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


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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