gazprom, rather than 
their countries' national interests.  Azerbaijan-based 
international oil company representatives believed GOAJ 
buy-in to expand Shah Deniz gas production and gas transit to 
Turkey was crucial, and looked to the U.S. for support. 
Separately, Minister of Energy and Industry Natiq Aliyev told 
visiting TDA Regional Director Dan Stein March 29 that he 
supported the TCP concept and believed Turkmenistan might be 
ready to strike a deal on a TCP.  END SUMMARY. 
 
¶2. (U) During an April 3 visit to Azerbaijan, EUR DAS Matt 
Bryza discussed Azerbaijan's possible role in helping Europe 
diversify its gas supplies.  Bryza met with President Aliyev, 
political opposition leaders, Deputy Speaker of Parliament 
and former SOCAR executive Valeh Alasgarov, Director of 
Azerbaijan's State Oil Fund (SOFAZ) Samir Sharifov, and 
representatives of international oil companies in Azerbaijan. 
 Bryza's meetings with President Aliyev, political opposition 
leaders, and Samir Sharifov are reported septel.  DAS Bryza's 
visit followed a visit by TDA Regional Director Dan Stein 
March 28-30 to discuss a feasibility study on trans-Caspian 
pipeline issues. 
 
Valeh Alasgarov 
--------------- 
 
¶3. (C) DAS Bryza noted that Russia's recent gas cutoff in 
Ukraine had reenergized European thinking about alternate gas 
supplies for Europe.  He recounted his recent discussions in 
Rome and Athens in which the Europeans expressed their 
concern over their growing reliance on Russian gas. 
Alasgarov agreed that Russia was pushing hard to expand the 
Black Sea Blue Stream pipeline (under the Black Sea) and 
strengthen its monopoly power as a supplier to Europe. 
Alasgarov spoke in favor of a Southern Corridor as perhaps 
the only way to channel Gazprom away from an effort to stifle 
competition by acquiring strategic energy assets in Europe, 
and toward more market-based behavior.  Alasgarov warned that 
besides Russia and Gazprom, a Southern Corridor faced 
opposition from officials in France, Italy, Germany, and 
other European countries, who pursued their own narrow 
personal interests rather than the national interests of 
their countries.  Many of these personal interests, he said, 
included corrupt relationships with Gazprom.  Alasgarov 
agreed with Bryza that it would be worthwhile to pursue a TCP 
to Azerbaijan from Kazakhstan or Turkmenistan, as this would 
make cheap Central Asian gas less accessible to Gazprom, 
thereby pressing Gazprom toward reforms required to attract 
foreign investment to develop domestic Russian gas fields. 
Alasgarov also believed that Phase II of development of 
Azerbaijan's Shah Deniz gas field could be expanded to 
provide an additional 10 to 20 BCM, but that the Italians and 
Greeks needed to take the first step by offering Azerbaijan a 
long-term gas sales/puchase contract. 
 
¶4. (C) Turning to the Baku-Tbilisi-Ceyhan (BTC) pipeline and 
discussions on the Kazakhstan-BTC Inter-governmental 
Agreement (IGA) aimed at incorporating oil produced in 
Kazakhstan into BTC, Alasgarov said that all parties now 
seemed to agree on the relationshp of the IFA to the host 
government agreements (HGA's) governing the project in each 
country.  The IGA would form the legal framework outlining 
the parties' rights and responsibilities for expanding the 
BTC project to include cross-Caspian shipping of crude from 
Kazakhstan.  The HGAs would define these rights and 
responsibilities with specificity in each country to prevent 
investors from demarnding unlimited rights and access to 
Azerbaijani facilities.  As in the case of the original BTC 
IGA and HGAs (from 1999) the Kzakhstand-BTC IGA would be 
agreed and initialed; HGAs would then be negotiated; when 
completed, the IGA would be signed, with the HGAs attached as 
appendices.  Alasgarov argued that Azerbaijan was ready to 
 
