KAZAKHSTAN: CHINESE PIPELINE UPDATE

C O N F I D E N T I A L ALMATY 001433

SIPDIS


DEPT FOR EB/ESC (JONES),EUR/SNEC, EUR/CACEN (MUDGE)

E.O. 12958: DECL: 04/06/2015
TAGS: ENRG CH KZ ECONOMIC
SUBJECT: KAZAKHSTAN: CHINESE PIPELINE UPDATE

REF: A. BEIJING 3909


B. ALMATY 58

C. 04 ALMATY 4688

Classified By: DCM Mark Asquino for reasons 1.4 b and d.


1. (C) Summary: Construction of the stalled Atasu-Alashankou
oil pipeline is moving forward after a harsh winter and the
late delivery of pipe, according to KMG contacts. However,the
Kazakhstanis are unhappy with the Chinese over perceived
lower netbacks and lack of control -- Beijing has
responsibility for both financing and filling the pipeline.
The Chinese are still searching for the 10m tons annual
needed to fill initial capacity. End Summary.

--------------
Atasu-Alashankou construction back on track
--------------


2. (C) Construction of the 960 km pipeline is in full swing
after an unusually harsh winter and the late delivery of pipe
upset plans for a November 2004 start. According to a
KazMunaiGas (KMG) engineer who worked on the site one-and-a
half months this winter, pipe only started to arrive in
February. Serik Burkitbayev, the President of the Kazakhstani
Oil and Gas Institute, a main project contractor, blamed the
late pipe on a Chinese desire to control the project,
including choosing suppliers. The Chinese are financing the
50-50% joint venture, which is the second leg in a
cross-Kazakhstan pipeline. Only the third and final leg,
between Kenkiyak and Atasu, will link oil-rich Western
Kazakhstan with China.

3 (C) The KMG engineer was confident, however, that the
pipeline - at least pipes in place welded under the ground -
would be ready for the promised delivery date of December

2006. The Chinese director of the first leg of the pipeline
(Kenkiyak-Atyrau),Dzhan Chengwu, did not share the same
degree of certainty as his Kazakhstani colleague but thought
completion was possible.

--------------
...Though filling it harder
--------------


4. (C) Burkitbayev and the KMG engineer differed on the ease
of finding shippers. The engineer sheepishly admitted that it
could take six months to fill the pipeline; the norm is
usually one-and-a half for a project of this size.
Burkitbayev, however, said that the pipeline would be easily
filled in a fifty-fifty split between Kazakhstani and Russian
producers. Negotiations, he added, were already under way
with Rosneft to ship 5 million tons of former Yukos crude
south. The rest would come from the Atasu hub of the second
stage, the Turgai basin.


5. (C) PetroKazakhstan, the main Turgai basin producer, is
leery of a Chinese monopsony. Marketing Director Robert
Goldsmith said the company is still exploring options, but
needs at least two buyers. (Comment: The Atasu-Alashankou
second leg needs Russian oil since the Turgai basin produces
a total of 12 m tons a year. Even if all that crude were to
be sent to China - unlikely since some is refined in
Kazakhstan - it would barely fill the initial capacity of 10
m tons a year. Russian crude becomes less of a factor once
the third leg is completed and Western Kazakhstani product -
such as Tengiz or Kashagan - can be shipped. End Comment.)

--------------
Kazakh-Chinese Honeymoon Over?
--------------


6. (C) Burkitbayev griped that it was "difficult" to work
with the Chinese. He added that, "the government is not
happy, the oil companies are not happy." He hinted that the
GOK lost a large degree of control when it agreed to let the
Chinese finance and fill the pipeline. He also said that
other export routes - CPC, BTC, and even the Russian pipeline
system - might be better options financially: "It (the
Chinese pipeline) is not a good deal for us."


7. (C) Comment: Despite grumbling and mutual suspicions, the
Chinese and the Kazakhstanis will expand energy links.
Geography - a growing producer next to a hungry consumer -

should more than match distrust and keep the relationship
from derailing. Moscow, however, may meddle if too much West
Siberian crude goes south. According to an oil trader here,
only 36% of West Siberian crude reaches world markets, the
rest is refined locally at a deep discount. Every barrel
shipped to China via Kazakhstan cuts into vested Russian
interests. Transneft President Semyon Vainshtok's April 12
comments to the press that Russia would not deliver oil to
the Kazakhstani-Chinese pipeline appear to be the first
indication of push-back from Moscow. End Comment.
ORDWAY


NNNN