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Identifier
Created
Classification
Origin
05ALMATY953
2005-03-11 08:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
US Office Almaty
Cable title:  

AMB ORDWAY MEETS WITH SHKOLNIK AND KULIBAYEV;

Tags:   ECON  ENRG  EPET  PREL  PGOV  KZ  ECONOMIC 
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						UNCLAS  ALMATY 000953 

SIPDIS


DEPT FOR EUR/SNEC AMBASSADOR MANN, EUR/CACEN JMUDGE, ALSO
FOR EB/IPC/IEC/EPC CGREEN
ENERGY FOR LCOBURN
COMMERCE FOR CENTRAL ASIA DESK OFFICER DSTARKS
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER

SENSITIVE

E.O. 12958: NA
TAGS: ECON ENRG EPET PREL PGOV KZ ECONOMIC
SUBJECT: AMB ORDWAY MEETS WITH SHKOLNIK AND KULIBAYEV;
DISCUSSES BTC, CPC AND KASHAGAN




1. (SBU) Summary: Ambassador Ordway met with Minister of
Energy and Mineral Resources Vladimir Shkolnik March 4
in Astana. They discussed developments in the
negotiations between Kazakhstan and Azerbaijan on the
provision of Kazakhstani oil to the Baku-Tbilisi
Ceyhan (BTC) pipeline, expansion of the Caspian
Pipeline Consortium (CPC) line and prospects for
conclusion of the negotiations for Kazakhstan's
purchase of a stake in the Kashagan field. President
Nazarbayev's son-in-law and first vice-president of
KazMunayGas (KMG) Timur Kulibayev also participated. End
Summary.



--------------------------


Aktau-BTC Developments


--------------------------




2. (SBU) Concerning BTC, the Minister informed the
Ambassador that the next round of meetings with the Azeri
side will take place March 18 in Baku. While in principle
progress appears to be taking place, serious discussions
still need to be had on the issue of taxation. In Shkolnik
and Kulibayev's opinion, the taxation scheme for BTC should
proceed from the notion that the Kazakhstani port of Kuryk
(south of Aktau) is the point of origin for the Kazakhstani
oil in the BTC line. They perceive that Azerbaijan wishes
to consider the lines from the production facilities to the
terminal as part of the system for taxation purposes, and
find this concept unreasonable. [Comment: According to both
Kazakhstani working-level sources and an AGIP-KCO consortium
partner, the GOK and the consortium partners radically
differ on oil transport from Kashagan to Aktau. The
consortium believes the Kashagan PSA gives them the right to
build or not to build the pipeline from the field to Aktau.
The GOK believes they have this right and want to control
it. It does not like the BTC model, which gives the pipeline
consortium control from wellhead to Ceyhan in Turkey. A U.S.
member of the Kashagan consortium said getting the oil to
Aktau worries him more than getting it across the Caspian.
End Comment].



3. (SBU)Shkolnik seemed slightly pessimistic about the
process and criticized the Azeris for a lack of flexibility.
For his part, Kulibayev appeared more sanguine about the
prospects for an agreement.



--------------------------


CPC Expansion


--------------------------





4. (SBU) The Ambassador and Shkolnik also discussed the next
steps to be taken since the decision was reached by the CPC
partners to expand the system. Shkolnik expressed his
satisfaction that the parties had agreed on expansion, but
judged that rather little time, perhaps a month, remains to
get an advantageous settlement of the remaining issues,

particularly the commercial terms. Shkolnik's urgency is
based on a belief that the Russian participant in CPC will
change - that Rosneft will become the Russian operator
rather than the Ministry of Energy and Industry, which
Shkolnik views as a negative development. Shkolnik
criticized U.S. companies for inflexibility, which he thinks
may prevent agreement before Rosneft becomes a player.



--------------------------


Kashagan State of Play


--------------------------





5. (SBU) Shkolnik also told the Ambassador that the GOK was
meeting with the Kashagan consortium partners March 4 in
London. The Ambassador asked Shkolnik which issues were
still being negotiated, and the Minister replied, "(a)ll of
them." Shkolnik reported that the Kazakhstani side is now
offering about $1 billion for half of British Gas (BG's)
stake in the consortium, or 8.33% of the whole. Shkolnik
maintained that while Kazakhstan was only bidding on 8.33%
now, he considers that it still has and would continue to
have a priority right to buy the other half of the
stake.[Note: The Chinese were to purchase a 16.67% for
$1.23bn. The elevated price reflects Capex investments made

. End Note]



6. (SBU) Shkolnik said that he still sees two main issues:
the purchase itself, and the changes that would be made to
the consortium arrangements (e.g. the size of a blocking
share) after Kazakhstan becomes a partner. He made it clear
that Kazakhstan expects to have considerable influence in
the consortium even if it is only to be a second-tier
investor. [Note: Governance issues also worry the
consortium; namely, how to create a firewall between the GOK
as regulator and the GOK as partner. End Note].



7. (SBU) The Ambassador also asked Kulibayev what KMG's
plans were for financing the purchase. Kulibayev did not
indicate that KMG viewed the escalating price of the stake,
or the approaching March deadline as a problem. He seemed
to think that KMG would be able to use its own cash,
although he did not exclude the idea of borrowing some part
of the money needed, particularly for subsequent cash calls.



--------------------------


Comment


--------------------------





8. (SBU) As usual, Shkolnik was voluble and gregarious in
this meeting. However, he displayed some frustration,
saying that virtually every party he mentioned (Azerbaijan,
ExxonMobil, ChevronTexaco, Russia, the Kashagan consortium)
needed to show more flexibility and appreciate the
advantages of working with Kazakhstan. In particular, he
seems to view the prospect of Rosneft becoming Russia's
agent on CPC with trepidation; and he clearly wants the
Russian side locked into commitments on the remaining
expansion issues before that happens. We did not have
advance notice that Kulibayev would attend the meeting. His
interjections were brief but he gave every impression of
confidence that the issues with Azerbaijan would work
themselves out and particularly that KMG could finance the
Kashagan deal without difficulty. End comment.

ORDWAY


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