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C O N F I D E N T I A L SECTION 01 OF 04 BAKU 000782 
 
SIPDIS 
 
DEPT PASS TO DEPT OF ENERGY 
 
E.O. 12958: DECL: 09/30/2020 
TAGS: ENRG PGOV PREL ARM TU AJ
SUBJECT: SUBJECT: SCENESETTER FOR DEPARTMENT OF ENERGY 
DEPUTY SECRETARY PONEMAN'S VISIT TO BAKU, OCTOBER 4-5, 2009 
 
Classified By: Charge d'Affairs Don Lu for Reasons 1.4 (b) and (d) 
 
¶1.  (C) SUMMARY:  Your visit to Baku comes on the heels of 
successful visits by Department of State Deputy Secretary 
Steinberg and U.S. Special Envoy for Eurasian Energy Issues 
Morningstar.  The mood here remains skeptical about the new 
U.S. Administration, fed by perceptions that the U.S. is 
promoting Turkey-Armenia reconciliation without proper 
attention to a resolution of the Nagorno-Karabakh (NK) 
conflict. Moreover, Baku has loudly and repeatedly complained 
that the rapprochement process potentially weakens 
Azerbaijan's position in negotiations with Armenia, and 
resists calls for de-linkage.  At the same time, President 
Aliyev has asked for help with repealing Section 907, sales 
of military equipment and greater U.S. engagement on 
Nagorno-Karabakh.  The country is maintaining macroeconomic 
and social stability in the face of the global financial 
crisis, but has taken insufficient steps to reform its 
economy and root out corruption to ensure longer term 
sustainability.  Nearly one million barrels of oil per day 
move through the Baku-Tbilisi-Ceyhan pipeline.  Democracy and 
human rights remain problematic areas in the bilateral 
relationship.  End Summary. 
 
Strategic Interests and Orientation 
----------------------------------- 
 
¶2.  (C) Azerbaijan's strategic direction is deeply affected 
by its physical security environment.  Sandwiched between 
Russia and Iran, and with the unresolved Nagorno-Karabakh 
conflict tying down 70 percent of its ground forces along the 
Line of Contact, Azerbaijan recognizes the need for strong 
allies.  The August 2008 conflict in Georgia deepened 
Azerbaijan's sense of insecurity, and caused the GOAJ to 
re-examine Azerbaijan's strategic orientation. In the face of 
increasing Russian pressure, and with nervousness about 
Iran's intentions in the South, the GOAJ has asked the U.S. 
for significantly greater tangible support, particularly in 
terms of security cooperation. Azerbaijan,s strategic 
priorities and relations with Turkey, Turkmenistan, 
Kazakhstan, Armenia and other nations in the region continues 
to drive its energy agenda in a manner not always aligned 
with its purely commercial interests. 
 
Energy 
------ 
 
¶3.  (SBU) Azerbaijan's massive oil and gas reserves and 
strategic location place the country at the epicenter of 
Eurasia energy policy.  This was highlighted June 2-5 with 
the Baku's Caspian Oil and Gas Show and again on September 15 
at the Celebration for 15th Anniversary of the Signing of the 
"Contract of the Century", which reopened the Azeri, Chirag, 
and Guneshli fields (ACG) to western energy companies for the 
first time since the 1920s.  As both a producing and a 
transit country, Azerbaijan is critical to the development of 
a Southern Corridor to transport Caspian hydrocarbons, 
including Kazakh oil and Turkmen gas, to European and world 
markets. 
 
