KAZAKHSTAN: AMBASSADOR BRIEFS OIL EXECUTIVES ON

C O N F I D E N T I A L SECTION 01 OF 04 ALMATY 001086

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

E.O. 12958: DECL: 03/26/2015
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: AMBASSADOR BRIEFS OIL EXECUTIVES ON
SECRETARY BODMAN'S VISIT


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REF: A. ALMATY 960

B. ALMATY 1085

C. ALMATY 886

D. BAKU 368

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


1. (C) Summary: Ambassador briefed ExxonMobil (EM),
Chevron, and ConocoPhillips (CP) representatives on Secretary
Bodman's visit to Kazakhstan (Ref A) in separate March 16-17
meetings. In follow-on conversation, EM and CP
representatives confirmed Shell's earlier report (Ref B) that
a recently-discovered design flaw would significantly delay
first Kashagan production. The EM executive reported recent
progress in resolving the Caspian Pipeline Consortium (CPC)
standoff on management secondees and internal control
procedures. However, he painted a bleak overall picture of
the CPC talks: the issue of expansion aside, Russian
brinkmanship was endangering the shipment of base volumes;
Russian negotiators seemingly had no political will to
conclude the negotiations; and, consistent with Chevron's
view (Ref C),key Russian actors appeared to have personal
financial interests in linking expansion to the construction
of a Burgas-Alexandroupolis (B-A) bypass pipeline. CP's
representative confirmed Baku reporting (Ref D) that the
Azeris appeared poised to renegotiate fundamental parts of
the initialed Baku-Tbilisi-Ceyhan Inter-Governmental
Agreement (BTC-IGA).


2. (C) Summary (continued): The EM and CP executives reacted
favorably to the idea of an Aktau-Baku Trans-Caspian gas
pipeline, while echoing widespread industry skepticism about
the GOK's push to develop a domestic petroleum industry. EM
voiced no interest in being a "first-mover" in building a
Bosphorus bypass, telling Ambassador that a bypass was not
economically feasible without Russian participation.
Finally, reflecting on Energy Minister Izmukhambetov's
surprise appeal to Secretary Bodman to intervene in the
Tengiz "royalty-in-kind" issue (Refs A,C),Chevron's
representative declined the Ambassador's offer of help, for
the time being, explaining that Chevron was still optimistic
that it could resolve the problem on its own. End Summary.

Ambassador Briefs on Secretary Bodman's Visit
--------------


3. (SBU) Ambassador briefed EM's General Manager, David
Willis, and Government Relations Director Yelda Guven; CP's
Country Manager Hakim Janah; and Chevron's Deputy Eurasia
Manager Ted Etchison in separate March 16-17 meetings,
following Secretary Bodman's March 13-15 visit to Kazakhstan.

CPC Negotiations
--------------


4. (C) EM's Willis informed Ambassador of recent progress in
the CPC expansion negotiations: shareholders had unanimously
approved a Russian proposal to allocate management secondees
(excepting the General Director and Deputy General Director)
in proportion to equity; the shareholders had also approved a
package of internal management and audit procedures.
However, Willis continued, the bigger picture remained bleak.
The Russians, he said, "appear to have no political will to
conclude the negotiations." Even President Nazarbayev seemed
to have resorted to a long-term view, recently telling EM's
Chairperson that completion of the final 700 km leg of the
Chinese oil pipeline (expected to take at least two years)
might pressure the Russians to conclude the CPC negotiations.


5. (C) Willis echoed Chevron's suspicions that key Russian
actors, especially TransNeft's Seymon Vaynshtok, had personal
financial reasons to link CPC expansion to the construction
of a B-A bypass. Willis suggested that, if American
companies were involved in operating a B-A bypass, Russian
opportunities to make illicit gains would be limited. Where
Vaynshtok and others really hoped to cash in, he said, was on
Black Sea shipping. (Comment: Willis's analysis does not
explain why the Russians are pushing specifically for a B-A
bypass. Guven offered a geopolitical reason, suggesting that

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the Russians wanted to limit Turkey's influence as a
transportation corridor. End comment.)


