VZCZCXRO7872
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHBS #1239/01 2241252
ZNR UUUUU ZZH
R 111252Z AUG 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA
RUEHAH/AMEMBASSY ASHGABAT
RUEHTA/AMEMBASSY ASTANA
RUEHKB/AMEMBASSY BAKU

UNCLAS SECTION 01 OF 02 BRUSSELS 001239 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EU
SUBJECT: BP BULLISH ON SOUTH CASPIAN GAS PRODUCTION 
 
¶1.  (SBU) Summary.  In a July 16, 2008 meeting with Special 
Envoy Gray, Bill Schrader (President of BP Azerbaijan) and 
Herb Vogel (Head of BP Global Gas) presented BP's planning 
scenarios for potential gas supplies from Azerbaijan and 
offshore Turkmenistan.  BP predicts Europe will face a big 
supply gap by 2020 and believes opening up the Southern 
Corridor will be essential to fill this gap.   BP believes 
that Azerbaijan and Turkmenistan could be a major source to 
help meet these needs with potential production as high as 
100 bcm by 2025.  BP estimates that existing gas transit 
routes are insufficient to handle future European gas demand 
so new routes will have to be built.  Getting the gas to 
Europe, however, all comes back to getting a transit 
agreement with Turkey.  In Schrader's mind President Aliyev 
is happy to see the gas projects languish until he gets the 
European deals he wants.  Meanwhile, according to Schrader, 
the Turks, who are playing the game like the Azeris, are 
starving for money.  End Summary. 
 
¶2.  (SBU) In a July 16, 2008 meeting with Special Envoy Gray, 
Bill Schrader (President of BP Azerbaijan) and Herb Vogel 
(Head of BP Global Gas) presented BP's planning scenarios for 
potential gas supplies from Azerbaijan and offshore 
Turkmenistan. 
 
Finding the gas to meet Europe's needs 
-------------------------------------- 
¶3.  (SBU) BP sees Europe facing a big supply gap by 2020 and 
believes opening up the Southern Corridor will be essential 
to fill this gap.  BP estimates that the EU 27 plus Turkey 
will need 700 to 850 bcm of gas by 2020.  Current contracted 
supplies along with LNG that could be acquired through 2020, 
however, only amount to about 500 bcm.  This leaves a 
potential supply gap of 200 to 250 bcm.  BP believes that 
Azerbaijan and Turkmenistan could be a major source to help 
meet these needs.  Schrader laid out four possible scenarios 
for gas production from Azerbaijan and offshore Turkmenistan: 
 
-- Scenario 1 - No additional access.  This scenario assumes 
no additional access to gas resources beyond what is 
currently discovered and under development (Shah Deniz, SOCAR 
production, and Turkmenistan offshore shipped east to 
Turkmenistan and north to Russia).  Under this scenario gas 
production in the region could peak at about 50 bcm in 2025. 
 
-- Scenario 2 - Limited access.  This scenario assumes access 
to Azeri-Chirag-Gunashli (ACG) non-associated gas, in 
addition to the sources in Scenario 1.  Under this scenario 
gas production could peak at about over 60 bcm by 2025. 
 
-- Scenario 3 - Access with exploration success in 
Turkmenistan.  This scenario assumes access to ACG 
non-associated gas with access and exploration success in 
offshore Turkmenistan.  Under this scenario gas production 
could peak at about 90 bcm in 2025. 
 
-- Scenario 4 - Access with exploration success in Azerbaijan 
and Turkmenistan.  This scenario assumes:  access to ACG 
non-associated gas; access and exploration success offshore 
in Turkmenistan; and access and exploration success in 
Azerbaijan.  Under this scenario gas production could peak at 
about 110 bcm in 2025. 
 
¶4.  (SBU) BP also believes there is a large potential for 
more onshore gas production in Turkmenistan, but they did not 
consider it in their estimates, because they do not believe 
it will be available for exports west. 
 
