KAZAKHSTAN NEAR BTC IGA AGREEMENT WITH AZERBAIJAN?

C O N F I D E N T I A L SECTION 01 OF 03 ALMATY 001934 SIPDIS SIPDIS DEPT FOR EB/ESC; SCA/PO (MANN); SCA/CEN (MUDGE) USTDA FOR DAN STEIN E.O. 12958: DECL: 05/30/2016 TAGS: ENRG EPET KZ PGOV PREL AJ SUBJECT: KAZAKHSTAN NEAR BTC IGA AGREEMENT WITH AZERBAIJAN? REF: A. BAKU 742 ¶B. ALMATY 1835 ¶C. ALMATY 1237 Classified By: POEC Chief Deborah Mennuti; Reasons 1.5(b) and (d). ¶1. (C) Summary: On May 31, Fabrice Mosneron-Dupin, lead investor representative in the ongoing Kazakhstani-Azeri negotiations to sign an Inter-Governmental Agreement (IGA) governing trans-Caspian oil transport, briefed Econoff on the recent, unexpected change in the Government of Kazakhstan's (GOK) negotiating position. Mosneron-Dupin believes that both the GOK and the Azerbaijani government (GOA) are preparing to sign a minimalistic IGA -- likely as soon as June 16 or 17 -- which ignores investor interests, thus effectively committing the governments to financing and building the necessary infrastructure on their own. Mosneron-Dupin interprets the radical GOK shift as the result of "clan battle," in which Prime Minister Daniyal Akhmetov imposed his own negotiator and recast the GOK negotiating position in nationalistic terms, after Azeri Finance Minister Samir Sharifov complained to Akhmetov that the previous GOK negotiator, Kairgeldy Kabyldin (believed to be associated with a rival group headed by Timur Kulibayev),had aligned himself too closely with investor interests. On May 30, Kabyldin (strictly protect) urged Mosneron-Dupin to approach the GOK at the highest levels in an attempt to save Kazakhstan from an agreement which Kabyldin sees as an agreement harmful to the national interest. End summary. Changed GOK Strategy the Result of Clan Struggles? -------------- -------------- ¶2. (C) TOTAL's Mosneron-Dupin, General Manager of the Kazakhstan Caspian Transportation System (KCTS) Project, briefed Econoff the day after meeting with the GOK's new lead IGA negotiator, Vice Minister of Energy Lyazzat Kiinov, and, "informally," (essentially in secret) with Kabyldin. Mosneron-Dupin told Econoff that he had learned from various Kazakhstani and Azeri sources that the GOK's abrupt change in its IGA approach (reftels) had occurred after Sharifov called Akhmetov to complain that Kabyldin was aligned too closely with project investors, to the detriment of Kazakhstani national interests. Akhmetov reacted, Mosneron-Dupin explained, by installing the nationalistic Kiinov, "someone from his own clan," as lead negotiator, and simultaneously hatched the strategy of excluding the international investors from the project altogether. Mosneron-Dupin told Econoff that, according to his sources, Kabyldin belongs to a rival clan, that of presidential son-in-law Timur Kulibayev. (Comment: While Mosneron-Dupin repeatedly described the behind-the-scenes conflict as a "clan battle," it is not clear if his sources meant exactly that, or rather a conflict based, not on clan origins, but on competing business and power interests. End Comment.) Azeris "Quite Happy," Ready to Sign -------------- ¶3. (C) Mosneron-Dupin told Econoff that, according to his sources, "relatively high-level Azeris" were "quite happy" with the new GOK approach. The BTC pipeline was profitable even with current volumes, Mosneron-Dupin explained. Furthermore, he added, the Azeris believe that oil from their own Azeri-Chirag-Gunashli (ACG) field will "fill the BTC for a long time," and thus aren't worried about using Kazakhstani oil to fill the BTC. And while Kazakhstani volumes might, at some point in the future, drop BTC tariffs for ACG producers "by 50 cents or $1 a barrel," the cost savings were "insignificant" in the face of $70 a barrel oil. ¶4. (C) The GOK had already submitted its new, "one or two page" draft IGA to the GOA, Mosneron-Dupin said. The two sides were meeting "next week" to discuss the document. However, the Azeris "seem ready to sign," and final signature by June 16 or 17 seemed likely. Kiinov: "We Don't Need Outside Investors" -------------- ¶5. (C) Mosneron-Dupin told Econoff that his meeting with ALMATY 00001934 002 OF 003 Kiinov had gone "very badly." Kiinov informed Mosneron-Dupin that the GOK had already exchanged a new IGA draft with the GOA, but refused to give Mosneron-Dupin a