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FM AMEMBASSY BAKU
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C O N F I D E N T I A L BAKU 000726 
 
SIPDIS 
 
EUR FOR MATT BRYZA; EEB FOR BOYDEN GRAY AND STEVE MANN 
 
E.O. 12958: DECL: 08/03/2018 
TAGS: ECIN ECON ENRG EPET PGOV PINR PREL AZ TU
SUBJECT: AZERBAIJAN PRESIDENT, SPECIAL ENVOY GRAY DISCUSS 
NEXT STEPS IN ENERGY COOPERATION 
 
REF: A. BAKU 719 
     ¶B. BAKU 721 
 
Classified By: Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b, 
d) 
 
¶1.  (C) SUMMARY:  In a July 14 meeting with Special Envoy 
Gray, President Aliyev sought USG views on how to best 
proceed on the Southern Corridor project.  SE Gray reaffirmed 
the U.S. commitment to work with Turkey and the EU to enable 
gas transit.  To entice Turkmenistan into shipping gas west, 
Aliyev remained convinced that any final consumer needed to 
take the initiative to buy gas at the Turkmen border. 
President Aliyev was unhappy with Secretary Rice's comments 
in Prague implying a lack of democracy in Azerbaijan, saying 
"such comments are not helpful."  Clear in this meeting with 
President Aliyev was his eagerness to accept guidance from 
the USG on how to move forward vis-a-vis gas transit through 
Turkey, and to a lesser extent, bilateral energy cooperation 
with Turkmenistan.  Also palpable was his assessment that 
Azerbaijan could rely on no one else, in the face of a 
"full-court press" by Russia, lack of progress on transit 
with Turkey, confusing correspondence with Turkmenistan and 
perceived problems with BP.  END SUMMARY 
 
¶2.  (C) On July 14 Special Presidential Envoy for Eurasian 
Energy C. Boyden Gray, Eurasian Energy Coordinator Ambassador 
Steve Mann and Ambassador Derse met with President Aliyev. 
Also present were (on the U.S. side) U.S. Trade and 
Development Agency Regional Director Dan Stein, Department of 
Energy Director of Russian and Eurasian Affairs Lana Ekimoff, 
and Embassy Energy Officer, and (on the GOAJ side) 
Presidential Personal Assistant Ali Asadov. 
 
TURKEY TRANSIT 
-------------- 
 
¶3.  (C) SE Gray gave President Aliyev a read-out of his July 
9-13 Turkey visit.  He sensed an energy policy split within 
the GOT, an impression supported by other knowledgeable 
observers with whom he had spoken.  In separate meetings, a 
positive and upbeat PM Erdogan and MFA U/S Apakan (FM Babajan 
was out of town) seemed eager to cooperate with Azerbaijan 
and the West in energy sector development and on Southern 
Corridor projects.   The PM was also very positive about his 
Nakhchivan June 4 meeting with President Aliyev.  However in 
SE Gray's meeting with the Energy Minister, a brusque Guler 
focused exclusively on getting Azerbaijan to fulfill its 
"promise" to Turkey of eight billion cubic meters annually 
(bcm/a) of Shah Deniz Phase Two (SD2) gas.  Guler said that 
the GOT could facilitate the transit of the other five bcm/a 
of SD2 to Europe through its own internal pipeline network, 
obviating the need for any new pipeline, and not factoring in 
any gas for Georgia.  SE Gray told Aliyev that the PM had 
suggested a energy working group between the U.S. and the GOT 
MFA, which he interpreted as a manifestation of the PM's 
desire to shift responsibility for Southern Corridor energy 
issues from the Energy Ministry to the Foreign Ministry, 
rumors of which he has heard elsewhere. 
 