Energy Snapshot 
--------------- 
 
¶4.  (SBU) Azerbaijan currently exports about one million 
barrels of oil per day through two non-Russian pipelines to 
European markets -- Baku-Tbilisi-Ceyhan (BTC) and Baku-Supsa 
(Georgia/Black Sea)-- in addition to the Baku-Novorossiysk 
(Russia/Black Sea) pipeline.  It also produces natural gas 
for export to Turkey and Georgia.  As a producing and transit 
country, Azerbaijan is critical to the development of a 
Southern Corridor to transport Caspian hydrocarbons, 
including Kazakh oil and Turkmen gas, to European and world 
markets.  BP is the operator for both the ACG oil fields 
(through the Azerbaijan International Operating Company 
(AIOC) Consortium) and the BTC Pipeline, and remains the 
dominant player among the international oil companies (IOC) 
in Azerbaijan.  President Aliyev has stated that the Shah 
Deniz Production Sharing Agreement (PSA) will be extended for 
five years, but lacking a signed contract, BP has pushed back 
to 2016 the likely operations start date for Shah Deniz,s 
second phase.  Meanwhile, Azerbaijan is showing some evidence 
of interest in courting new IOCs by granting an oil 
exploration concession for the Absheron field to French 
energy giant Total.  On the transit front, IOCs are urging 
 
BAKU 00000782  002 OF 004 
 
 
Azerbaijan to conclude agreements with Kazakhstan to allow 
oil to flow by tanker to BTC from the mammoth North Caspian 
Kashagan field as part of the Kazakh Azerbaijan Caspian 
Transport System (KACTS), which should come on line in 2013. 
 
Political Impediments to Gas Transit 
------------------------------------ 
 
¶5.  (C) Azerbaijan and President Aliyev recognize the 
strategic imperative for Azerbaijan to market its gas via the 
Southern Corridor.  Nonetheless, disagreements between Turkey 
and Azerbaijan over the price of Azerbaijani gas being sold 
to Turkey and transit terms for future gas transit have been 
major obstacles to the realization of a "Southern Corridor" 
of energy exports.  SOCAR representatives charge that 
Turkey,s BOTAS is dragging out the transit negotiations in a 
bid to force Azerbaijan to accept higher transit fees. 
Azerbaijan remains frustrated with Turkey's efforts to 
promote reconciliation with Armenia, and Baku's recent 
decision to forge a deal with Moscow on gas sales to GazProm 
is a result of this. 
 
¶6.  (C) Azerbaijan has lost some of its faith in the future 
of "Southern Corridor" transit since the Nabucco 
inter-governmental agreement was signed in Turkey on July 13. 
 In an August 27 meeting with SE Morningstar, President 
Aliyev, referred to recent talks with the Turks as a failure 
and lamented a loss of momentum in negotiations on transit 
and gas pricing. Additionally, it remains unclear that 
Turkmenistan is prepared to commit gas volumes much needed by 
the Nabucco project, and Turkmenistan President 
Berdimuhammedov,s July declaration to seek arbitration on a 
Turkmen claim to the ACG field could present a further 
impediment.  Finally, prospects for utilizing Iraqi gas for 
Nabucco remain in doubt due to continued disagreements 
between the Iraqi federal government and the Kurdistan 
Regional government.  Many industry observers and some in 
SOCAR,s leadership believe that focusing on the Italy Turkey 
Greece Interconnector (ITGI) project is a more realistic 
option for Azerbaijan at this stage. 
 
Renewable Energy 
---------------- 
 
¶7.  (SBU) The government of Azerbaijan appears to be 
demonstrating modest interest in renewable and alternative 
energy.  Since 2001, the government has had a small task 
force on the issue.  In July, President Aliyev ordered the 
creation for a State Agency for Alternative and Renewable 
Energy.  To date, no concrete steps have occurred, and these 
issues remain the purview of Minister of Energy and Industry 
Natiq Aliyev.  Azerbaijan recently became the 93rd member of 
the International Agency for Alternative Energy, and Minister 
Aliyev recently announced the creation of pilot projects for 
renewable energy, primarily focused in rural areas.  The 
government has announced plans to build several small 
hydroelectric plants, and has a burgeoning wind farm on the 
Absheron Peninsula. 
 
Economy Still Strong 
-------------------- 
 
¶8.  (SBU) The business climate, particularly outside the oil 
sector, is challenging.  Corruption and institutionalized 
monopolies remain serious roadblocks to further investment. 
Transparency International's Corruption Perceptions Index (as 
well as anecdotal evidence from American business contacts in 
Baku) confirms that Azerbaijan still has a long way to go in 
stamping out corruption.  The WTO accession process could 
help bring about the legislative and regulatory changes 
needed to reform Azerbaijan's economy and introduce 
transparent, market-driven practices; but seems to have 
stalled, despite President Aliyev's pledged support. 
 