"These estimates are realistic..." 
---------------------------------- 
¶5.  (SBU) Schrader believes that BP's estimates for 
Azerbaijan and Turkmenistan gas production are realistic. 
The estimates use data BP has on Azerbaijan and data received 
from Turkmenistan looking at known seismic structures, with 
exploration discovery success in Azerbaijan, and offshore 
Turkmenistan is treated as a risked outcome.  As such, 
Schrader said these numbers are possible.  BP estimates that 
development of these gas resources would cost approximately 
$1.0 - 1.5 billion per bcm.  This is up from $500 million per 
bcm just a few years ago based on inflation in the industry. 
BP estimates total costs to develop SD-2 will be $17 billion 
for production of 1-13 bcm. 
 
But, how to get the gas back to Europe? 
--------------------------------------- 
¶6.  (SBU) BP estimates that existing gas transit routes are 
insufficient to handle future European gas demand.  Current 
gas export capacity from Azerbaijan can only handle 18-31 bcm 
 
BRUSSELS 00001239  002 OF 002 
 
 
- this includes the South Caspian Pipeline (7bcm currently, 
expandable to 20 bcm ), reversing the former Gazprom export 
line to Azerbaijan (10 bcm), and the export link to Iran, 
currently running at about 0.5 bcm of gas to Iran. (Note: BP 
estimates the Azerbaijan-Iran pipeline would require major 
investment to reach full capacity of 10 bcm as the link has 
not been maintained during the past 30 years End note.) 
Existing gas export routes from Turkmenistan are similarly 
limited to about 60 bcm, 50 bcm through Russia and 10 bcm 
through Iran. 
 
It all comes down to Turkey 
--------------------------- 
¶7.  (SBU) Getting the gas to Europe, however, all comes back 
to reaching a transit agreement with Turkey.  Schrader 
believes that Azerbaijan is not in this for the money; they 
already have $2.3 billion a month going into their oil fund. 
Instead, Schrader believes Azerbaijan's gas policy is a 
geopolitical strategy to tie Azerbaijan to Europe.  As such, 
Azerbaijan is not interested in selling all of its gas to 
Turkey.  In Schrader's mind President Aliyev has all the 
money he needs and would be happy to wait out the Turks until 
he gets the European deals he wants.  Meanwhile, according to 
Schrader, the Turks are playing the game as if the Azeris are 
starving for money. 
 
Too early to be considering Nabucco 
----------------------------------- 
¶8.  (SBU) BP views Nabucco as being marketed 10 years early. 
From BP's standpoint they believe the Southern Corridor will 
need to grow on a capillary basis - building connections and 
capacity in small steps rather than going for a 30 bcm 
pipeline off the bat.  Based on their outlook for gas 
production from the Caspian, BP believes Nabucco would be 
better pitched as an early 2020s project instead of a 2012-13 
project.  According to BP, there will not be enough initial 
gas supply to justify Nabucco as currently proposed.  If SD-2 
produces 13 bcm, Azerbaijan and Georgia takes 1 or 2 bcm and 
Aliyev decides to send 1 or 2 north to Russia that would 
leave 9-12 bcm at the Turkish border.  BP believes Turkey 
will want to take a minimum of 5-6 bcm for their own use, 
which would leave only 3-7 bcm for exports to the EU.  This 
scenario would work for TGI, which only needs 6 bcm but not 
for Nabucco which needs a minimum of 8 bcm. 
 
¶9.  (SBU) Comment.  BP's projections argue the case that more 
gas volumes will become available once an agreement on 
transit is reached.  Much depends on how Turkey decides to 
play the game, but equally important for meeting Europe's 
long-term needs will be finding a way to open up offshore 
Turkmenistan for exploration and development and getting 
Turkmenistan and Azerbaijan to come to an understanding over 
gas transit.  End Comment. 
 
Silverberg 
.