6. (C) The issue of CPC expansion aside, Willis said, Russia
was beginning to obstruct ordinary pipeline operations in a
presumed act of brinksmanship. Russia had blocked the
approval of an annual budget, forcing the company to work
quarter-by-quarter. Russia was also blocking a proposal to
replace the heavily-corroded Tengiz-Atyrau segment of the
pipeline; the pipe was in such poor shape that if was almost
impossible to repair. Finally, the Russians were blocking
necessary amendments to the CPC-Kazakhstan charter; luckily,
the GOK had adopted legislation which mitigated most of the
legal consequences of the delay. All of these issues would
be raised again in CPC meetings in Oman during the week of
March 20, Willis said, but prospects for settlement seemed
dim.

BTC: Azeris to Reopen Negotiations?
--------------


7. (C) CP's Hakim Janah echoed Embassy Baku's recent reports
that the BTC-IGA negotiations were also troubled. The
Azeris, he said, had recently issued a "re-draft" of the IGA
which limited investor protections. Furthermore, the Azeris
appeared intent on negotiating the IGA and the HGAs
simultaneously. Janah voiced concern that the new Azeri
approach would, in turn, jeopardize concessions already made
on the GOK side on the important issues of ratification and
tax stability.

Kashagan Delays
--------------


8. (C) Both Willis and Janah confirmed Shell's report (Ref B)
that a major design flaw in Kashagan's offshore facilities
would significantly delay first production. Kashagan, Willis
said, was "a project in crisis," and operator AGIP
"incapable." Willis explained that project partners had
identified the design flaw -- which posed the threat of
poisonous gas leaks - "a year ago." AGIP had subsequently
reported that it had rectified the problem, only to have a
recent review make clear that a complete redesign was
required. In response, Willis said, consortium partners
would intensify efforts to reduce AGIP's effective control of
the project. "Their name will stay on the shingle," he said,
but large parts of the project would be outsourced to other
partners, who would also nominate growing numbers of
management secondees.


9. (C) Asked by Ambassador whether the GOK was aware of the
design flaw, Willis noted that AGIP had briefed KazMunaiGaz's
Managing Director for Transportation, Kairgeldy Kabyldin. It
wasn't clear, however, if the message had reached top GOK
levels: "no one wants to be the messenger." CP's Janah
explained that AGIP's CEO had recently held a press
conference in which he had repeated "information that he
knows is false" regarding project completion dates and cost.
Janah expressed concern that AGIP's lack of candor would
create bad will with the GOK. Willis acknowledged that the
consortium partners were vulnerable to charges of "breach of
contract," and predicted that the issue would "tie up our
lawyers for years to come."

Gas Issues: Trans-Caspian Pipeline and Petrochemicals
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10. (C) Willis told Ambassador that, in his view, a
Kazakhstan-Azerbaijan Trans-Caspian gas pipeline "made
economic sense." However, he asked, what about delimitation
issues? Ambassador suggested that it might be possible to
design a route which, under any set of territorial claims,
would traverse only Kazakhstani and Azerbaijani territory.
Guven voiced doubt: in her interpretation, the 1998
Kazakhstani-Russian bilateral delimitation agreement gave
Russia the right to block any transnational Caspian project
Kazakhstan participated in, even if Russia's Caspian
territory was not affected.


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11. (C) Willis underscored the importance of securing Turkmen
gas for the pipeline, because "Kazakhstan has no gas to sell
right now." Willis suggested that the government might be
banking on unrealistic volumes of Kashagan and Tengiz gas,
the vast majority of which would be reinjected. Twenty years
down the road, he said, things would be different. (Note:
CP's Janah suggested that the "N" Block would be an excellent
future source of gas for a Trans-Caspian pipeline. The field
had proven gas, he said, perhaps on the order of 5-10 tcf;
early Soviet drilling had discovered gas at a depth of 500
meters. End note.) Reflecting on the GOK's ambitions to
build a domestic petrochemical industry, Willis explained
that EM had taken an "updated look" at industry prospects in
2005, and concluded that the industry was not viable. Even
if feedstock prices were pressed to "nothing," Willis said,
the price of building necessary infrastructure would result
in petrochemical production prices "double" those of the
Saudis. Until the GOK invests in a lot of support
infrastructure, he concluded, the industry will remain
economically unfeasible.


