VZCZCXRO2209
PP RUEHAG RUEHROV
DE RUEHKB #0566/01 1701136
ZNY CCCCC ZZH
P 181136Z JUN 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 5509
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEAIIA/CIA WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000566 
 
SIPDIS 
 
E.O. 12958: DECL: 06/16/2018 
TAGS: PGOV PREL ENRG AJ TX TK
SUBJECT: AZERBAIJAN: SOCAR TELLS SE GRAY EVERYONE WANTS 
GOAJ GAS 
 
 
Classified By: Ambassador Anne E. Derse, reasons 1.4 (b,d) 
 
¶1. (C) SUMMARY.   SOCAR President Rovnaq Abdullayev told a 
USG delegation on June 2 that in addition to competition 
among the Nabucco, TGI and TAP pipeline projects for Shah 
Deniz Phase Two gas, Turkey, Israel, Iran and Russia have 
each individually notified SOCAR that they wish to purchase 
all of Shah Deniz Phase Two gas.  Azerbaijan is unlikely to 
take the offers of either Israel, Iran or Russia for SD2 gas, 
although if Russia were to link SD2 sales to solving N-K the 
GOAJ would be faced with a tough decision.  Absent that 
development, the competition for SD2 is still between Nabucco 
and TGI, since despite SOCAR's wishes it does not seem likely 
that SD2 will have enough to fill TGI and to start Nabucco; a 
key question in this regard is how much (or more accurately 
how little) SD2 gas will induce Turkey to open itself up for 
transit of the remaining SD2 volumes.  Abdullayev recognizes 
that Turkmen gas will be needed to help secure new Caspian 
gas sales to Europe.  He also underscored that while while 
the GOAJ would honor its existing PSAs, it sought a way to 
transit expected volumes of Kazakh oil that would not lessen 
its own ownership of the BTC pipeline.  END SUMMARY 
 
¶2. (C) On June 2, a USG delegation headed by Special Envoy 
for Eurasian Energy C. Boyden Gray and including Eurasian 
Energy Coordinator Ambassador Steve Mann, Charge D'Affaires 
to Turkmenistan Ambassador Richard Hoagland, Ambassador 
Derse, EEB Energy Officer Larry Wright and EnergyOff 
(notetaker) met with SOCAR President Rovnaq Abdullayev, 
Marketing VP Elshad Nassirov, and Development Manager Vaqif 
Aliyev. 
 
SD2: NABUCCO, TAP, TGI WANT IT... 
--------------------------------- 
 
¶3. (C) Abdullayev said in a recent meeting Nabucco partner 
RWE had told SOCAR it needed to purchase at least 15.5 
billion cubic meters annually (bcm/a) from the Shah Deniz 
Phase Two (SD2) for the pipeline's first phase, "or else the 
project won't go ahead."  He said when SOCAR had talked to 
OMV a year ago, it had sought a minimum of 5 bcm/a for 
Nabucco.  With expected annual SD2 production of 
approximately 13 bcm/a, and with some of that to be 
earmarked for Georgia and Azerbaijan, SD2 couldn't meet this 
request even if it wanted to.  He added that TGI pipeline was 
seeking a minimum of 5 bcm/a from SD2 and TAP had a 6 bcm/a 
minimum request, meaning that among just these three pipeline 
projects aggregate demand was over 26 bcm/a. 
 
...TURKEY WANTS IT ALL... 
------------------------- 
 
¶4.  (C) Additionally, Botas has told SOCAR it wants to buy 
all of SD2 production for domestic Turkish consumption, but 
would be satisfied with a minimum of 8 bcm/a.  Without this 8 
bcm/a, Abdullayev understood that the GOT would not allow 
transit of Azerbaijani gas for European markets.  However, he 
said if Azerbaijan did sell 8 bcm/a to Turkey, it would have 
only 2 bcm/a left for European markets (assuming that 3 bcm/a 
of SD2 would be for Azerbaijan and Georgian use).  Abdullayev 
said he planned to meet with the Shah Deniz Consortium to 
find out the most up-to-date information on expected SD2 
production.  His hope was that if the GOT could be satisfied 
with 5 bcm/a, perhaps there would be 10 bcm/a of SD2 left to 
for two other pipeline projects.  Speaking more generally, 
Abdullayev said that, given an approximately USD 15 billion 
expense for SD2 development, SOCAR needed to review the 
overall Shah Deniz development project "to see if it is 
economical." 
 
...AS DOES RUSSIA ISRAEL, IRAN 
------------------------------ 
 
¶5. (C) Abdullayev said that in a recent meeting Israeli 
Minister of National Infrastructure Ben Elizer (in Baku for 
the Caspian Oil & Gas Show), said Israel wanted to buy all of 
SD2 production at market prices.  Additionally, Abdullayev 
said that during a meeting earlier that day, Gazprom Chairman 
Alexei Miller told him that Russia too sought to buy all of 
SD2 volumes at market prices.  And, a few days prior an 
official Iranian delegation informed SOCAR that Iran too 
wished to buy all of Shah Deniz Phase Two volumes.  Smiling 
broadly, Abdullayev summed it up by saying that in the last 
three days, Turkey, Iran, Israel and Russia had each informed 
SOCAR that it wished to buy all of SD2 volumes. 
 
