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C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000416 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/28/2018 
TAGS: PGOV PREL AJ ENRG
SUBJECT: AZERBAIJAN: NABUCCO CONTINUES TO WORK FOR SHAH 
DENIZ VOLUMES 
 
 
Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d) 
 
¶1. (C) SUMMARY:  According to Nabucco Pipeline General 
Manager Reinhard Mitschek, the Nabucco Pipeline Consortium is 
increasingly focusing on the commercial mechanism the Shah 
Deniz consortium will devise to market its gas.  To break the 
Turkish transit deadlock, it is contemplating offering Turkey 
the ability to off-take additional amounts from Nabucco in 
the case of a "security of supply event."  Nabucco is seeking 
all available Shah Deniz volumes.  Nabucco has been told by 
SOCAR that in the case of having to decide between TGI and 
Nabucco, SOCAR will choose Nabucco, although SOCAR hopes that 
with the addition of Turkmen gas, Nabucco and TGI would be 
possible.  An inter-govermental agreement (IGA) among the 
Nabucco countries is expected to be signed in June, with 
Azerbaijan to be invited as an observer country. END SUMMARY. 
 
¶2. (C) On April 23 Ambassador Derse met with Nabucco Gas 
Pipeline Managing Director Reinhard Mitschek and OMV 
Azerbaijan office director Wolfgang Sporrer.  On April 28, 
Emboff again separately met with Sporrer, to get a readout of 
the April 24 Nabucco meetings with SOCAR and with the Shah 
Deniz Consortium. 
 
¶3. (C) Mitschek said he was in town for separate meetings 
with both SOCAR and the Shah Deniz Consortium.  Nabucco was 
increasingly following the issue of Shah Deniz Phase Two 
(SD2) gas marketing, i.e. the commercial entity or entities 
created by the Shah Deniz Consortium with whom Nabucco would 
have to reach agreement concerning SD2 sales.  Mitschek had 
heard that there would be a special purpose vehicle (SPV), 
similar to the Azerbaijan Gas Supply Company's (AGSC - headed 
by Statoil) role in marketing Shah Deniz Phase One (SD1) gas, 
but it was unclear which companies would be part of such an 
SPV.  He had also heard that the Shah Deniz Consortium had 
received a verbal commitment from the EU for joint marketing 
of SD2 gas in Europe, allowing the SD Consortium to sell into 
Europe without competition law problems.  (COMMENT: SOCAR 
comments re SD2 marketing will be covered in upcoming 
septel). 
 
¶4. (C) According to Mitschek, SD Consortium member 
StatoilHydro had told OMV that SD2 will have 13 billion cubic 
meters annually (bcm/a), available no earlier than late 2013. 
 It is expected that once Azerbaijan, Georgia and Turkey have 
bought SD2 gas, no more than 7 to 8 bcm/a will be available 
for sales to Europe. (COMMENT:  StatoilHydro has told Embassy 
that it expects at best approximately 6 to 9 bcm/a available 
for sales to Europe.)  Mitschek said that SD2 can sanction 
"either TGI or Nabucco" but not both.  For Nabucco to be 
green-lighted, it needs all of the expected 7-8 bcm/a of SD2 
- "if SD divides its sales, there is no Nabucco" -  plus 
"soft commitments" from suppliers for volumes of up to 20-25 
bcm/a by 2015-2016.  (Sporrer later told Emboff that the 
official OMV line was that 12 bcm/a were needed to sanction, 
with a soft commitment for another 12 bcm/a.  Sporrer said 
that from a technical viewpoint the easiest solution was to 
ship Turkmen gas across Iran to Turkey, and that such a 
solution would accord with all international laws, although 
he acknowledged Emboff's point that the USG would be strongly 
opposed to such a "solution.") 
 
¶5. (C) Mitschek said that Nabucco looked to Azerbaijan, 
Turkmenistan, Iraq and Egypt to supply the volumes necessary 
to make Nabucco commercially viable.  In this regard, Nabucco 
was quite heartened by EU External Relations Commissioner 
Ferrero-Waldner's early April visit To Turkmenistan and 
subsequent claim that she had gotten Turkmen agreement to 
supply 10 bcm/a to Nabucco. 
 
