KAZAKHSTAN: KULIBAYEV DISCUSSES ENERGY WITH

C O N F I D E N T I A L SECTION 01 OF 03 ALMATY 001237

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 04/06/2015
TAGS: ENRG EPET KZ PGOV
SUBJECT: KAZAKHSTAN: KULIBAYEV DISCUSSES ENERGY WITH
AMBASSADOR

REF: A. ALMATY 1086


B. ALMATY 1085

C. ALMATY 886

ALMATY 00001237 001.2 OF 003


Classified By: AMBASSADOR JOHN ORDWAY FOR REASONS 1.4(B) and (D)


1. (C) Summary: During a wide-ranging discussion of energy
issues with the Ambassador on March 30, Timur Kulibayev
(President Nazarbayev's son-in-law) confirmed rumors that he
would serve as Vice-President of Samruk, the newly-created
state holding company. Kulibayev voiced optimism that the
BTC-IGA negotiations would be concluded soon, telling the
Ambassador that, in his view, recent Azeri edits to the
initialed agreement would not pose an obstacle to signature.
He was less optimistic about agreement on CPC expansion,
warning that if the impasse were not resolved before
TransNeft took over Russia's CPC share, TransNeft's president
could delay a resolution for "years." Kulibayev confirmed
other reports (reftels) that the Russians appeared to be
favoring a Burgas-Alexandroupolis Bosphorus bypass route, but
noted that the GOK favored the Samsun-Ceyhan alternative, as
a means of creating a "Caspian blend" of crude for sale on
world markets.


2. (C) Summary (continued): Kulibayev described
KazMunaiGaz's (KMG) negotiations to buy Lithuania's Mazeikiu
Nafta refinery as going "badly," explaining that a signed
agreement with TransNeft to supply the refinery with
Kazakhstani crude had been scuttled by high-ranking Russian
authorities. Kulibayev welcomed the idea of a Trans-Caspian
gas pipeline connecting Kazakhstan and Azerbaijan; however,
the project's dependence in its early years on Turkmenbashi's
provision of gas, along with the legal issue of Caspian
delimitation, were significant obstacles that would have to
be overcome. Regarding ConocoPhillips' (CP) bid for the
offshore "N Block," Kulibayev said that CP's bid, recently
improved, was now effectively identical to rival Shell's;
however, there was no clear reason for KMG to suspend its
ongoing negotiations with Shell. End Summary.

TK Confirms Role in State Holding Company
--------------


3. (C) Kulibayev confirmed the widespread rumors that he
would serve as Vice-President of Samruk, the new State
Holding Company, with responsibility for managing energy
assets. (Samruk's initial holdings will include KazMunaiGaz
(KMG); KazakhstanTemirZholy (railroad),KEGOC (the
electricity grid operating company),KazakhTelecom, and the
postal service, KazPost.) Kulibayev praised Samruk's
president, former Industry and Trade Minister Sauat Mynbayev,
as a "very capable executive." Kulibayev justified Samruk's
creation by pointed out the advantage of separating
regulation of the state companies (performed by the
ministries) from management of those companies from a
business perspective (to be performed by Samruk). Kulibayev
acknowledged that further privatization of the state holdings
was planned, but noted that privatization would proceed on a
"case-by-case" basis. Complete privatization of
KazakhTelecom, for example, would be "easy," he said, given
the already-existing private telecom market.

Status of BTC-IGA
--------------


4. (C) Kulibayev told the Ambassador that he thought the
BTC-IGA negotiations would soon be concluded. He was
familiar with the recent changes proposed by the Azeris, he
said, and they didn't appear "huge." Kulibayev then offered
the Ambassador insight into the GOK's May 2005 last-minute
reversal of its agreement to sign a draft BTC-IGA. The
reversal, he said, occurred after Prime Minister Akhmetov and
the Ministry of Energy and Mineral Resources (MEMR) accused
Kulibayev and KMG President Kairgildy Karabalin of "treason"
for having conceded too much in the IGA. As a consequence,
Kulibayev said, "the President pulled back." However,
Kulibayev noted, his vision had eventually won out.


5. (C) Kulibayev remarked that he was "reasonably confident"

ALMATY 00001237 002.2 OF 003


that Kazakhstan would find the necessary outlets for its oil.
However, he said, a recent new oil discovery in Azerbaijan's
offshore zone would necessitate the building of a "second
BTC." (Comment: We do not know what discovery he was
referring to. End comment.) Kulibayev speculated that
Kazakhstan might consider shipping more oil to Iran, then
concluded that, in fact, the GOK was unlikely in the
short-run to do more with Iran than conduct swaps.

