Cablegate: Caspian Energy: Uk Tells Amb Morningstar They Are

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P 281141Z SEP 09

C O N F I D E N T I A L LONDON 002230

E.O. 12958: DECL: 09/22/2019

Classified By: Jock Whittlesey, A/Econ Couns, reasons 1.4 b & d

1. (C/NF) Summary: Ambassador Richard Morningstar, Special Envoy for Eurasian Energy Diplomacy, and UK government and private officials agreed on the need for continued engagement with Caspian governments on energy issues, while encouraging Europe to increase both its outreach to the region and internal reform efforts. In meetings with UK Foreign Office and Department of Energy and Climate Change officials, Prince Andrew (the UK Special Representative for International Trade and Investment), ExxonMobil, BP, and an industry group hosted by British American Business, all agreed Europe needs to organize itself and its energy markets, while continuing to press for Southern Corridor oil and gas routes. UK government officials also expressed concerns about Ukraine's ability to reform itself adequately, and Russia's continued use of energy policy as a tool to extract other concessions from former Eastern bloc countries. A Chevron representative said if Caspian Pipeline Company (CPC) expansion does not take place immediately, Russia will be able to slowly shut down the Baku-Tblisi-Ceyan oil corridor (a key non-Russian route). Chevron also said China is increasing its presence in Iran because Beijing fears U.S. companies will pile in if U.S.-Iran relations improve.

2. (C/NF) Amb. Morningstar described USG goals in the region as: -Protecting U.S. energy security; -Helping Europe achieve its own energy security; -Helping Caucas and Central Asian countries increase production, be independent, and develop their economies. In describing Russian/Ukrainian issues, Amb. Morningstar stressed the USG is not anti-Russian (we don't oppose either Nord-Stream or South Stream, although we question their viability and cost), but rather we needed to work closely with both Moscow (through the Clinton-Lavrov Committee and its Energy Market Sub-Committee) and Kyiv. The Southern Corridor is very important, but Nabucco and other projects are not the only pieces of the puzzle, and Europe needs to reform its own market, become more interconnected, and increase gas storage and Liquefied Natural Gas. Morningstar stressed the U.S. cannot be out in front of the Europeans on their own energy issues. We can help push them in the right direction, but Europe will need to do its own work to reduce its dependency on Russia. Morningstar said USG action over the next six months include: 1) shoring up Ukraine gas issues to prevent last year's cutoff; 2) pressing Turkey and Azerbaijan to settle pricing, transit and other disagreements; 3) getting as much high-level European involvement in these and other issues (he said it was a positive sign former German Foreign Minister Joscka Fischer was representing European companies.) End Summary.

UK Officials Agree on Long-game in Caspian ----------------------------- ------------

3. (C/NF) Amb. Morningstar and UK government officials, led by Michael Davenport, Head of the Russia/Central Asia Directorate, in the Foreign Office (FCO), and John Neve, Director for International Energy at the Department of Energy and Climate Change (DECC), agreed the Southern corridor gas and oil pipeline projects are an important part of the strategy for improving energy transport and independence, but they are not the entire strategy. The British government continues to engage in the region, and will send DECC Secretary Ed Miliband to Moscow in early October to discuss bilateral energy issues (despite the UK receiving less than one percent of its energy supplies from Russia) and Copenhagen climate change plans. UK officials were enthused about prospects for the US-EU Energy Council, and thought the USG could assist them in pressing the EU to reform its internal market, improve research and technology, and improve regulatory policies.

4. (C/NF) British officials agreed with Amb. Morningstar that Ukraine is not helping its own case. FCO officials were unsure if current leaders in Kyiv were up to the task of reforming, but felt the upcoming elections would have an impact on the politicians' behavior. The FCO thought Russia would be happier with Yanukovich than with Tymoshenko, due to the former's predictability, but would likely be fine with either in the Presidency. Turning to Turkmenistan, Davenport said British companies were starting to become frustrated with getting little-to-no movement out of the government in Ashgabat. UK companies fear they will never be permitted a toe-hold in the Turkmen market. Amb. Morningstar said he was counseling western companies to stay engaged, and to think long-term. Turkmen President Berdimuhamedov will be in London in March 2010 for a Chatham House Conference.

5. (C/NF) Elsewhere, the FCO told Ambassador Morningstar there is a difference of opinion between the UK and the rest of the EU on Uzbekistan and whether to maintain an arms embargo against them or not (UK does not support an embargo.) The UK is not engaged with Uzbekistan on energy. Within the EU itself, however, the UK is pressing hard for a permanent representative to the Caspian region. They have contemplated sending 4-5 member state representatives out in a group, but fear the problem of divergent interests. In addition, the EU has no permanent representative in Baku, and despite Pierre Morel wearing the Caspian hat, his effectiveness is diluted because he also handles Georgian issues for the EC. British officials told Morningstar it was difficult to get sustained political engagement in Europe over energy issues, and they even have difficulty getting the attention of their ministers in London.