¶4.  (C) Aliyev said Azerbaijan had made no "promise" of 8 
bcm/a to Turkey.  He did not believe there was such an 
internal policy split, or that the Energy Ministry could be 
acting independently.  SE Gray's information "complicates our 
plans," since "there would be nothing left" of SD2 were the 
GOAJ to sell 8 bcm to Turkey.  "If we agree to their demands 
for 8 bcm, what will be their demands in the future?" 
President Aliyev has told SOCAR that if there is no agreement 
on transit through Turkey, SD2 development should not be 
sanctioned (COMMENT:  In a subsequent conversation between 
SOCAR Vice-President Elshad Nassirov and Eurasian Energy 
Coordinator Ambassador Steven Mann, Nassirov requested that 
this Presidential dictum linking SD2 development to fair 
transit not be communicated to the GOT, as the GOAJ was 
seeking indirectly to persuade Turkey that the GOAJ was 
seeking other export options for SD2 gas not involving 
transit through Turkey  END COMMENT). 
 
TURKEY: SDI PRICING 
------------------- 
 
¶5.  (C) On the negotiations between Botas and the Shah Deniz 
Consortium for a new price for the Shah Deniz Phase One (SD1) 
gas being sold to Turkey, Aliyev said the new price must be a 
 
market price.  However, there has been "no progress" with 
Botas, and the matter could end up in arbitration (COMMENT: 
For the first year of SD production gas was sold to Turkey at 
the sub-market price of USD 120 per thousand cubic meters 
(tcm) due to the pricing algorithm devised at the time of the 
PSA, when oil was being sold at USD 18 dollars per barrel. 
This algorithm had in it an oil ceiling price of a 
then-unimaginable USD 40 per barrel.  Once the new price is 
agreed between Botas and the SD Consortium, it will be 
applied retroactively to the date of April 15, 2008.  END 
COMMENT) 
 
¶6.  (C) Aliyev said it was unacceptable that countries such 
as Turkey, Georgia and Ukraine, with no energy production 
themselves, seek to present themselves as "energy suppliers." 
 Turkey was seeking to "separate the sources from the 
market," but Azerbaijan would not let this happen.  Turkey 
should seek to act in accordance with international practice, 
and not seek to impose terms on consumers and producers. 
SD's "competition" (i.e. Russia) was working actively to 
subvert the Southern Corridor by putting pressure on (inter 
alia) Turkey.  Aliyev said that the future of SD1 was 
uncertain and now, given GOT intransigence, there was no 
clear picture of whom SD2 consumers would be.  For the first 
of many times in this meeting, he said that he "does not know 
what to do" about Turkey. 
 
¶7.  (C) SE Gray said Russia's threat not to renew Turkey's 
six bcm/a gas supply contract expiring in 2011 was clearly an 
attempt to pressure Turkey.  However, there was no European 
response to Russia's clear attempts to dominate the European 
gas market.  More generally, SE Gray said that one could not 
understand EU energy policy without understanding its 
priorities.  Western Europe won't recognize its own gas 
needs, since it cannot admit it cannot meet its climate 
change goals without vast amounts of additional gas.  Gray 
explained that Western Europe was focused almost exclusively 
on meeting its climate change goals, ignoring the threat of 
Gazprom's gas monopoly.  The United Kingdom's goal in all 
this was to become the world's major carbon trading center. 
 
NEXT STEPS 
---------- 
 
¶8.  (C) In response to President Aliyev's repeated question 
of what to do next, SE Gray enumerated the following steps: 
 
- ONE:  Go forward with the GOT Foreign Ministry energy 
working group proposed by the PM, to test if the GOT is 
serious in seeking USG help in "re-ordering its house" or is 
just indulging in a "good cop-bad cop" routine, as President 
Aliyev believes.  Try for periodic meetings of such a group 
to move the various issues forward, and to see if indeed the 
PM is seeking to sideline the Energy Ministry and empower the 
MFA in energy policy. 
 
