Identifier
Created
Classification
Origin
06ALMATY1085
2006-03-28 02:50:00
CONFIDENTIAL
US Office Almaty
Cable title:  

KAZAKHSTAN: SHELL EXECUTIVE WARNS OF FURTHER

Tags:  ENRG EPET KZ 
pdf how-to read a cable
VZCZCXRO3509
PP RUEHDBU
DE RUEHTA #1085/01 0870250
ZNY CCCCC ZZH
P 280250Z MAR 06
FM AMEMBASSY ALMATY
TO RUEHC/SECSTATE WASHDC PRIORITY 4636
INFO RUEHAK/AMEMBASSY ANKARA 1831
RUEHAH/AMEMBASSY ASHGABAT 6922
RUEHKB/AMEMBASSY BAKU 0646
RUEHBJ/AMEMBASSY BEIJING 1238
RUEHEK/AMEMBASSY BISHKEK 7458
RUEHDBU/AMEMBASSY DUSHANBE 1640
RUEHMO/AMEMBASSY MOSCOW 1184
RUEHNT/AMEMBASSY TASHKENT 7419
RUEHSI/AMEMBASSY TBILISI 2182
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 001085 

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/26/2015
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: SHELL EXECUTIVE WARNS OF FURTHER
KASHAGAN DELAYS

REF: ALMATY 886

Classified By: Amb. John Ordway for reasons 1.4(B) and (D).

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 001085

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/26/2015
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: SHELL EXECUTIVE WARNS OF FURTHER
KASHAGAN DELAYS

REF: ALMATY 886

Classified By: Amb. John Ordway for reasons 1.4(B) and (D).


1. (C) Summary: Martin Ferstl, Country Manager for Shell,
told Ambassador on March 3 that the Kashagan project
contained a "serious" design flaw in the design of its
offshore facilities. As a result, the one-year design
process would have to begin anew, with corresponding delays
in first production. Ferstl termed the design error
"unprecedented" in the oil industry, and predicted that the
issue would provoke the GOK to seek damages for
non-performance under the Production Sharing Agreement (PSA).
Ferstl also voiced concern about the direction of CPC
expansion negotiations, and asked hypothetically if the USG
would support an initiative to resolve the dispute via
international arbitration. Ferstl confirmed Shell's
continuing interest in a Bosphorus bypass pipeline, telling
Ambassador that he was concerned by the apparent ease by
which a terrorist act could block oil transit through the
Straits. Ferstl was less enthusiastic about the idea of a
Trans-Caspian gas pipeline, suggesting that Kazakhstan lacked
sufficient gas to simultaneously pursue re-injection, a
petrochemical industry, and the Chinese and Trans-Caspian gas
pipelines. End Summary.

Kashagan Facing Serious Technological Problems
-------------- -


2. (C) Ferstl (strictly protect) told Ambassador on March 3
that the Kashagan project (in which Shell is a partner)
contained "serious design flaws" which would set the project
back at least a year, and likely result in lower initial
production volumes than planned. Ferstl said that the design
problem presented serious safety risks, including the
possibility of high-pressure sulfurous gas leaks, and thus
the consortium had no choice but to restart the entire design
phase of the offshore facilities -- a one-year process.
Ferstl told Ambassador that the design error was
"unprecedented in the oil industry." For the time being,
project partners weren't speaking publicly about the delays,
which could push "first oil" back to 2011.


3. (C) Ferstl predicted that the delay would lead to an
extended dispute in the framework of Kashagan's PSA, as

KazMunaiGaz's (KMG) up-front costs would be increased, and
the GOK's revenue stream delayed. No government in the world
would accept this magnitude of cost and time overruns, Ferstl
said, and "the GOK has an excellent case for a claim of
non-performance under the contract." Ferstl noted that this
latest setback has only intensified the resolve of Kashagan
partners to strip a measure of control from operator AGIP.
"We're working on changes to the operating agreements,"
Ferstl concluded. On a "positive" note, Ferstl laughed, the
Kashagan delays would ease the looming shortage of oil
pipeline capacity caused by delays in CPC expansion and
BTC-IGA negotiations.