BAKU 00000582  002 OF 003 
 
 
sign the IGA during last May's dedication ceremony for the 
Azerbaijani portion of BTC, even though it would have 
preferred to continue negotiations on several key elements. 
When Kazakhstani President Nazarbayev refused to sign at that 
time, Azerbaijani President Aliyev decided to negotiate 
improvements in the IGA from Azerbaijan's perspective. 
Negotiations seemed to be approaching endgame, according to 
Alasgarov.  The key outstanding issues involved Azerbaijan's 
desire to ensure that Kazakhstani producers shipped their oil 
exclusively to Baku, rather than to Iran. 
 
International Oil Company Representatives 
----------------------------------------- 
 
¶5. (SBU) Statoil Azerbaijan President Georg Gundersen noted 
that the focus of Statoil, which like BP enjoys a 25 percent 
stake in the Shah Deniz consortium, was on marketing Shah 
Deniz gas.  Shah Deniz Phase II looked promising, with 
"significant additional production" possible in theory by 
late 2011 or 2012.  To achieve this goal, the commercial 
foundation for Phase II needed to be finalized by the end of 
¶2007.  GOAJ buy-in would be essential, he added.  EU 
competition policy could hinder exports to Europe of 
Kazakhstani gas, and thereby provide a disincentive to expand 
Phase II production, Gundersen believed.  In practice, a 
joint marketing agreement allowing the Shah Deniz consortium 
to export its gas to Europe as a single consortium provided 
the most commercial attractive marketing option.  But EU 
competition regulations prohibited such an arrangement, 
requiring instead that each company in a consortium market 
its gas individually.  Ironically, Gundersen continued, this 
EU policy cleared the way for Gazprom, a state monopoly, to 
sew up much of the European market. 
 
¶6. (SBU) Bryza said he had heard similar worries about EU 
competition policy from BP, but noted that the European 
Commission and Council strongly supported development of a 
Southern Corridor to import Azerbaijani gas - along with 
Central Asian gas exported via TCP - to Europe.  Gundersen 
noted that there were two camps within the EU Commission. 
The energy camp understood the need to diversify supplies, as 
well as the technical and business realities of getting the 
gas to market.  The anti-trust camp pursued their mission 
with something "close to religious fervor."  He worried that 
the pressing investment decisions required for Shah Deniz 
Phase II and a trans-Caspian pipeline would be made much more 
difficult if the EU required gas to be marketed separately. 
 
¶7. (C) In a separate meeting, BP Azerbaijan President David 
Woodward and BTC and Shah Deniz Pipeline Director Michael 
Townsend expressed strong support for development of a 
Southern Corridor and a TCP for gas exports to Europe.  They 
argued such projects would be commercially attractive to BP 
and the Shah Deniz consortium, and would help constrain 
Gazprom's monopolistic tendencies.  But they worried such 
projects were unlikely to succeed absent U.S. support. 
President Aliyev, Woodward explained, is focused on securing 
domestically produced gas for consumption in Azerbaijan to 
shield Azerbaijan against Gazprom's threats to raise gas 
prices precipitously.  Woodward lamented that Aliyev often 
lacks strategic vision, and seems unaware that Azerbaijan 
enjoys an opportunity to secure market share for its gas in 
Greece and Italy, but will lose that chance to Gazprom if he 
does not move quickly.  Woodward and Townsend suggested the 
U.S. could play a key role in realizing a Southern Corridor 
by helping Aliyev expand his strategic vision and think 
beyond Azerbaijan, Georgia, and Turkey as markets for 
Azerbaijan's gas.  Woodward confirmed Alasgaraov's claim that 
if Greece, Italy, and Turkey would put in place necessary 
infrastructure, the Shah Deniz consortium could more than 
double Phase II production from 8.6 BCM to 17 or even 20 BCM 
by 2012.  Woodward and Townsend also suggested that the U.S. 
encourage President Aliyev to open the Azeri-Chirag-Guneshli 
oil field to exploration for "deep gas" by international 
companies, which could result in at least as much additional 
gas production as an expanded Phase II of Shah Deniz. 
Woodward worried that Aliyev may weighing whether to save 
this additional gas for the future to provide a strategic 
reserve and mitigate the approaching problem of managing 
windfall oil and gas revenues as BTC and the Shah Deniz gas 
pipeline come on stream later this year.  On gas marketing, 
Woodward said BP had adjusted its strategy, and no longer 
worried about exporting Shah Deniz gas to Europe as a single 
consortium.  As a result, BP was no longer as concerned as 
 