copy. The KCTS system, Kiinov said, was a "very simple" project, and hence the GOK didn't need outside investors. Kiinov went so far as to say, Mosneron-Dupin related in disbelief, that the GOK didn't even need an IGA to protect its interests against the Azeris, as "the Azeris need our oil more than we need them." Mosneron-Dupin told Econoff that it was clear, talking to Kiinov, that the latter envisioned a smaller infrastructure project than the investors had planned. Even so, he said, Kiinov's cost estimates were outlandishly low; at one point Kiinov had suggested that it would cost the GOK only $25 million to build the infrastructure necessary to ship 400,000 barrels of oil a day to the BTC pipeline. Kabyldin: New Approach Not In GOK Interests -------------- ¶6. (C) Kabyldin, Mosneron-Dupin said, agreed to meet only "informally," and had arranged a meeting through a cryptic series of phone calls. Mosneron-Dupin said that Kabyldin was "clearly scared," shaken by the accusations that he had inadequately defended Kazakhstani interests. Kabyldin, Mosneron-Dupin explained, clearly recognized the dangers the new strategy posed to the GOK, and had urged the investors to appeal to Akhmetov and President Nazarbayev for a change of course. (Note: Mosneron-Dupin told Econoff that the investors planned such an appeal in the context of next week's Foreign Investor's Conference. End note.) The GOK strategy did note entail the construction of sufficiently large infrastructure to take advantage of economies of scale or provide the capacity needed to carry future Kashagan volumes, Kabyldin argued. Furthermore, the GOK's minimalistic IGA draft would leave Kazakhstan completely vulnerable to future changes in terms -- such as tariff rates -- by the Azeris. (Mosneron-Dupin told Econoff that therein lay the crux of the GOK folly: as a transit country, Azerbaijan had fundamentally different interests in an infrastructure project than did Kazakhstan, as a producing country.) Finally, Kabyldin emphasized, the GOK vision of farming out the various project pieces -- pipeline, Kazakhstani terminal, Kazakhstani ships, Azeri ships, Azerbaijani terminal, etc. -- to various companies would drive down potential GOK profit, as each company would independently attempt to maximize its profit, thus raising the overall transportation costs of Kazakhstani oil. Mosneron-Dupin: Investors Have Little Leverage -------------- -- ¶7. (C) Asked what leverage the oil companies had, either as suppliers of crude to the KCTS system (as Kashagan partners), or as shareholders in the BTC Pipeline Company, Mosneron-Dupin replied "not much." The investors, he said, had all along proposed a very large export route -- capable of handling from 500,000 to 800,000 b/d of Kazakhstani crude -- at a high cost of $3-4 billion. The GOK could clearly not finance such a project on its own, he concluded. While it was unclear what size a project the GOK now envisioned, it would still require external financing, which would likely be granted only if the Kashagan producers provided volume ("ship or pay") guarantees. However, Mosneron-Dupin admitted, in the absence of other export options, Kashagan producers could scarcely withhold their volumes. On the other hand, Mosneron-Dupin added, in the larger sense it would be "silly" for the Kashagan producers to commit huge volumes to the KCTS project if the GOK proceeded according to current plans, according to "such a contradictory relationship." The Kashagan producers, he concluded, would be "driven back" to the Russians, or would turn to the Chinese, in an attempt to find an alternative export route. ¶8. (C) Comment: At first glance, we share Mosneron-Dupin's view that the GOK, paradoxically, risks losing the most from its own initiative. The possibility that the GOK's shift in strategy may have been motivated as much by a struggle for power amongst economic elites as by careful economic reasoning only builds the case that the GOK may be miscalculating its own interests. This wouldn't be the first time (Ref C) that Kulibayev's moderate, relatively ALMATY 00001934 003 OF 003 pro-investor stance on the IGA had lost out to a hard-line view. All of this leaves aside, of course, the critical question of the degree to which are own interests are harmed by the GOK's new approach. End comment. ORDWAY