Prince Andrew's Involvement in the Region --------------------- -------------------

6. (C/NF) Prince Andrew's position as UK Special Representative for International Trade and Investment often takes him to the region. He said the Turkmen want to expand exports in all directions: North to Russia, South to Iran, East to China and West to Europe, but they don't realize yet how much they need the West. As an example, he said the Malaysians desperately want to enter the Turkmen market, but Petronas doesn't have the technology Western companies have. Other concerns, Prince Andrew said, are that binding arbitration in the region is not at all binding. There is no pressure on local governments to abide by contracts so companies must rely on fickle good will. To make matters worse, he said, the Europeans are in disarray and can not come up with a united energy plan.

Industry's Activities ---------------------

7. (SBU) ExxonMobil: In a private meeting with ExxonMobil executives, led by Paul Tobin, Transportation Manager, and Rob Young, Caspian/Europe/Russian Exploration Manager, Tobin described the company's plans to move into "unconventional" resources across Europe. These include "tight gas" and "shale gas" - the latter in Germany and the Netherlands. ExxonMobil is also focusing on untested possibilities in the Black Sea, such as deep water sites at over 1500 meters, where they have a few licenses for wild-cat exploration. Exploration results in the South Caspian/Azerbaijan areas have been disappointing, but the North Caspian have been successful. The business climate in Kazakhstan has deteriorated since the late 1990's and ExxonMobil does not see it getting better. Young thought that the depths discussed for South Stream were doable, and in fact had been done before; however, it would be expensive.

8. (SBU) On Russia, ExxonMobil feels generally positive; for instance President Medvedev recently supported CPC expansion. However, questions remain about how the Kazakhs (KMG) will execute the work (i.e., whether to hire an outside manager or one from within the consortium.) ExxonMobil believes the involvement of Transneft, because of its political connections, has improved the situation. In the end, ExxonMobil does not think Kazakhstan will vote down proposals to go forward.

9. (SBU) ExxonMobil's interests in Turkmenistan are a bit broader than other companies', they said. They are interested in both on-shore and off-shore gas development, but they don't see much potential for off-shore now. The Turkmen are apprehensive about who would control the reserves if the International Oil Companies developed fields. The government's personnel resources are also stretched beyond capacity; officials don't have either the skills or the understanding to properly develop the natural resources efficiently. They have had little luck convincing the Turkmen to allow them to work with ExxonMobil. Ambassador Morningstar said he has told the Turkmen they would benefit from Western companies' capital and technology.

10. (SBU) Chevron's Luis Coimbra, General Manager of Marketing and Transportation, said five years of working on Southern Corridor oil transport (Caspian Pipeline Company - CPC) has shown no progress. Russia is over-building pipeline, and is well-positioned to attract any spare oil production for its own routes. Coimbra said without significant movement on Southern Corridor oil routes, Russia could soon stop development of other projects at critical political points. He predicted that without a Southern passage through the Caucuses soon, Baku-Tblisi-Ceyan capacity could drop by one-half within 10 years, and would be empty another 10 years later. Chevron didn't want to see another Odessa-Brody (i.e., an empty tube.) Chevron's top priority is CPC expansion. Shell shares Chevron's concerns about the urgency of getting CPC done soon.

11. (SBU) BP, led by David Peattie, Group Vice President for Russia, said the company's outlook in the region was premised on estimates of $60-90/barrel range for the next 5-10 years. BP's margins are low now. Gas prices are very low, and profitability will suffer until prices rise a bit in the medium term. With this overview, he said TNK-BP is doing well (they earned a $3 bn profit in six years, from an $8.5 bn investment and are still one-half invested). In fact, BP shifted personnel to Moscow soon after the problems with TNK-BP because they saw the need to beef up their presence there. BP's long-term goal is to partner with a state-run oil and gas company in Russian. On the other hand, BP has decided to exit Kazakhstan, as Russia and Azerbaijan look more promising. In addition, some of BP's interests in Russia conflict with Kazakh projects, i.e., CPC expansion. Arctic exploration is the next frontier for BP, with hundreds of billions of barrels in difficult-to-reach locations. BP is sensitive to environmental concerns in the region and border issues. On Turkmenistan, BP sees a 30-40 year horizon and is taking things step-by-step in their development of an on-shore operation. BP's John Gerson, Chief of Government and Political Affairs, said the new USG policy is consistent and less antagonistic than in the past, and will be helpful to Western companies' efforts in the region. This cable was cleared by Ambassador Morningstar. Visit London's Classified Website: XXXXXXXXXXXX

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