ACCESS INDUSTRIES CHAIRMAN DISCUSSES KAZAKHSTAN

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 002155

SIPDIS

NOFORN
SIPDIS

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

E.O. 12958: DECL: 06/19/2015
TAGS: ENRG EPET KZ PGOV PREL RU
SUBJECT: ACCESS INDUSTRIES CHAIRMAN DISCUSSES KAZAKHSTAN
INVESTMENTS


Classified By: Amb. John Ordway, reasons 1.5(b) and (d).


1. (C) Summary: Access Industries Chairman Len Blavatnik
discussed his company's Kazakhstan investments with the
Ambassador on June 8. While Access is quietly offering its
only Kazakhstani power plant for sale, it is simultaneously
trying to buy into the Ekibastuz Gres II plant, as part of
what Blavatnik described as a strategic decision to invest
more heavily in electrical power generation. On the subject
of petrochemicals, Blavatnik cast doubt on Access-subsidiary
Basell's recently-announced interest in building a gas
chemical complex in Atyrau, telling the Ambassador that high
feedstock prices rendered Kazakhstan noncompetitive as a
petrochemical site, in comparison with the Middle East. End
summary.

Regional Coal Demand Rebounds to 1998 Levels
--------------


2. (SBU) Access Industries billionaire Chairman Len
Blavatnik, in Almaty for Kazakhstan's biannual Foreign
Investors Council and the International Herald Tribune's
Kazakhstan Investment Summit, called on the Ambassador on
June 8, accompanied by Access Senior VP Paul Rodzianko, and
Dennis Price, General Director of the Bogatyr Access Komir
coal mine. (All three are Amcits.)


3. (SBU) Blavatnik opened the conversation by remarking that
the regional economy had finally rebounded to 1998 levels,
both in terms of coal production (Bogatyr Access Komir's
Kazakhstani mines currently produced 40 million tons per
year, Blavatnik estimated, compared to 50 million under the
USSR),and "the ability of our customers to pay for it."
Still, Blavatnik lamented, Access didn't receive
"world-level" prices for its coal, and unfortunately had to
function "too much like a transportation company," shipping
its coal long distances to its Urals customers. (When the
Ambassador countered that Access probably hadn't paid
"world-level prices" to acquire its mines, either, Blavatnik
laughingly admitted that was true, while adding that he had
paid "risk-adjusted prices.")

Access: Growing Interest in Power Generation
--------------


4. (C) Blavatnik told the Ambassador that Access was
increasingly interested in investing in electrical power
generation, both in order to capture more value-added in the
production chain and to reduce the costs associated with
long-distance coal transport. Blavatnik envisioned numerous
markets. The old Russian power infrastructure was already
functioning at capacity, he said, opening the door for new
investment. Exporting electricity to China was inviting, he
added, as well as west to Brest.


5. (C) Notwithstanding the company's overall strategy of
increasing its generating assets, Blavatnik said, Access was
quietly looking to sell its "unprofitable" Access Energo CHP
(combined heat and power) plant in Petropavlosk. Access had
long petitioned the government for a wholesale tariff
increase, Blavatnik explained, and the Prime Minister had
recently promised Blavatnik to increase tariffs "at some
point," but it wasn't clear when that might happen. (Note:
Days earlier, AES's Dale Perry told Ambassador that Access
had approached AES about buying the plant -- an offer which
AES was considering. End note.)


6. (C) At the same time, Blavatnik explained, Access was
interested in buying into the Ekibastuz Gres II coal-fired
plant (owned 50/50 by RAO UES and the GOK),either by
building an additional 1000MW of capacity or by transferring
turbines from its CHP plant in Petropavlosk. Either way,
Access would likely export the power to Russia, taking
advantage of Northern Kazakhstan's abundant 500 kV connector
lines.

Nuclear Power: Not Economical
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7. (C) Asked by the Ambassador what he thought of the GOK's
recently-revived plans to build a nuclear power station by
2015, Blavatnik shook his head. Nuclear power doesn't make
economic sense in Kazakhstan, he said. "The government is
too smart to do it," he added. "By the time they get to a
decision-point, rational logic will take over." Price noted
that oft-discussed plans to build gas-fired plants in
Kazakhstan's Caspian region, along with new transmission
lines to carry the electricity east, were similarly
uneconomical when compared to electricity generated from
Kazakhstan's abundant coal.

Basell's Petrochemical Project: Stalled on Feedstock Price
-------------- --------------


8. (C) Blavatnik then turned the conversation toward
petrochemicals, "and my latest acquisition, Basell." (Note:
Access acquired Basell in 2005. In late March, Basell,
KazMunaiGaz (KMG) and SAT&Company announced the formation of
a joint venture aimed at constructing an integrated gas
chemical complex in Atyrau. End note.) "Kazakhstan is
ideally positioned for petrochemicals," Blavatnik stated.
However, he added, Basell's announced project faced high
feedstock prices in comparison with Middle East competitors.
In most Middle East countries, Blavatnik explained,
governments effectively subsidize feedstock prices for the
petrochemical industry. In Kazakhstan, he continued,
Basell's only existing option was to buy TengizChevrOil gas
at around $50 per thousand cubic meters. At that price,
Blavatnik concluded, "it's probably not going to work.
Unless we solve that problem, I don't know how far we go."
(Comment: Although Blavatnik is looking at the Chinese
market, most oil and gas experts we've talked to would
contest Blavatnik's assertion that Kazakhstan is "ideally
situated" for a petrochemical industry. The skeptics point
out that Kazakhstan's landlocked status and distance from
market reduce its competitiveness. Further, most of
Kazakhstan's associated gas is reinjected to maintain oil
pressures, greatly reducing the quantities available for
petrochemical processing. Even at the selling price of
$50/mcm, for example, TengizChevroil is reserving the
contractual right to reinject the gas, rather than sell it to
Basell, should geology and the market so dictate. End
comment.)


9. (C) Blavatnik closed the conversation by reflecting on
contemporary Russia, through the lens of Access's major oil
investment, TNK-BP. TNK-BP is a "very good business," he
said, though the company faced near-constant tax harassment
and was forced to navigate a political context "much more
complex than Kazakhstan's." Blavatnik noted that, in line
with BP's global strategy, TNK-BP was selling some of its old
assets -- including one to a CNPC/Rosneft joint venture, a
point which Blavatnik thought was indicative Russian
willingness to sell assets to the Chinese -- while focusing
on acquiring new, growth-oriented assets. As far as state
policy, Blavatnik opined that the approaching end of Putin's
term meant that "the status quo is about all we can expect in
the near future."
ORDWAY