Identifier
Created
Classification
Origin
05ALMATY3232
2005-09-06 11:35:00
CONFIDENTIAL
US Office Almaty
Cable title:  

KAZAKHSTAN: ENERGY SCENESETTER FOR SECRETARY

Tags:  EPET ENRG AJ GZ KZ ECONOMIC 
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C O N F I D E N T I A L ALMATY 003232 

SIPDIS


FOR SECRETARY BODMAN FROM CDA ASQUINO
DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 09/05/2015
TAGS: EPET ENRG AJ GZ KZ ECONOMIC
SUBJECT: KAZAKHSTAN: ENERGY SCENESETTER FOR SECRETARY
BODMAN'S MEETING WITH FOREIGN MINISTER SHKOLNIK AT
US-KAZAKHSTANI ENERGY PARTNERSHIP, SEPTEMBER 8

REF: ALMATY 1944

Classified By: CHARGE MARK ASQUINO FOR REASONS 1.4(B) and (D)

C O N F I D E N T I A L ALMATY 003232

SIPDIS


FOR SECRETARY BODMAN FROM CDA ASQUINO
DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 09/05/2015
TAGS: EPET ENRG AJ GZ KZ ECONOMIC
SUBJECT: KAZAKHSTAN: ENERGY SCENESETTER FOR SECRETARY
BODMAN'S MEETING WITH FOREIGN MINISTER SHKOLNIK AT
US-KAZAKHSTANI ENERGY PARTNERSHIP, SEPTEMBER 8

REF: ALMATY 1944

Classified By: CHARGE MARK ASQUINO FOR REASONS 1.4(B) and (D)


1. (C) SUMMARY: In advance of your planned meeting with
Energy Minister Shkolnik, Embassy Almaty wanted to offer
background on the most pressing issues in the US-Kazakhstani
energy dialogue and suggest key issues where your engagement
could be crucial. They include the following:

Achieving a GOK-GOA IGA on transporting Kazakhstani oil into
BTC (Kazakhstani Caspian Transport System-KCTS) that is fair
to both government partners and private investors alike;
Finalizing CPC expansion at terms advantageous to private and
government consortium partners;
Making the tender process, both for sub-contracts and new
offshore blocs, as fair and as transparent as possible.

For a broader outline of hydrocarbon development in
Kazakhstan, please see reftel. END SUMMARY.

--------------
Talking Points
--------------


2. (C) During your meeting with Energy Minister Shkolnik, you
may
wish to raise some of the following points in priority order:

-- We understand that Kazakhstan and Azerbaijan would like to
sign an IGA to move oil through BTC, the so-called
Kazakhstani Caspian Transport System (KCTS),at the October
4-7 KIOGE Oil and Gas Show in Almaty. We support this effort.
However, the IGA must respect investor interests and be
similar in spirit to the BTC agreement. It must include tax
stability, international maritime standards, and
parliamentary ratification. A follow-on Host Government
Agreement (HGA) is no less important and must also respect
investor rights.

-- We understand that progress has been made on CPC
expansion, though important issues still remain. As with
KCTS, any expansion agreement must respect the interests of
private investors and state actors alike and prevent any one
group from gaining dominance. The USG supports a timely
resolution respecting the interests of all parties, both
private and state shareholders.

-- We hope that any new tender process, whether for new

acreage or for subcontracts on existing projects, will be
transparent and give all capable companies fair access. We
understand that ConocoPhillips would like to participation a
tender for the North Sultan offshore Caspian field.
ConocoPhillips is a first-rate, integrated oil company with
expertise in developing offshore gas fields. In another
matter, American oil services company McDermott, in coalition
with Kazakhstani (Kazstroyservis) and British partners
(AMEC),is competing for a "hook-up and completion tender" at
the Kashagan off-shore field. While the ultimate decision
lies with Kashagan operator AGIP-KCO, we hope the GOK will
use its dual role as consortium partner (via state oil
producer's Kazmunaigas' 8.33%) and regulator to ensure a
fair, transparent process.

