Identifier
Created
Classification
Origin
06ALMATY2157
2006-06-19 11:43:00
CONFIDENTIAL//NOFORN
US Office Almaty
Cable title:  

KAZAKHSTAN: ADVOCACY: KAZMUNAIGAZ DELAYS "N BLOCK"

Tags:  BTIO ENRG EPET KZ PGOV PREL 
pdf how-to read a cable
VZCZCXYZ0004
PP RUEHWEB

DE RUEHTA #2157/01 1701143
ZNY CCCCC ZZH
P 191143Z JUN 06
FM AMEMBASSY ALMATY
TO RUEHC/SECSTATE WASHDC PRIORITY 5813
INFO RUEHAK/AMEMBASSY ANKARA 1902
RUEHKB/AMEMBASSY BAKU 0698
RUEHBJ/AMEMBASSY BEIJING 1270
RUEHKV/AMEMBASSY KIEV 2466
RUEHMO/AMEMBASSY MOSCOW 1269
RUEHNE/AMEMBASSY NEW DELHI 0354
RUEHSI/AMEMBASSY TBILISI 2217
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L ALMATY 002157 

SIPDIS

NOFORN
SIPDIS

COMMERCE FOR ADVOCACY CENTER/BLOPP AND DBLOOM
DEPT FOR EB/ESC; SCA/PO (MANN); SCA/CEN (MUDGE);
EB/CBA(MERMOUD)

E.O. 12958: DECL: 06/19/2015
TAGS: BTIO ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: ADVOCACY: KAZMUNAIGAZ DELAYS "N BLOCK"
DECISION

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

C O N F I D E N T I A L ALMATY 002157

SIPDIS

NOFORN
SIPDIS

COMMERCE FOR ADVOCACY CENTER/BLOPP AND DBLOOM
DEPT FOR EB/ESC; SCA/PO (MANN); SCA/CEN (MUDGE);
EB/CBA(MERMOUD)

E.O. 12958: DECL: 06/19/2015
TAGS: BTIO ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: ADVOCACY: KAZMUNAIGAZ DELAYS "N BLOCK"
DECISION

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


1. (C) Summary: Kazakhstani government officials recently
informed ConocoPhillips (CP) that KazMunaiGaz (KMG) will not
select a partner or partners for the development of the
offshore Caspian "N" block until fall, notwithstanding
earlier indications that KMG would make a decision by the end
of May. In good news, CP was informed that rival Shell's
period of exclusivity for negotiating a share in the block
had expired, and CP was invited to submit a new bid,
sweetened either in financial terms or by a commitment to
build a petrochemical plant. CP Country Manager Hakim Janah
told the Ambassador on June 8 that he had left the meetings
with a sense that CP had all but secured at least a 15% stake
in the project, with the possibility of gaining more at
Shell's expense. CP now faces the choice of either entering
into another round of profit-eroding bidding against Shell,
or approaching its rival with a proposal to share the
concession, perhaps on 25/25/50 terms with KMG. Post shares
Janah's view that the GOK likely delayed the "N" block
decision, not only to squeeze further profit from Shell and
CP, but also to preserve leverage -- and a big-ticket
"deliverable" -- for President Nazarbayev's anticipated fall
visit to the White House. End summary.

Disappointment as the Decision is Delayed...
--------------


2. (C) Janah briefed the Ambassador on the status of CP's bid
to participate in the "N" Block project on June 8, following
CP CEO Jim Mulva's May 29-31 visit to Astana. Janah
explained that Mulva's trip had been scheduled in
anticipation of a final decision on the "N" Block project.
However, Timur Kulibayev (presidential son-in-law and VP of
Samryk Holding Company, which now subsumes KMG) broke bad
news to Mulva on May 29, telling the CEO that KMG had decided

to postpone a final decision on "N" until autumn. Kulibayev,
Janah said, had justified the delay on the grounds that (a)
the 2006 seasonal window to work on the "N" block had already
closed, anyway; and (b) the recent creation of Samruk
required that certain legislative amendments be passed before
KMG could legally choose a project partner. Janah told the
Ambassador that he didn't find either justification very
compelling, and that he believes instead that the GOK wants
to preserve its leverage over CP through the summer, in hopes
that CP can help deliver a White House audience for
Nazarbayev.