- TWO:  Get Brussels more active.  EU Secretary General 
Javier Solana has become interested in the energy issue, and 
SE Gray was scheduled to meet with his deputy the coming 
week.  "If Solana become involved, it is a different 
picture," since he is far more effective than the relatively 
weak EC President Jose Maneul Barroso, who is beholden to and 
seeking to curry favor with the French. 
 
GOTX - BUYERS MUST ACT 
---------------------- 
¶9.  (C) Aliyev said he was surprised that Azerbaijan had 
recently once again received a diplomatic note from 
Turkmenistan protesting GOAJ development of the ACG offshore 
field (septel), which he saw as inconsistent with the 
positive bilateral cooperation exhibited by Turkmenistan on 
the possibility of offshore bilateral energy cooperation and 
on the upcoming September joint energy conference and 
exhibition.  Aliyev ascribed this letter to "Russia being 
active" in Ashgabat, to include its offers of buying GOTX gas 
at "market price." 
 
¶10.  (C) When Hungarian Prime Minister Gyurcsany recently 
asked him as to what to do to expedite Turkmen integration 
into the western energy grid, Aliyev said he told him that 
"those who want to buy Turkmen gas must act now." 
Turkmenistan was considering a cross-Caspian option, but 
wants to sell its gas at the border, so buyers must be ready 
and willing to buy it at the border.  Aliyev told Gyurcsany 
 
that he should sign an MOU with Turkmenistan and one with 
Azerbaijan in this regard.  Azerbaijan was willing to buy 
GOTX gas at the border, but only if "all the other pieces 
were in place," to include final customers and assured 
transit.  Aliyev added that the EU would be wise to invest in 
any potential pipeline from Turkmenistan to Azerbaijan, much 
as Russia is doing with Southstream. 
 
¶11.  (C) Ambassador Mann said that until the major IOCs are 
allowed into Turkmenistan to develop the upstream sector, it 
is bootless to focus on buying large volumes from 
Turkmenistan, because such uncommitted volumes won't be 
available.  Instead, initially a consortium should develop 
the Turkmen upstream sector.  In a recent meeting with Head 
of State Agency for Hydrocarbon Resources Baimurat Muradov, 
there were indications that the GOTX was "re-thinking" its 
proscription on international companies pursuing onshore 
development.  Aliyev said that such fundamental changes will 
take time, and that he has seen no signs of such a changing 
policy.  Even if the GOTX were to adopt a new policy towards 
exporting to the West, implementation will take time, with 
typical gas development until production taking seven to 
eight years.  Meanwhile, the Southern Corridor project was 
facing unexpected obstacles such as Turkey, and the June 
announcement that Austria would join Southstream, which if 
true would "kill Nabucco."  Azerbaijan is the "easiest part" 
of the Southern Corridor project, Aliyev said, "Everywhere 
else there are problems."  In response to a question from 
USTDA Stein, Aliyev said that the GOAJ had contemplated LNG 
across the Black Sea, which might make sense, given that it 
had its own terminal (i.e. Kulavi). 
 
GOTX EARLY GAS 
-------------- 
¶12.  (C) Mann presented Aliyev with a two-page paper, 
"Pathway to 'Early Gas' from Turkmenistan and Beyond," 
listing steps the GOAJ and GOTX could take to interconnect 
their offshore gas infrastructures.  Aliyev said that 
technically it wouldn't be hard to do, if Berdimukhamedov had 
the political will.  Mann said that he repeatedly has told 
the GOTX President to diversify gas exports, since if 
Berdimuhamedov relies on Russian belief in sanctity of 
contract, "Turkmenistan's only recourse will be in a Moscow 
court" if the Russians go back on their promise of a "market 
price" for GOTX gas.  Aliyev agreed that Russian assurances 
of a market price to the GOTX rang hollow, and that if 
Turkmenistan had no alternative export routes, it wouldn't 
get a market price from Gazprom. 
 
