KAZAKHSTAN: KMG TRANSPORTATION MANAGER ON PIPELINE

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 001835 SIPDIS SIPDIS DEPT FOR EB/ESC; SCA/PO (MANN); SCA/CEN (MUDGE) E.O. 12958: DECL: 05/22/2016 TAGS: ENRG EPET KZ PGOV PREL SUBJECT: KAZAKHSTAN: KMG TRANSPORTATION MANAGER ON PIPELINE NEGOTIATIONS, GAS REF: A. BAKU 742 ¶B. MOSCOW 1931 Classified By: POEC CHIEF DEBORAH MENNUTI FOR REASONS 1.4(B) and (D) ¶1. (C) Summary: Newly-appointed KazTransOil Deputy DG, Sabr Yessimbekov, told Econoff on May 18 that the recent round of BTC-IGA negotiations had gone "very badly" under the direction of the GOK's new lead negotiator, the "nationalistic" Vice-Minister of Energy, Lyazzat Kiinov (Ref A). Yessimbekov suggested that the former GOK negotiator, Kairgeldy Kabyldin, was highly frustrated with the new, hard-line GOK position, and was considering asking the USG to intervene with Kiinov and other GOK obstructionists. Yessimbekov was more sanguine about prospects for a Caspian Pipeline Consortium (CPC) settlement, while confirming reports from Moscow (Ref B) of a "soft linkage" between the issues of CPC expansion and the construction of a Burgas-Alexandroupolis (B-A) bypass pipeline. Yessimbekov spoke optimistically of KazMunaiGaz (KMG) prospects for buying a controlling share of the Lithuanian "Mazeiki Nafta" refinery complex, telling Econoff that KMG had eliminated Russian opposition to the KMG bid by engaging Rosneft as a strategic partner. On gas issues, Yessimbekov signaled a strong GOK interest in diverting a share of future Karachaganak gas production to a gas treatment plant to be built in Kazakhstan, and minimized prospects of the Chinese building a pipeline across Kazakhstan to deliver Turkmen gas to China. End summary. BTC-IGA -------------- ¶2. (C) Yessimbekov told Econoff on May 18 that the May 15-17 round of BTC-IGA discussions in Astana had "gone very badly." Kairgeldy Kabyldin, he said, had been replaced as lead negotiator with the "ultra-nationalistic" Kiinov. Kiinov, Yessimbekov complained, "believed that the Azeris need the IGA more than we do," and was teaming with hard-line representatives of the Ministry of Foreign Affairs to re-work the IGA. Yessimbekov told Econoff that Kabyldin had told him that he regretted that the USG had not been invited to observe the Astana round of negotiations, and that Kabyldin was considering asking the USG to intervene with Kiinov and other "hard-line" GOK figures. (Note: Yessimbekov -- who until his promotion earlier in the week had worked directly for Kabyldin -- was unable to set up an appointment for Econoff with Kabyldin before the latter departed Astana for meetings in Moscow. Yessimbekov urged Econoff to try to make contact upon Kabyldin's return, while warning him to avoid any suggestion that Kabyldin might wish to dissent from the GOK's negotiating position. End note.) ¶3. (C) Yelda Guven, ExxonMobil's Government Relations Representative, told Econoff on May 22 that the May 15-17 "negotiating" session in Astana had been "truly bizarre." The Kazakhstani side had kept the Azeris waiting an entire day (May 15),she said, explaining that they had to "work on their position." As of May 17, when Guven left Astana, the three parties (GOK, GOA, and investors) had yet to meet together. Kabyldin, she said, had shuttled back and forth between the investors and the GOK, asking questions which seemed to suggest that the GOK, at least, was flirting with the idea of excluding the investors from the agreement and turning to a "contractor" to build the infrastructure connecting the Kazakhstani oil fields and the BTC pipeline. (Kabyldin seemed surprised, she said, when the investors reminded him that the BTC Pipeline Company functioned according to unanimous vote -- thus necessitating at least some degree of mutual government/investor interest.) Guven, who is not experienced in BTC-IGA negotiations, could neither confirm nor contradict ConocoPhillips' interpretation of the GOK's apparent