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

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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

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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