Identifier
Created
Classification
Origin
05ALMATY4106
2005-11-18 04:59:00
CONFIDENTIAL
US Office Almaty
Cable title:  

KAZAKHSTAN: KMG LOOKING TO BUY INTO KARACHAGANAK

Tags:  ENRG EPET KZ 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L ALMATY 004106 

SIPDIS


DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 11/17/2015
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: KMG LOOKING TO BUY INTO KARACHAGANAK

Classified By: POEC CHIEF DEBORAH MENNUTI, REASONS 1.4(B) and (D)

C O N F I D E N T I A L ALMATY 004106

SIPDIS


DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 11/17/2015
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: KMG LOOKING TO BUY INTO KARACHAGANAK

Classified By: POEC CHIEF DEBORAH MENNUTI, REASONS 1.4(B) and (D)


1. (C) Summary. Two expatriate oil executives told Econoff
(in confidence) on November 14 that state-owned oil and gas
company KMG has opened discussions with KPO (Karachaganak
Petroleum Operating Company) members about buying a share of
the consortium. British Gas (BG) Business Planning Manager
Robert Flippin told Econoff that BG, unhappy with its
joint-operatorship (with Italy's Eni) of the field, was
considering selling part of its stake in return for KMG's
support for its bid to become KPO's sole operator. On
November 11, Gazprom's CEO Alexei Miller and President
Nazarbayev reportedly discussed plans to renovate the
Orenburg gas processing plant in order to receive increased
volumes of Karachaganak associated gas -- a proposal which,
if given on terms economical to KPO, would pave the way for
expanded Karachaganak oil production. End Summary.

KMG TO BUY INTO KARACHAGANAK?
--------------


2. (C) Both Flippin and Karachaganak Representative Office
Manager (and Eni secondee) Claudio Cogliati told Econoff that
KMG had recently opened discussions with consortium members
aimed at buying into KPO. Both men explained KMG's motives
in fiscal terms. Karachaganak's 1997 Production Sharing
Agreement (PSA),Flippin explained, limited the GOK's "take"
to 8% during the field's "cost-recovery" phase. (Flippin
added that these terms were among the most favorable to
investors in all of Kazakhstan, likely equaled or exceeded
only at Tengiz.) The GOK's share of revenues would improve
dramatically after cost-recovery had been achieved. While
the high price of oil had advanced that projected date to
2008-2010, Flippin said, KMG was still impatient to secure
higher revenues, and saw buying into the consortium as the
way to do so.


3. (C) Flippin told Econoff that BG would consider selling a
minority KPO share to KMG in return for securing the GOK's
support in its bid to become sole KPO operator. The current
arrangement -- in which BG and Eni are "joint operators" and
split project staffing, with each office rotating every two
years -- was, in Flippin's view, "unwieldy," and, in
Cogliati's, "inefficient." Flippin speculated that Eni would
ultimately have to go along with a KMG decision to strip it
of Karachaganak operatorship because Eni needed KMG support
to maintain its increasingly-unpopular operatorship of the
Kashagan field. (Note: Conoco-Phillips' Hakim Janah recently
made a similar point, telling Econoff that while Eni's
management of Kashagan was "terrible," Kashagan consortium
members were powerless to vote Eni out as long as the Italian
company had KMG's support. End Note.)

SEEKING A GAS DEAL...AS A WAY TO PRODUCE MORE OIL
-------------- --------------


4. (C) Following a November 11 meeting with President
Nazarbayev, Gazprom CEO Alexei Miller told the press that a
long-term agreement on gas deliveries from Karachaganak to
the Orenburg gas processing plant "was in the works."
Cogliati told Econoff that successful completion of the
project depended on three things: the estimated $300 million
upgrade of the Orenburg facility, an expansion of the gas
pipeline to meet the projected 15 billion cubic meters (bcm)
per year delivery (up from the current 7 bcm),and "an
acceptable price" for the Karachaganak gas. Flippin
explained that Orenburg, as Karachaganak's monopsonistic
buyer, currently paid only 30 cents per thousand cubic feet
for KPO's gas, a price Gazprom had shrewdly calculated as
being just above Karachaganak's break-even point. While KPO
would be seeking a better price before agreeing to expand gas
sales to Orenburg, Flippin noted, KPO's real objective was to
increase production of oil. In that context, any
cost-effective means of getting rid of Karachaganak's
associated gas would be considered.


5. (C) Comment: Neither Flippin nor Cogliati identified any
particular reason to reject KMG's advance, giving the
impression that the keys to the deal will be price and the
size of KMG's share. Presumably, given the GOK's December
2004 "preemption" legislation, either BG or Eni (or both)
could sell part of their 32.5% KPO shares without the
approval of consortium members Chevron (20%) or Lukoil (15%).
End Comment.

ORDWAY


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