new strategy (Ref B),telling Econoff that little could be known for certain until the GOK produced a new draft agreement. CPC Expansion Negotiations -------------- ALMATY 00001835 002 OF 002 ¶4. (C) Asked about the status of CPC expansion negotiations, Yessimbekov said that the negotiations were now less problematic than the BTC-IGA negotiations. The Russian companies considered expansion to be "inevitable," he said, and were simply trying to maximize their profits. Yessimbekov predicted that an MOU on the B-A bypass would be signed more-or-less concurrently with the CPC agreement (Ref B). Yessimbekov explained that four Russian companies -- TransNeft, RosNeft, TNK-BP, and Sibneft -- had signed a "Khristenko Protocol" on February 20, acknowledging that "CPC expansion is linked to a B-A bypass," and pledging to form a bypass project company with at least 51% Russian ownership. The Protocol "welcomed" the participation of KMG and Chevron, Yessimbekov continued, and the two companies had begun discussing how to coordinate their participation, tentatively agreeing to accept no less than 35% ownership in the project. All Kazakhstani volumes (both TengizChevroil and others),he said, would be shipped "under Chevron's name." ¶5. (C) Yessimbekov noted that the Khristenko Protocol also confirmed the signatories' agreement that Russia's CPC share would be transferred to TransNeft. TransNeft, he concluded, was positioned to profit hugely from the B-A bypass, not only as an operator, but also by shipping oil on both sides of the bypass. While TransNeft was legally prohibited from operating offshore, the company would set up legal subsidiaries to circumvent the law, ultimately carrying oil "all the way to America." Mazeiki Nafta -------------- ¶6. (C) Yessimbekov told Econoff that he was "cautiously optimistic" that KMG would win its bid to buy a share of the Mazeiki Nafta refinery. KMG had overcome Russian determination to block the transit of Kazakhstani oil to the refinery, he said, by taking on Rosneft as a "strategic partner." While KMG had originally bid on 53.7% of the company, the Lithuanian government was now asking KMG to buy a 85% share for slightly more than $2 billion. Rival bidder PKN Orlen "has no money and no oil," Yessimbekov claimed, adding that he was suspicious that the Lithuanians were using the Polish company simply to drive up the asking price. New Karachaganak Gas Treatment Plant? -------------- ¶7. (C) Yessimbekov sidestepped Econoff's question about the status of Kazakhstani-Russian negotiations to expand the Orenburg gas processing plant, but reported that it was now "90% certain" that increases in Karachaganak gas production would be split between Orenburg (if the Karachaganak producers were offered a better price than at present) and a planned, 10 bcm gas treatment plant in Kazakhstan. The plant would cost $5 billion, Yessimbekov estimated, and could supply gas both for a petrochemical project and for onward shipment -- potentially to Almaty, via a yet-unbuilt gas pipeline. (A Karachaganak contact confirmed to Econoff that the GOK has recently intensified discussions with project partners about building a gas plant in Kazakhstan; however to date, the talks "have not gone very far." The Karachaganak Production Sharing Agreement gives project partners the option -- but not the obligation -- to participate in such a project.) Gas Pipeline From Turkmenistan to China? -------------- ¶8. (C) Asked about reports that the Chinese had agreed in principle to buy 30 bcms of Turkmen gas and deliver it by pipeline to China, potentially across Kazakhstani territory, Yessimbekov said that the news "had all of KMG laughing." "We have no intention of losing our potential Chinese gas market to the Turkmen," he said, explaining that the GOK would be more interested in building the pipeline itself, in order use "cheap Turkmen gas" to meet domestic demand in Southern Kazakhstan, while exporting its own gas to China. ASQUINO