BAKU 00000566  002 OF 003 
 
 
 
TURKMENISTAN 
------------ 
 
¶6.  (C) Abdullayev said Turkmen gas flowing to Azerbaijan 
would significantly enhance SOCAR's ability to support the 
various pipeline projects, agreeing with Ambassador Mann that 
timing is the issue.  Saying that SOCAR had laid 500 
kilometers of pipeline in the Caspian in the previous year, 
he added that building the 380 kilometers needed to hook up 
with Turkmenistan would be easy.  As such, he agreed with 
Ambassador Derse that the main obstacles in the way of a 
GOTX-GOAJ interconnector are political, not technical, 
although he said that given ACG and SD infrastructure design, 
any interconnector would have to connect to the Azerbaijani 
coast.  Overall bilateral delimitation is not important, 
since the pipe would run east-west while the delimitation 
line is north-south.  If GOTX volumes were to come west, new 
gas pipelines to Erzurum would be needed, although everything 
depended on the volume of Turkmen gas coming west.  Echoing 
President Aliyev's sentiments, Abdullayev said that 
Turkmenistan, not Azerbaijan must be the initiator of any 
deal to interconnect their respective offshore 
infrastructures in order to transit GOTX gas west.  Mann 
responded that while it is true that, as Abdullayev said, 
"Azerbaijan doesn't need GOTX gas,"  it is good for 
Azerbaijan to have productive relations with Turkmenistan. 
All agreed that strengthening GOTX-GOAJ energy sector 
cooperation should be done with as little publicity as 
possible.  In response to Mann's question, Abdullayev said 
that SOCAR would need take or pay volume commitments from 
Turkmenistan before building any interconnector or pipeline 
for GOTX gas, to which SE Gray responded that they would work 
on seeking such a commitment when they traveled on to 
Ashgabat after this leg of the visit. 
 
¶7. (C) In response to SE Gray's question about what he could 
do to advance Turkmenistan-Azerbaijan energy cooperation, 
Abdullayev said that the ball was in Turkmenistan's court - 
he had briefed the head of Turkmenistan,s State Agency For 
Hydrocarbon Resources Baimurat Muradov on Azerbaijani 
proposals for joint development during his recent visit to 
Baku, laying out SOCAR's vision of providing GOAJ energy 
infrastructure to the GOTX and jointly developing the 
Sardar-Kapaz offshore field.  Now Azerbaijan was waiting for 
feedback from Turkmenistan. 
 
KAZAKH OIL TRANSIT 
------------------ 
 
¶8. (C) Ambassador Mann encouraged Azerbaijan to be an 
effective partner in moving Kazakh oil volumes to market. 
Abdullayev said that would be no problem, as Azerbaijan had 
rail, ships and pipelines available to do so.  Delays were 
the Kazakhs' fault, but SOCAR would be discussing commercial 
principles later in the week with Kazakh interlocutors. 
Azerbaijan planned to eventually transit 20 million tons 
annually by rail, 20 million tons annually by BTC, and 30 
million tons annually by a new pipeline, for a maximum annual 
capacity of 70 million tons. 
 
¶9. (C) In this regard, Mann expressed USG full support for 
BTC expansion to 1.2 mmbd.  Abdullayev said he wasn't against 
expansion, but didn't want Azerbaijan to lose ownership share 
as Kazakh oil volumes through BTC increased, as would happen 
under the terms of the current PSA.  Mann countered that the 
current PSA was a good one and should be honored, with 
Abdullayev saying that Azerbaijan always honors its 
contracts.  However, under the existing PSA after ZBD (zero 
balance date, 2024, when the BTC Consortium loses ownership 
of the pipeline), SOCAR ownership would decrease from 85 
percent to 48 percent if Kazakh transit volumes were to 
increase to expected levels, and this was something that 
"Azerbaijani future generations would blame us for."  Mann 
countered that Azerbaijan's future generations would say that 
SOCAR was commercially reliable, repeating that the USG 
wished for BTC expansion, which was desirable for both 
Azerbaijan and the US, and looked to SOCAR for support. 
Abdullayev said that SOCAR fully supports BTC expansion and 
will adhere to its contacts, maintaining its reputation as 
the most commercially reliable country in the region. 
 
10.(C) COMMENT:  Given that Azerbaijan seeks to market its 
gas for primarily geostrategic vice commercial reasons, it is 
unlikely to take the offers of either Israel, Iran or Russia 
 
BAKU 00000566  003 OF 003 
 
 
for SD2 gas, although if Russia were to link SD2 sales to 
Russian support for solving N-K the GOAJ would be faced with 
a tough decision.  Absent that development, the competition 
for SD2 is still between Nabucco and TGI, since despite 
SOCAR's wishes it does not seem likely that SD2 will have 
enough to fill TGI and to start Nabucco.  A key question in 
this regard is how much (or more accurately how little) SD2 
gas will induce Turkey to open itself up for transit of the 
remaining SD2 volumes. 
 
¶11. (U) SE Gray and Ambassador Mann have cleared this cable. 
DERSE