¶13.  (C) Aliyev said that neither the GOTX nor the GOAJ could 
be the initiator of any cross-Caspian project.  Rather, "the 
consumers must initiate."  But, all those with an interest in 
such a project, to include individual European countries, 
Turkey and BP were all under Russian Pressure.  Azerbaijan, 
Aliyev underscored, is &alone8 in its full support for the 
Southern Corridor and in resisting Russian pressure.   Gray 
agreed with Aliyev, saying that it was clear that Russia 
wished to vitiate the Southern Corridor Project and buy 
Caspian gas for itself, as opposed to investing money into 
additional production in places such as Yamal.  Gray said his 
concern was that if the TNK-BP project ended badly, "no 
western company will want to go to Russia."  Aliyev said 
Russia needs additional resources, but instead was focusing 
on seeking to block alternative supply to Russia.  Russia 
should be investing in projects with IOCs to increase 
production, not in "strange pipelines" like Southstream. 
 
¶14.  (C) Aliyev said BP continued to relay bad news, having 
recently informed Azerbaijan that there would be less 
associated gas from the ACG field than expected, and that the 
start of SD2 production would be delayed by one year 
(COMMENT:  Publicly the SD Consortium has said that SD2 
production would start o/a late 2013, while privately it has 
commented that the start would probably be later).  Aliyev 
said he "did not exclude" Russian pressure on BP with respect 
to its activities in Azerbaijan.  If Russia were to "separate 
Azerbaijan from Europe," then it could dominate European gas 
markets, hence BP could be an important tool for Russia in 
this regard. 
 
SEPTEMBER CONFERENCE 
-------------------- 
 
¶15.  (C) SE Gray said he would discuss high-level USG 
 
attendance at the September 9-10 Azerbaijan-Turkmenistan 
Energy Conference and Exhibition in Baku.  (COMMENT:  In a 
separate meeting between SOCAR Marketing VP Nassirov and 
Ambassador Mann, Nassirov said that GOTX President 
Berdimuhamedov would not be attending this conference, as he 
felt that he could not again return to Baku until Aliyev had 
made a visit to Ashgabat.  The senior GOTX official would be 
Vice-Premier for Oil and Gas Tachbergy Tagiev). 
 
SEC RICE PRAGUE COMMENTS 
------------------------ 
 
¶16.  (C) Aliyev commented he had noted Secretary Rice's 
comments to Radio Liberty in Prague as to how oil-rich 
countries experienced a decrease in democracy.  Seeming to 
quote from memory, he cited the Secretary as saying that 
"these countries cannot be ruled as in the eighteenth 
century," and that "pressure must be put on these leaders 
from both the top and the bottom . . . my message to these 
leaders . . . they must know that freedom will not fail." 
Aliyev said that these comments directed towards Kazakhstan, 
Uzbekistan, Azerbaijan and Turkmenistan "were not helpful," 
to include her specific referral to Turkmenistan - "these 
kinds of things create questions." 
 
 
¶18.  (C) COMMENT:  Clear in this meeting with President 
Aliyev was his frustration with surrounding parties in terms 
of natural gas development, marketing and transport.  While 
eager to accept guidance on the "way forward" from the USG, 
Aliyev decried Turkey's intransigence on transit as the key 
underlying problem.  Lack of progress on SD1 pricing and 
excessive demands for SD2 gas have further muddied the waters 
with Ankara.  Aliyev, as always, pointed to Russian pressure 
on potential partners, including Turkey, Turkmenistan and BP, 
and noted that following the Medvedev/Miller visit, Russia is 
even a meddler in Azerbaijan. Mixed signals from the GOTX, 
bad news from BP, heightened Russian regional activity and 
inaction out of Brussels, in Aliyev's view, has left 
Azerbaijan "alone," and led the President to suggest more 
openly that Azerbaijan forego the sanctioning of SD2. 
 
¶19.  (U)  Ambassadors Gray and Mann have cleared this cable. 
DERSE