¶6. (C) Mitschek said that the EC had told OMV that the July 
2007 TGI IGA would be considered "null and void" because it 
violated EU competition law, although the EC has not yet 
informed the TGI Consortium members as such.  The Turkish 15 
percent netback scheme in this IGA was also contrary to EU 
law.  According to Mitschek, the EC has told OMV that the 
Nabucco partners could initiate a process that would result 
in the EC declaring the TGI IGA null and void, but Mitschek 
said Nabucco will not do, so as it doesn't wish to irritate 
Turkey. 
 
¶7. (C) Mitschek deprecated TGI, saying that its lack of third 
party access made it essentially an "(Italian energy company) 
Edison pipeline," i.e. a pipeline built to serve only Edison 
 
BAKU 00000416  002 OF 002 
 
 
(and to a lesser extent the Greek energy company DEPA).  It 
would not even deliver gas to northern Italy, where demand 
was highest, whereas a Nabucco pipeline could build a spur 
from Baumgarten, Vienna to service this market. 
 
¶8. (C) To assuage Turkish supply concerns, Mitschek said that 
the Nabucco shippers were contemplating offering a "security 
of supply event" clause to Turkey.  This clause, approved by 
both OMV and RWE so far, would allow Turkey to offtake as 
much as 40 percent of transiting gas at market prices if an 
independent organization certifies that there is a "security 
of supply event" in Turkey.  The consumers whose gas was 
being off-taked by Turkey would get gas from OMV storage. 
(COMMENT:  SOCAR envisions that the Turkish transit impasse 
will be solved by selling Turkey additional volumes in a 
separate sales and purchase agreement - upcoming septel). 
 
¶9. (C) In order to satiate Turkish desire to be "more than a 
transit country," Mitschek said that the Nabucco consortium 
was also contemplating an OMV-Botas joint venture trading 
company in Turkey.  Whereas large EU gas suppliers would buy 
directly from the gas producers, smaller buyers might buy 
from a non-single source "gas basket" offered by this GoT-OMV 
joint venture, to mitigate risk.  Nabucco has not broached 
this idea, nor the "security of supply event" clause, to the 
GoT yet. 
 
¶10. (C) Mitschek said that the final draft of a Nabucco 
countries IGA would be ready in June.  The EU has already 
approved the draft in its current form.  Nabucco will seek to 
sign such an IGA in June in the Hague, with Azerbaijan 
invited as an observer country. 
 
NABUCCO SOCAR & SHAH DENIZ MEETINGS 
----------------------------------- 
 
¶11. (C) OMV Azerbaijan Country Representative Wolfgang 
Sporrer separately told us that in an April 24 meeting with 
SOCAR Vice-President for Marketing Elshad Nasirov, Nasirov 
said that Azerbaijan was seeking to provide gas to all the 
major competing pipeline projects, assuming that with the 
addition of Turkmen gas, there would be enough gas for TGI, 
TAP and Nabucco. However, according to Sporrer, Nasirov also 
told them that if SOCAR had to choose between TGI and 
Nabucco, "it would choose Nabucco."  (However, in a separate 
April 28 meeting with Emboff, Nasirov said he thought it 
unlikely that Turkmen gas could be brought into the 
Azerbaijani grid in time for a 2013 Nabucco, adding that he 
saw no reason why Nabucco couldn't be started later). 
According to Sporrer, Nasirov also said that Nabucco's 
meeting later that day with the Shah Deniz consortium was 
essentially pointless, since it would be SOCAR deciding where 
the SD2 gas went.  Sporrer said that all SD Consortium 
members were present for Nabucco's Shah Deniz meeting, 
although consistent with Nasirov's statement, SOCAR had sent 
only a relatively junior employee.  Sporrer described the SD 
Consortium meeting as a "beauty contest," where Nabucco made 
a presentation and fielded a few questions.  Nabucco's own 
questions about the marketing of SD2 gas were not answered. 
 
¶12. (C) COMMENT:  The Nabucco Consortium continues to make 
steady progress in its bilateral negotiations with 
Azerbaijan, although it still has not found the minimal 
"missing volumes" needed to sanction the project. 
DERSE