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C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000337 
 
SIPDIS 
 
SOFIA FOR SE MORNINGSTAR 
 
E.O. 12958: DECL: 04/21/2019 
TAGS: PGOV PREL AJ TK RU
SUBJECT: AZERBAIJAN: A SHIFT IN GAS EXPORT STRATEGY? 
 
REF: ANKARA 553 
 
Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b,d) 
 
¶1. (C) SUMMARY: In the face of President Aliyev's recent high 
profile, energy-focused trip to Russia, SOCAR continues to 
insist that the goal of its gas export strategy remains 
export to Europe via Turkey.  However, SOCAR now states that 
due to continued inability to find a mutually acceptable gas 
transit solution with Turkey, Azerbaijan's fallback position 
will be to export its gas to Europe through Russia, possibly 
via swap deals with Gazprom.  Although SOCAR Is not 
currently considering selling any of the projected  13 to 16 
billion cubic meters annually of Shah Deniz Phase Two gas to 
Russia when it comes on line no earlier than late 2016, it 
might sell some of its own (SOCAR-produced, non Shah-Deniz) 
gas to Russia in the shorter term.  SOCAR contends that 
Turkey still refuses to offer it commercially viable prices 
for either the Shah Deniz Phase One gas it is currently 
receiving or the Shah Deniz Phase Two gas it is seeking to 
purchase.  According to SOCAR, President Aliyev is not going 
to the Sofia Energy Summit.  END SUMMARY. 
 
2.(C) On April 21 SOCAR Marketing Vice-President Elshad 
Nasirov, the SOCAR official primarily responsible  for gas 
marketing decisions, told EnergyOff that despite President 
Aliyev's recent press statements from Russia, Azerbaijan's 
gas export strategy remains the same:  to export its gas to 
European markets.  Azerbaijan's first choice as gas transit 
country is Turkey, but if Turkey continues to refuse to grant 
viable transit conditions for Caspian gas, Azerbaijan will 
seek to export the 13-16 billion cubic meters annually 
(bcm/a) of Shah Deniz Phase Two (SD2) gas scheduled to come 
on line no earlier than late 2016 to Europe via Russia, 
possibly via swap deals with Gazprom.  Nasirov said that it 
is possible that SOCAR will sell some  non-Shah Deniz gas 
volumes  to Russia in the shorter-term, but insisted that 
SOCAR is not currently considering selling any SD2 gas to 
Russia (COMMENT: A Shah Deniz Consortium member confirmed to 
EnergyOff that it made 'good economic sense' for Azerbaijan 
to sell at least some volumes to Russia, especially if it can 
work out satisfactory swap arrangements such that it can sell 
Gazprom gas in European markets as its own). 
 
¶3. (C) Nasirov said that discussions with Turkey over Shah 
Deniz gas are still moribund.  Turkey is still seeking to 
de-link the low price it is currently paying  for Shah Deniz 
Phase One (SD1) gas and the putatively higher  price it says 
it would pay for SD2 gas.  SOCAR opposes this de-linkage, 
since it is "the same gas from the same field traveling via 
the same pipeline over the same distance to the same market." 
 Nasirov flatly denied rumors that Turkey had offered USD 350 
per thousand cubic meters (tcm) for SD2 gas (ref).  In the 
formal negotiations between Botas and the Azerbaijan Gas 
Supply Company (AGSC - the special purpose venture led by 
StatoilHydro to sell SD1 gas to Turkey), Botas is still 
offering a three-year phased increase to USD 180/tcm, a price 
SOCAR feels is insultingly low.  In informal discussions, 
Nasirov said Turkish officials have "joked" about paying 'as 
much as' USD 250/tcm, which SOCAR has pointed out is still 
way below the price Turkey pays Gazprom and Iran for gas. 
 
¶4. (C) Nasirov denied that Azerbaijan was seeking to use gas 
sales to Russia as leverage for Russian help on 
Nagorno-Karabagh, saying that "no one in Azerbaijan is nave 
enough to think the Russians will give up territories for 
gas." 
 
¶5. (C) Nassirov said the recent announcement of RWE Midstream 
gas cooperation with Turkmenistan was "an encouraging 
development," and added that SOCAR President Rovnaq 
Abdullayev would be traveling to Ashgabat shortly (Ashgabat 
is hosting a pipeline security conference April 23-24.). 
 
¶6. (C) Nasirov said that President Aliyev would not be 
traveling to the Sofia Energy Summit, but that Energy 
Minister Natiq Aliyev would be attending.  Nasirov said that 
Azerbaijan would seek to invite Turkish officials to 
Azerbaijan before the end of April in another attempt to 
break the gas deadlock. (The Turkish Ambassador had earlier 
told the Ambassador that Energy Minister Guler had invited 
SOCAR and Energy Minster Natiq Aliyev to Ankara April 28.) 
 
BAKU 00000337  002 OF 002 
 
 
 
¶7. (C) COMMENT:  In talks with USG officials SOCAR continues 
to stress that the goal of Azerbaijan's  gas export strategy 
-- to sell gas directly to Europe --  hasn't changed, and 
that the primary reason for its increased focus on gas 
cooperation with Russia is to "increase leverage on the 
government of Turkey"  to secure transparent commercial 
transit terms and arrangements.  But we believe  there has 
been an important shift in the GOAJ position, at least as 
enunciated by Nasirov:  if transit through Turkey continues 
to be denied, Azerbaijan will seek export routes to Europe 
through  Russia  for Shah Deniz gas, quite possibly via swap 
deals (Nasirov has previously told Embassy that Russia had 
agreed to allow its territory to be used purely for transit). 
 The other energy companies in the Shah Deniz Consortium are 
all seeking primarily  to find a viable customer for SD2 gas 
so they can monitize their investment, as the clock ticks on 
their Production Sharing Agreement with Azerbaijan. 
According to at least one SD Consortium gas executive, none 
of the Consortium members (with the obvious exception of 
TPAO) "has any problem" selling SD2 volumes to Europe through 
 Russia, or even selling gas to Russia.  Resolving  the 
transit issue with Turkey remains essential to achieving USG 
goals of diversifying not just sources, but routes, of gas 
supply to Europe. 
 
¶8. (C) COMMENT (CONT): As for a putative signing of the 
Nabucco IGA in early May in Prague, conversations with SOCAR 
and other SD Consortium members indicate their view that 
while any IGA incorporating commercially viable and 'clean' 
transit principles through Turkey (i.e. without linking gas 
transit through Turkey to gas sales to Turkey) would be seen 
as welcome recogition of market realities, SOCAR and the Shah 
Deniz Consortium's optimal solution is one where Turkey 
allows provides a transparent and commercially viable transit 
regime for any/all upstream gas, irresepective of pipeline 
project or final consumer.  This way, SOCAR and the SD 
Consortium could calculate netbacks for various pipeline 
projects vying for SD2 gas in order to decide which  pipeline 
project (Nabucco, TGI, TAP) to support with its SD2 volumes. 
 As such, SOCAR requests to the USG and EU have been to not 
champion specific pipeline projects, but rather to bring 
about viable transit through Turkey so that commercial 
factors can then determine which pipeline(s) get sanctioned. 
END COMMENT. 
DERSE