¶9.  (SBU) The GOAJ believes that it is withstanding the 
difficulties of the global economic crisis, particularly in 
comparison to its neighbors.  High oil export receipts led to 
extremely rapid economic growth in prior years, and, with oil 
hovering USD 70 per barrel, Central Bank and State Oil Fund 
reserves are mounting once again.  Baku has also benefited 
from relatively low levels of foreign debt exposure and has 
not had to devalue its currency.  Azerbaijan, which has 
roughly a USD 44 billion economy, held about 18 billion manat 
in net reserves as of December 2008. 
 
BAKU 00000782  003 OF 004 
 
 
 
Turkey and Nagorno-Karabakh 
--------------------------- 
 
¶10.  (C) Azerbaijan is willing to pursue a political track to 
solve the Nagorno-Karabakh (NK) conflict with Armenia; 
however, any solution that does not guarantee the territorial 
integrity of Azerbaijan is anathema.  Azerbaijani views on 
this issue have intensified in the context of 
Turkish-Armenian moves toward opening borders, especially in 
terms of efforts to "de-link" these plans from withdrawal of 
Armenian forces from Azerbaijan's seven occupied territories. 
 Immediately after the April 22 initialing of 
Turkish-Armenian "roadmap," Azerbaijan voiced concerns about 
reconciliation, complaining that Turkey and the United States 
failed to consult Baku and did not take into account the 
effect of border opening on prospects for the negotiations to 
resolve NK.  President Aliyev's line on the Turkey-Armenia 
process is that he is deeply disappointed at Turkish 
behavior, but Turkey is a sovereign country that can make its 
own decisions.  He adds, however, that Turkey will face the 
consequences if it de-links reconciliation with Armenia from 
the NK process, and routinely points to the energy sector. 
This will likely be heavy on his mind as the Turkish and 
Armenian Presidents are slated to meet later this month to 
sign joint protocols on the rapprochement. 
 
Security Cooperation 
-------------------- 
 
¶11.  (C) Azerbaijan has increased its defense spending 
tenfold in five years and now spends about 2 billion dollars 
annually, or about three percent of GDP.  GOAJ officials are 
unequivocal about Azerbaijan's orientation westward for its 
security needs, but they argue just as forcefully that they 
need American weapons systems to build adequate defenses. 
Azerbaijanis complain bitterly about the restrictions of 
Section 907 of the Freedom Support Act even though the waiver 
provision is applied, because of the "parity" policy on 
assistance to Armenia and Azerbaijan observed by 
Congressional appropriators. 
 
¶12.  (C) DoD has conducted several engagement events with 
Azerbaijan Navy and Coast Guard officers with the purpose of 
building capacity for critical energy infrastructure 
protection.  The events have been well received by Coast 
Guard and Navy leadership, but have limited value in the 
overall maritime security posture.  Only significant 
investment in new surveillance and response capabilities - 
including infrastructure, radar, intelligence, ships, and 
aircraft - will meet the security challenges faced here.  The 
GOAJ has little appetite to embark on new, expensive projects 
which it may perceive as unnecessary or problematic to 
managing its complex relations with Iran and Russia. 
 
¶13.  (C) For the past two years, President Aliyev and other 
senior ministers have continually asked to purchase U.S. 
military equipment.  Last year the Ministry of Defense 
provided a list of requested "defensive equipment," that 
included Patriot missiles, self-propelled mortars, Multiple 
Launch Rocket Systems, Javelin anti-tank missiles, Stinger 
missiles and UAV aircraft.  EUCOM reviewed the entire list 
and did not believe any of the items would be approved for 
sale.  We have encouraged the Ministry of Defense to put 
together a Foreign Military Sale request that we could use to 
begin incrementally a relationship on military sales.  For 
example, President Aliyev has mentioned air defense and yet 
their initial equipment list lacked an air defense radar 
system.  Offering enhanced cooperation on security to 
Azerbaijan, particularly in terms of access to U.S. defense 
technology, may be the best tool we have to mollify Baku's 
concerns about Turkey-Armenia rapprochement and patch up 
souring relations. 
 
