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C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000030 

SIPDIS 

ANKARA PLEASE PASS TO DAS BRYZA 

EO 12958 DECL: 01/13/2019 
TAGS PGOV, PREL, AJ, TU, ENRG 
SUBJECT: AZERBAIJAN: BP DOWNBEAT ON 2009 SHAH DENIZ PHASE 
TWO PROGRESS

REF: A) BAKU 1126 B) BAKU 1186 C) ANKARA 56

Classified By: CA Don Lu, Reasons 1.2 (b,d)

¶1. (C) SUMMARY: Acording to BP Azerbaijan, inability to reach agrement between Azerbaijan and Turkey on the price of Shah Deniz Phase One gas currently being sold toTurkey and on transit of Shah Deniz Phase Two ga has delayed and will continue to delay the deveopment of the Shah Deniz Phase Two project in 2009. As such, SOCAR might be more willing to first develop ACG non-associated (aka “deep”) gas, as it can be developed relatively inexpensively and in increments, with the resulting gas sold to purely regional markets, including Russia and Iran (i.e., no need to transit through Turkey). The Central Azeri Oil platform in the ACG offshore oil mega-field has resumed production as of December, and the AIOC Consortium expects production to reach pre-September 2008 levels within a few months. END SUMMARY. 

¶2. (C) On January 13 Charge met with BP Azerbaijan President Bill Schrader and UK CDA Simon Tonge, to discuss recent energy issues. Also present were BP Azerbaijan Gas Marketing Manager Richard Ruddiman, BP Azerbaijan Government Relations VP Seymour Khalilov, and the U.S. and UK Embassy Energy Officers. 

SHAH DENIZ DEVELOPMENT DELAYED 

¶3. (C) In general, BP Azerbaijan was not optimistic on timely Shah Deniz Phase Two (SD2) development. As such, according to BP Azerbaijan, the Shah Deniz (SD) Consortium will continue to slow-track SD2 development in 2009, due to disputes over Shah Deniz Phase One (SD1) price and SD2 transit with the Government of Turkey. In BP’s opinion, an optimistic scenario is some type of agreement in 2009, but currently the SD Consortium has budgeted no more than a negligible, ‘placeholder’ amount on SD2 in 2009 due to lack of progress on SD1/SD2 in its talks with Turkey. BP Azerbaijan also noted that SOCAR will probably also be marginally less likely to spend the large amounts needed for its share of SD2 investment given its vastly decreased oil-related income and that fact that the start of payback for any such SOCAR investments is no earlier than 2015. 

¶4. (C) As for SD1, BP senses a reluctance from SOCAR to go to arbitration with its Turkish brother, but the two sides are still orders of magnitude apart on price for SD1, with no real ‘negotiating’ occurring. BP senses that the SD Consortium would be willing to give GOT a price lower than the Gazprom/Iran price (as we have confirmed separately with SOCAR), but Botas’s current offer is so low that “there is no real discussion going on.” ACG DEEP GAS MAY MOVE FORWARD SOONER 

¶5. (C) In a related vein, BP said it was seeing a continued increase of interest in Azeri Chirag Guneshli (ACG) non-associated (aka ‘deep’) gas from the GOAJ, and thinks it possible the GOAJ will seek to develop deep gas before SD2, since development can be done far more cheaply and incrementally, with the resulting gas being sold to Russia, Iran, and Georgia (i.e., no need for Turkey transit). TURKMENISTAN 

¶6. (C) When asked about the possibility of GOTX gas being supplied to GOT, BP repeated its opinion that due to the long timelines involved with gas development, there would be no GOTX gas coming west earlier than 2020. UKRAINE-RUSSIA 

¶7. (C) BP said that it thought that one result of the Gazprom-Ukraine gas conflict, which has affected Turkish gas supply, would be that the GOT would be even more focused on security of supply/supply diversification/getting as much gas as it can from SD2. GEORGIA 8. (C) According to BP the Georgian government is unusually quiet for this time of winter, i.e. not complaining about the lack of gas it is receiving from Azerbaijan. BP says that SOCAR is pushing as much gas to Georgia as is obligated, and that Georgia is also getting its full amount from SD1. These two sources, plus the gas it is getting as transit gas, seem to be meeting the GA demand, and BP thinks it might be the case that GA will not need any gas from Gazprom this winter. BP agreed that GA could benefit from gas storage, pointing out that many countries try to have storage equal to 20 percent of its annual need. 

CENTRAL AZERI GAS LEAK IDENTIFIED
BAKU 00000030 002 OF 002

¶8. (C) BP has restarted oil production from CA and is about to start re-injecting gas again in the Central Azeri field. It has closed off a “few suspect wells” from which they think a bad cement job caused the leaking gas (which is actually good news, since had it been a reservoir leak the damage would have been potentially non-repairable, whereas now all BP has to do is fix the cement job around a few wells, a hard and expensive job to be sure, but preferable to losing the platform). Production is now around 700,000 bpd, and with gas injection they hope to get it back up to September levels, i.e. 950,000 bpd. 

¶9. (C) COMMENT: Since this meeting, there is indication (reftel c) that Botas has increased the price it is willing to pay for Shah Deniz Phase One gas. Additionally, SOCAR VP for Marketing Elshad Nassirov canceled a January 15 meeting scheduled with the Embassy to fly on short-notice to Turkey to meet with the Turks on SD-related issues. Embassy will be reporting on these developments septel. LU