CPC Expansion: A Hardening of the Russian Position
-------------- --------------


4. (C) Turning to the subject of CPC expansion negotiations,
Ferstl noted that, at the end of 2005, the private company
CPC shareholders had offered a compromise which gave the
Russians "80% of what they had asked for." However, Russia's
position had hardened even further since then, Ferstl said,
leaving him with the impression that the Russians had
resolved to either obtain terms as favorable as they had on
their own pipelines, or "let the project sit there." Even
taking into account Kashagan production delays, the CPC
deadlock was posing transportation problems. Chevron had
decided to ship its "second generation" Tengiz volumes out by
rail -- but at what point would the region's railways become
congested? Ferstl concluded the topic by asking the
Ambassador how much political support the USG would offer if
the CPC partners resolved to take the dispute to
international arbitration. Ambassador offered to raise the
question with Washington.


ALMATY 00001085 002 OF 002


Shell Interested in Bosphorus Bypass
--------------


5. (C) Asked if Shell had interest in a Bosphorus bypass,
Ferstl said "yes." Commercially, he said, Samsun-Ceyhan was a
better option, because the deep-water Ceyhan port could
support "maximum trading operations." Burgas-Alexandroupolis
was shorter, and therefore cheaper, and had Transneft/TNK-BP
backing. However, it had a major disadvantage --
supertankers would have difficulty skirting all the tiny
islands in the Aegean. One way or another, Ferstl concluded,
a bypass was needed. He told the Ambassador that he had been
struck recently by how easily a terrorist act could shut down
the Bosphorus strait -- potentially until a new bypass was
built. At a cost of $1 - $1.50 per barrel, he said, a bypass
was an excellent "long-term insurance policy" against a
Bosphorus closure.

Skepticism About a Trans-Caspian Gas Pipeline...
-------------- ---


6. (C) Ferstl was less enthusiastic about the prospect of a
Trans-Caspian gas pipeline. Turkmenistan, he and the
Ambassador agreed, would not be a reliable partner in such a
venture until political change took place. However, Ferstl
said, "Kazakhstan is not a gas-rich country." Tengiz and
Kashagan had a lot of gas, but if the gas was extracted
rather than re-injected "you lose the oil." Karachaganak, in
turn, was "a long way to the North"; furthermore, its gas was
tied to the Orenburg gas-processing plant. Overall, Ferstl
said, Kazakhstan lacked the gas in the short-term to
simultaneously pursue a petrochemical industry and gas
pipelines both to China and to the West.

...And the Petrochemical Industry
--------------


7. (C) Ferstl told Ambassador that he was skeptical of
Kazakhstani ambitions to develop a local petrochemical
industry. Kazakhstan's cost structure wasn't comparable to
that of potential competitors in the Middle East, he said,
citing Qatar, with easy access to the sea and thus world
markets, as an example. The GOK wanted to build a "small"
petrochemical industry, he added, but the competition was
global, and based on economies of scale. Even selling to the
Chinese was costly. Railroad costs were high, and the
Chinese markets were on the coast -- where they could be
served by ships. The only thing that saves the idea of a
local petrochemical industry, Ferstl said, is WTO. After
accession there will be a flood of products coming into
Kazakhstan from China, he explained. "Something will have to
go the other direction."


8. (C) Comment: Ferstl, sanguine by nature, was clearly
worried, not only about Kashagan delays and further cost
overruns, but also about potential GOK legal action against
the consortium. We will report the opinion of Kashagan
partners ExxonMobil and ConocoPhillips -- consistent with
Shell's, if slightly less alarmed -- via septel. Per reftel,
we wonder if it is time to use USG influence to marshall what
appears to be widespread company interest behind one or the
other Bosphorus bypass option. End Comment.
ORDWAY