Department of Energy Second Line of Defense (SLD) Program 
--------------------------------------------- -- 
 
¶14.  (SBU) Embassy Baku hosts a Department of Energy-led 
Second Line of Defense (SLD) program.  The mission of SLD 
programs is to strengthen the capability of foreign 
governments to deter, detect, and interdict illicit 
trafficking of nuclear and radioactive materials across 
international borders and through the global maritime 
shipping industry.  The goal is to reduce the probability of 
 
BAKU 00000782  004 OF 004 
 
 
these materials being fashioned into a weapon of mass 
destruction or a radiological dispersal device to be used 
against the United States or its key allies and international 
partners. 
 
¶15.  (SBU) The Department of Energy initiated the SLD program 
in Azerbaijan in 2005, with an implementing Agreement between 
the DOE,s National Nuclear Security Administration (NNSA), 
and the Azerbaijan State Border Service (SBS).  Construction 
upgrades to 9 sites, predominantly border crossings, 
commenced in 2006; a total of 11 will be completed by 
November 2009.   Upgrades to the Baku Seaport and the Turkan 
Training Center, a training institute for the State Border 
Service, have already been completed.  The SLD program 
expects 13 land border crossing upgrades to be completed by 
the end of FY2010, with a total of 17 sites eventually 
scheduled for upgrades. 
 
¶16.  (SBU) The Department of Energy has maintained one 
contract staffer at Embassy Baku as the SLD Baku 
Representative since September 2008.  The SLD program works 
in close cooperation with the Mission's Defense Threat 
Reduction program (DTRO) and Export Control and Border 
Security Programs (EXBS). 
 
Democracy and Reform 
-------------------- 
 
¶17.  (C) The flawed October 2008 presidential election and 
especially the hastily conducted March 2009 referendum that 
made 41 changes to the Constitution including, inter alia, 
lifting the two-term restriction on the President, 
underscored the slowing of Azerbaijan's democratic 
transition.  Likewise, Azerbaijan's parliament unwisely moved 
this summer to place further restrictions on NGO activities. 
Intervention from the highest levels of government, as well 
as a well coordinated response from civil society, prohibited 
the most egregious changes.  Simultaneously, the GOAJ has 
taken measures to stifle free media, including the removal of 
FM-band broadcasting rights from Voice of America and Radio 
Liberty, and has limited the practice of Islam in some cases, 
pointing to threats of radicalism.  The opposition in 
Azerbaijan remains relatively uncoordinated, lacking in 
popular support as well as having a tendency towards 
infighting.  Lack of freedom of assembly is a large problem; 
nearly 100 young people were arrested on May 10 during 
several small events mourning the 13 victims of an April 30 
shooting at the State Oil Academy.  Several prominent 
journalists remain in jail and the now-famous case of the 
jailed youth-activist "bloggers" continues to drag on. 
 
¶18.  (C) Should any of these issues arise, you are certain to 
hear complaints that Azerbaijan is treated unfairly by the 
United States and Europe on human rights and democracy 
compared to Armenia and others.  In particular, President 
Obama's statement on May 3 World Press Freedom Day, which 
placed Azerbaijan in the same phrase as Zimbabwe, 
particularly irked some GOAJ leaders including the President, 
especially as Russia and Iran, other egregious violators of 
media freedom, were not mentioned.  It is important to stress 
that the U.S. has only one set of standards when evaluating 
democracy and human rights and that political and economic 
reform is an equal pillar, along with security and energy, of 
our bilateral relationship. 
 
Comment 
------- 
 
¶19.  (C) A visit this early in your tenure demonstrates the 
strategic importance of the United States' relations with 
Azerbaijan at a moment of regional turbulence, and will help 
set the tone for our future engagement.  The Azerbaijanis may 
want to discuss the Obama Administration's approach to 
regional foreign relations, and in particular the 
Administration's views of Nagorno-Karabakh, Turkey-Armenia 
rapprochement, and Section 907 of the Freedom Support Act. 
Enhanced security cooperation and energy sector development 
are the two most likely areas for improving relations, and on 
these fronts the President, Foreign Minister and others are 
prepared to talk. 
LU