CPC Expansion Negotiations and Bosphorus Options
-------------- ---


6. (C) Kulibayev was less sanguine about prospects for
resolving the impasse on CPC expansion, telling the
Ambassador that, if the deal were not completed before the
Russian government's share in the consortium was transferred
to TransNeft, TransNeft's Seymon Vaynshtok would delay a
resolution for two to three years while "redoing everything."
On the positive side, the issue was high on Nazarbayev's
agenda for his meeting the following week with Putin.
Kulibayev lamented that the GOK had been "unlucky" with some
of its TengizChevroil partners. The GOK had signed a
contract with Mobil -- a "nice" company -- only to end up
dealing with Exxon, a company which was, in Kulibayev's
words, "bureaucratic, ideological, and inflexible." If
progress were to be made in the negotiations, Kulibayev
concluded, Exxon would have to be persuaded to be more
flexible.


7. (C) Kulibayev told Ambassador that he was well-aware of
the recent Russian efforts to link CPC expansion to the
building of a Burgas-Alexandroupolis bypass pipeline
(reftels). Kulibayev remarked that the GOK, by contrast,
favored a Samsun-Ceyhan route, in order to be able to create
and market a "Caspian blend" of crude.

N Block: No Difference Between Bidders
--------------


8. (C) Kulibayev told the Ambassador that he was well-aware
of recent USG advocacy efforts on behalf of CP's bid for the
offshore "N" Block. Initially, he said, Shell had submitted
a superior commercial bid, but after CP improved its offer,
the two bids became practically indistinguishable. Still, he
said, KMG had begun negotiating with Shell, and would
continue to do so. Asked about the Energy Minister's recent
announcement that it would not offer any blocks for open
tender in 2006, Kulibayev professed not to understand why the
Ministry had chosen to delay, once again, the
much-anticipated round of open tenders.

Mazeikiu Nafta
--------------


9. (C) Kulibayev described KMG's bid to buy Lithuania's
Mazeikiu Nafta refinery as going "badly." TransNeft's
Vaynshtok had signed a deal with KMG allowing KMG to supply
the refinery with Kazakhstani crude, Kulibayev explained,
only to renege. When asked why TransNeft had scuttled the
agreement, he said, Vayhshtok had only shrugged and pointed
upward. Kulibayev observed that Poland's PKN Orlen, which
seemed to be in the lead for the bid, "had no oil." PKN
Orlen "took a deal away from us" years ago in Czechoslovakia,
he lamented. Ultimately, he said, the Government of
Lithuania was likely to buy Yukos's share itself, then resell
a minority share of the refinery.

Kazakhstan's Gas Plans
--------------


10. (C) Briefed by the Ambassador on USG interest in
encouraging new sources and routes for gas supply to Europe,
including a possible Kazakhstan-Azerbaijan Trans-Caspian gas
pipeline, Kulibayev smiled. This is what we have always
wanted, he said, but there are problems. The delimitation of
the Caspian is "dead," he said, with the Iranians and Turkmen
obstructing progress. Kulibayev scoffed at the Russian claim
that an undersea gas pipeline posed environmental risks, but
acknowledged that the Russians would use environmental

ALMATY 00001237 003.2 OF 003


arguments in an attempt to thwart a gas pipeline project.
Nor did Kazakhstan have enough gas to fill a pipeline,
Kulibayev added, necessitating Turkmenistan's involvement in
the project. And no one wanted to deal with Turkmenbashi, he
concluded.


11. (C) Kulibayev offered a surprisingly positive assessment
of the terms being offered Kazakhstan for sale of its gas to
the Orenburg processing plant. When we first began
negotiating with Gazprom, he said, "they weren't serious."
However, under recent terms, 25% of the Kazakhstani gas
processed at Orenburg would be sold to the West, 25% within
the CIS, and 50% would be returned to service Kazakhstan's
domestic market. Speaking of Kazakhstan's internal energy
needs, Kulibayev noted that the GOK was not in a position to
gasify the country due to the prohibitive cost of building
lengthy gas pipelines.


12. (C) Asked about prospects for a domestic petrochemical
industry, Kulibayev waved off the validity of the multitude
of feasibility studies already conducted on the subject,
remarking that the studies all seemed to validate the prior
opinions of their sponsors. In general, however, the idea of
a petrochemical plant seemed feasible, as Karachaganak -- or
even Tengiz or Kashagan -- could supply the low quantities of
feedstock necessary to build a plant. Kulibayev remarked
that Access President Len Blavatnik "seemed committed" in
going forward with a Basel joint venture to construct a gas
chemical complex in Atyrau.
ORDWAY