...Offset by Hints of CP's Improved Standing
--------------


3. (C) Kulibayev also delivered good news, Janah explained,
telling Mulva that Shell's "period of exclusivity" for
negotiating a share of the "N" block project had expired (on
December 31). Thus, CP was free to submit a new proposal and
negotiate anew with KMG. Kulibayev went further, Janah said,
telling Mulva that, "informally," CP was "in" with at least a
15% share of the project. CP could obtain 35% (squeezing
Shell out and leaving KMG with 65%),Kulibayev said, by
submitting an "enhanced" proposal. If Shell submitted the
better bid, CP could preserve its 15% by matching Shell's
terms. Or, finally, Kulibayev suggested, CP could negotiate
directly with Shell and submit a joint bid to KMG. "We would
be happy," Kulibayev said, "if you negotiated a 25/25%
split." Kulibayev declined Mulva's request, however, that
KMG broach the idea of project-sharing with Shell: "We can't
tell Shell who to marry," he answered.

The GOK Seeks a Petrochemical Commitment
--------------


4. (C) Mulva's other GOK interlocutors -- Prime Minister
Akhmetov, Deputy Prime Minister Karim Masimov, Energy
Minister Izmukhambetov, and KMG President Karabalin -- all
spoke encouragingly of CP's prospects, while stopping short
of Kulibayev's informal guarantee of a CP share. All of the
GOK officials told Mulva that CP needed to enhance its bid at

this point, either by improving the commercial terms, or by
including an offer to build a petrochemical plant. Akhmetov,
Janah said, had been most adamant that a petrochemical
proposal was needed to win the bid; while Kulibayev,
Izmukhambetov, and Karabalin had conceded that the same
advantage could be secured with improved financial terms.


5. (C) Janah relayed a lengthy exchange between Akhmetov and
Mulva on possible CP support for a petrochemical plant.
Mulva had told Akhmetov that, by CP's calculation, Kazakhstan
was not competitive with the Middle East in petrochemicals,
either in terms of feedstock price or distance to market. In
that context, Mulva asked, was the GOK prepared to subsidize
the initiative, or did it expect investors to accept very low
returns? Akhmetov replied that other studies (by Nexant and
Shell) had shown that Kazakhstan could compete in
petrochemicals. The GOK was willing to share the risk, with
KMG entering as a 50/50 partner in the project. And, at any
rate, Akhmetov concluded, the GOK didn't expect CP to enter
the project on non-commerical terms. In that case, Mulva
pressed, the GOK wouldn't expect a commitment until the
quantity and quality of "N" Block gas had been proven? At
this point, Janah explained, Akhmetov had backtracked,
insisting that the GOK was looking, in fact, for some kind of
upfront "commitment" to build the petrochemical project.


6. (C) Janah explained to the Ambassador that CP now faced a
choice of either improving its bid and entering another round
of profit-exhausting bid competition with Shell, or joining
with Shell to submit a joint proposal to KMG. Similarly, CP
had to decide whether to revisit the petrochemical issue, or
simply improve its commercial terms -- risking that Shell
might advance its own petrochemical proposal.


7. (C) Comment: While the GOK's latest delay on the "N" Block
decision is disappointing, it also seems, in retrospect,
almost inevitable, given Nazarbayev's keen focus on securing
an audience with President Bush in the fall. Given the USG's
high-level advocacy on behalf of CP's bid -- the Vice
President's efforts here in May culminated an intense
half-year of Secretary-level letters and mentions -- the GOK
should perhaps be excused for thinking that CP might help
ensure that Nazarbayev's visit goes well. End comment.
ORDWAY