--------------
KCTS
--------------


3. (C) Our KTCS private sector energy contacts here are
worried that the GOK is trying to walk back the IGA that was
nearly signed during the BTC opening in Baku in May. They
claim, with good reason, that the GOK does not merely want
clarification. Instead, it is trying to abandon two important
concessions to the North Caspian Shippers: tax stability and
ratification of the agreement by the Kazahstani parliament.
The shippers, which include US companies ExxonMobil and
ConocoPhillips, are members of the AGIP-KCO (Kashagan)
consortium, which will be the main customer for KCTS. One
AGIP-KCO partner says that he has lost faith in the ability
of KMG Transport Chief Kairgeldy Kabyldin to deliver and win
interagency battles against the Ministry of Finance, the main
enemy of tax stability. Our KMG working-level transport

contacts confirm that they lost the battle over taxes in the
days just before the planned KCTS IGA signing in Baku in May.
Tax stability is important not only to safeguard the
commercial terms of the agreement from future legislation,
but also to attract international financing to the project.


4. (C) The North Caspian Shippers also worry that getting the
oil to the port of Aktau or to the planned port of Kuryk from
Kashagan will cost them dearly. Consequently, it is important
that a follow-on HGA provide adequate protection and protect
investors. Our KMG contacts hinted at serious differences
between them and the shippers over getting the oil from the
wellhead at Kashagan to the Caspian.

--------------
CPC Expansion
--------------


5. (C) Shell's Kazakhstan country representative Martin
Ferstl reported that the next CPC shareholders meeting, to
include Minister Shkolnik and his Russian counterpart,
Khristenko, is planned for mid-September. Battle lines are
largely drawn between private shareholders, including US
companies ExxonMobil and Chevron, and the GOR. Kazakhstan
has, in the view of some, supported Russia, though others
hope that President Nazarbayev will ultimately seek a
compromise or support private shareholders.


6. (C) Issues over managerial control still prevent inking an
expansion deal. Namely, the GOR still has not agreed to a
proposal to appoint management secondees in line with equity
in return for giving up its demand to create a CPC-Russia
board of directors. Such a board would be open to
manipulation and take over by Russia, Kazakhstan, Oman and
one other partner, and is a redline for the private
shareholders. While agreement seems to have been reached on
tariffs for capital expenditures, the private shareholders,
according to Ferstl, rejected GOR demands for variable
tariffs on operating expenses. Chevron Eurasia Business
Chief Guy Hollingsworth told us that expansion approval
should come no later than December 2005, otherwise the
project will seriously fall off schedule.

--------------
New Tenders
--------------


7. (C) US companies may face challenges in obtaining fair
access to offshore Caspian tenders and related subcontracts.
New legislation gives KMG a 50% share in all new tenders plus
the option to pick a "strategic partner" to develop blocs.
Lawyers here report that the law leaves it unclear whether a
"strategic partner" will be chosen competitively or through
sweetheart deals.


8. (C) ConocoPhillips earlier voiced fears to us that it will
lose out on competing for the North Sultan offshore Caspian
bloc, which may hold 4-5 bn. barrels in proven or probable
reserves, to a combination of Shell and Nelson Resources. We
have also observed increasing contact between Shell and
Nelson since late 2004. Nelson Resources is believed by most
oil analysts here to be linked to Timur Kulibayev,
presidential son-in-law and KMG First Vice-President.
Kulibayev, in fact, is the real power at KMG, not the nominal
president.


9. (C) In another tender, US oil services giant McDermott is
competing with its Kazakhstani and British partners for a
Kashagan hook-up and finishing project, whose first stage is
estimated at $70 million. Although AGIP-KCO, the Kashagan
operator, will make the ultimate decision, we believe that
KMG, both as regulator and consortium partner, will exercise
its unique influence in picking a winner. In the past
AGIP-KCO has favored fellow Italian companies; as a result,
27% of all subcontracts have gone to Italians, with US
companies a distant second with 16%. McDermott has sought our
advocacy. We see your meeting with Minister Shkolnik as a
perfect opportunity to emphasize not only our expectations of
a fair tender process, but also the top-notch reputation of
McDermott in the oil services industry.
ASQUINO


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