US embassy cable - 02ANKARA8986

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008986 
 
SIPDIS 
 
 
STATE FOR E, EB/CBED, EB/ESC, EUR/SE 
STATE PASS NSC FOR QUANRUD AND BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
USDOE FOR PUMPHREY/ROSSI 
 
 
E.O. 12958: DECL: 12/12/2012 
TAGS: ENRG, ECON, EPET, AJ, GG, KZ, TU 
SUBJECT: BP STILL ANALYZING COMMERCIAL VIABILITY OF SHAH 
DENIZ 
 
 
REF: (A) BAKU 2227 (B) ANKARA 7575 
 
 
Classified by ADCM Scot Marciel, Reason 1.5 (b,d) 
 
 
1. (C) Summary and comment:  BP's gas analyst is struggling 
to make the commercial case for Shah Deniz -- although he 
claims top management is committed to the project, he 
believes the Turkish gas market is still oversupplied and the 
project is too expensive.  He also maintains that 
transporting Caspian gas through Turkey to Europe is not 
economically viable.  This current market review by BP may 
just be due diligence in the run-up to February sanction, or 
another negotiating tactic on the part of BP; however, given 
BP's November proposal to delay first gas to Turkey (ref a), 
and that its analyst is still crunching numbers in Turkey, it 
appears that BP's top management may still have some 
reservations about the project.  End summary and comment. 
 
 
2. (C) Brian Dodson (strictly protect), a gas analyst for BP, 
told econoff he is looking at the numbers from "every 
possible angle" to try to make Shah Deniz a more attractive 
project commercially for BP.  Dodson said BP's top management 
"wants to do this project," that it made "strategic and 
political sense" given their other interests in the region; 
however, the numbers kept coming up wrong.  Dodson stated 
there were real problems with Shah Deniz -- the Turkish 
market still looked oversupplied and there was no Turkish 
Treasury guarantee, the contract was not "robust," the cost 
of the project had soared to roughly USD 3 billion, and SOCAR 
had significant financing and government coordination 
problems.  At this stage, he said, BP was proceeding with the 
project based on trust that these problems would be resolved, 
and USD 3 billion was a "lot of trust." 
 
 
3. (C) Dodson conceded that, assuming the GOT purchased Shah 
Deniz gas according to the terms in the gas sales purchase 
agreement (SPA), BP would not lose money.  But at the current 
profit margin, there were better places for BP to invest. 
Dodson noted that the Turkish gas market looked far better 
than it did six months ago, due to BOTAS' successful 
negotiations with Russia and Iran.  Still, even after 
revising the supply figures, he estimated a gas surplus in 
Turkey from 2005-2011. 
 
 
4. (C) Dodson noted that several factors could make the 
commercial equation more appealing.  One was the gas transit 
tariff that the Energy Market Regulatory Authority (EMRA) 
sets.  He noted that an entry/exit-based tariff would help 
make Caspian gas competitive in the Istanbul market as well 
as onward to Europe.  (Note:  BP has commissioned a study on 
the benefits of an entry/exit tariff, which we have provided 
to TDA consultants advising EMRA on the transit tariff.  End 
note.)  Another factor could be BOTAS further reducing its 
supply from Russia -- Dodson thought that Turkey might have 
some contractual flexibility in either the Russian West 1 or 
2 sales purchase agreements that it had not yet divulged. 
 
 
5. (C) Commenting on Turkey's desire to be a transit country 
for Caspian gas to Europe, Dodson said the numbers did not 
add up.  Caspian gas would cost roughly USD 2/mmbtu at the 
Turkish border.  If that gas was going to get to a European 
gas hub, he estimated an additional 1300 kilometers of 
pipeline needed to be built, at an approximate cost of USD 2 
billion.  Assuming the pipeline added an additional USD 
0.60/mmbtu to the price of Shah Deniz gas, and that Turkey 
applied a very low transit tariff of USD 0.20/mmbtu, an 
optimistic estimate put Caspian gas at USD 2.80/mmbtu by the 
time it reached a hub in Europe.  Since gas was currently 
trading at USD 2.30-2.50/mmbtu at European hubs, the math 
didn't work for Caspian gas.  (Note:  Dodson added that he 
was not an expert on the European gas market, and these were 
his "napkin" calculations, adding that he would ask BP's 
European analysts to look into this issue.) 
 
 
6. (C) Comment:  Dodson's current market review may just be 
due diligence in the run-up to February sanction, or another 
negotiating tactic on the part of BP; however, given the 
concerns expressed by BP at the November partners' meeting 
(ref a), and that its analyst is still crunching numbers in 
Turkey, it appears that BP's top management may still have 
some reservations about Shah Deniz.  Dodson was careful to 
emphasize that he was looking only at the numbers, while top 
management was considering Shah Deniz in a much broader 
context.  (Note:  BP execs told us previously that BP's top 
management agreed that Turkey had resolved its gas surplus 
problem (ref b).)  As recently as last week, one BP exec told 
econoff the company was committed to Shah Deniz, while 
another said the company needed to "get its story straight" 
on gas.  End comment. 
PEARSON