BAKU 00000582  003 OF 003 
 
 
was Statoil about EU competition regulations pertaining to 
gas mrketing. 
 
¶8. (C) On BTC, Conoco-Philips representtive John Dabbar 
agreed with Deputy Speaker Alasarov's assessment that 
negotiations on the BTC-Kazakhstan IGA were approaching 
endgame.  The three key outstanding issues were commercial in 
nature, namely, Azerbaijan's demands that: 
 
-- BTC enjoy exclusive rights to export all cross-Caspian oil 
shipments from Kazakhstan; 
 
-- The IGA currently under negotiation pertain only to BTC, 
thereby requiring Kazakhstani producers to negotiate a new 
IGA for each additional field from which they may waish to 
export oil via BTC, which in turn affords the GOAJ repeated 
opportunities to negotiate more preferential contractual 
terms; and 
 
-- The governments of Azerbaijan and Kazakhstan form a 
monopoly shipping company for cross-Caspian tanker shipments. 
 
Dabbar did not seek U.S. intervention on these issues, and 
believed they would soon be worked out through commercial 
negotiations. 
 
Minister of Energy 
------------------ 
 
¶9. (C) While unavailable to meet DAS Bryza April 3, former 
SOCAR head Natiq Aliyev previously expressed his interest in 
a possible trans-Caspian gas pipeline during a meeting with 
TDA Regional Director Dan Stein March 29.  Aliyev focused 
initially on Turkmenistan, and believed President Niyazov was 
ready to strike a deal after the February visit by the 
Turkish energy minister to Ashgabat.  In Aliyev's view, a 
Turkmenistan-Azerbaijan gas pipeline was a realistic 
possibility.  Turkmen gas would then be shipped onward to 
market using roughly 14 billion cubic meters of excess South 
Caucasus Gas Pipeline (SCP) capacity.  Aliyev stressed that 
such a link could be constructed very soon. 
 
¶10. (C) Shifting focus, Stein recounted past problems with 
negotiating a TCP with Turkmenbashi.  He asked whether a 
separate pipeline from Kazakhstan to Baku might prove more 
realistic politically and commercially.  Aliyev agreed, 
noting Kazakhstan's good relations with Russia and the 
relative lack of Caspian delimitation issues between Russia 
and Kazakhstan as positive factors.  In addition, Aliyev 
believed that Turkmenistan would have no choice but to join 
the TCP network through a link to Kazakhstan once an 
agreement between Azerbaijan and Kazakhstan was struck. 
Turkmenistan, he argued, had only one safe, secure route for 
its gas: West. 
 
Comment 
------- 
 
¶11. (C) Azerbaijani interest in Southern Corridor and 
possible trans-Caspian gas pipeline is high, but further 
engagement with the GOAJ will be necessary to turn this 
support into concrete action.  International oil companies 
are likewise interested, but point to regulatory issues in 
the EU market, and the need for leadership and vision by the 
GOAJ.  With long lead times before any pipeline comes to 
fruition, cementing the political and commercial basis now 
for a project of this magnitude is a necessary, and urgent, 
next step.  Clearly, much work remains, but Post welcomes the 
efforts of the Department and TDA to begin exploring the next 
stage in energy development on the Caspian. 
 
¶12. (U) DAS Bryza has cleared this message. 
HARNISH