12. (C) Note: Energy Minister Izmukhambetov recently told
Ambassador that the GOK was "intrigued" by the idea of a
Trans-Caspian gas pipeline. The Russians had thus far been
unwilling to complete a deal to expand the Orenburg gas
processing plant as a Kazakhstani-Russian joint venture,
leaving open the possibility that Karachaganak gas would be
free for other uses. End note.

ExxonMobil: Not a Bosphorus Bypass "First Mover"
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13. (C) Willis told Ambassador that, based on an EM study
made a year ago, a Bosphorus bypass "didn't appear economic."
Ambassador countered by suggesting that a bypass should be
seen as insurance against a possible disruption of Bosphorus
traffic, and that insurance policies were not, by their
nature, "economic." Willis pointed out that CPC expansion
would only add "one tanker a day" to Bosphorus traffic. He
admitted only that the EM study had not accounted for
possible discounts placed on Tengiz crude by buyers worried
about the unreliability of winter shipments through the
Bosphorus. "We'll take another look," he said. He then
appeared to arrive at his real objection: to get Western
participation in a bypass, he said, "we need a Russian
commitment to put their oil through." Otherwise, he
concluded, "we'll pay for a pipeline while they sail their
dangerous ships through the Bosphorus, waving at us."

Tengiz Royalty-In-Kind Oil
--------------


14. (C) After briefing Etchison on Izmukhambetov's appeal to
Secretary Bodman to lobby Chevron to dispose of Tengiz sulfur

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and agree to deliver the GOK's Tengiz royalty oil "in kind,"
Ambassador proposed one way in which the USG might help
secure the GOK's pledge not to ship the royalty oil onward to
Iran. The Embassy, he suggested, could ask that the GOK make
the pledge in the form of a diplomatic note. Etchison
thanked the Ambassador for the offer, and said he would
consult on the issue with top management. In general,
however, Chevron was still optimistic that it could resolve
the issue on its own. (Note: Willis told Ambassador that, as
Chevron's Tengiz partner, EM would support Chevron's apparent
decision to seek an OFAC ruling on the issue. However, EM
believed that an earlier OFAC ruling appeared to cover the
current situation. Chevron is "overreacting," Willis
concluded, likely out of concern that Chevron Tengiz
secondees could be held personally liable if OFAC
subsequently objected to the transaction. End note.)

ExxonMobil Seeking New Concessions
--------------


15. (C) Willis informed Ambassador that EM was attempting to
secure additional acreage, both offshore and onshore. He
explained that, for the time being, EM was only attempting to
secure "access" and conduct technical and seismic studies.
The company would then wait for better commercial terms

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before signing exploration contracts. Others were following
the same strategy, he said. "Nobody is drilling wells."
Willis added that he didn't think the GOK wanted to encourage
more exploration either, because Kazakhstan faced too many
constraints -- a shortage of skilled labor above all -- to
expand its oil operations.

CP Advocacy: Losing to a Petrochemical Promise?
-------------- ---


16. (C) CP's Janah thanked Ambassador for Secretary Bodman's
advocacy for CP's "N Block" bid. "We've done everything we
could possibly do on the political front," he concluded.
Janah told Ambassador that KMG was scheduled to resume
negotiations with Shell that afternoon. He added that he
increasingly believed that Shell had promised to build a
petrochemical facility in return for the N Block concession.
If that is true, he said, then Shell would likely win the
bid. "We couldn't afford such a non-economic project," he
concluded. However, even if CP lost the N Block bid, USG
advocacy had served the company well by "raising its profile"
in the eyes of top GOK decision-makers.
ORDWAY