KAZAKHSTAN: TENGIZ UPDATE

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 002273

SIPDIS

NOFORN
SIPDIS

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

E.O. 12958: DECL: 06/25/2016
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: TENGIZ UPDATE

REF: A. 05 ALMATY 4264


B. ALMATY 960

Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5(b) and (d).


1. (C) Summary: New TengizChevrOil (TCO) General Director
Todd Levy discussed Tengiz developments with Econoff on June
22 in Atyrau. Levy told Econoff that the project to double
TCO oil production (to 500,000 barrels/day) would likely be
delayed three months, until July 2007, due primarily to a
shortage of skilled workers. TCO's recent deals with the
Azeris and with a private Kazakhstani terminal operator to
ship short-term (pre-CPC expansion) Tengiz volumes through
the BTC had recently come undone, forcing TCO to start
negotiations anew. The GOK has recently increased its
pressure on TCO to eliminate the company's sulfur stockpiles,
threatening to increase fines radically if TCO does not
develop a more ambitious sulfur removal plan. Finally, Levy
told Econoff (in strict confidence) that exploratory wells
had revealed significant oil reserves (his rough estimate:
100 million barrels) and "sweet" (non-sulfurous) gas at a
new, onshore field. End summary.

Tengiz Expansion Likely Delayed Until 3Q 2007
--------------


2. (C) New TCO General Director Todd Levy briefed Econoff on
the status of TCO's "Second Generation Production (SGP) /
Sour Gas Injection (SGI)" project, which will nearly double
TCO's current production of 280,000 barrels/day. Levy told
Econoff (in confidence) that, while TCO was publicly
targeting March 2007 for project completion, July 2007 was a
more realistic date. The principal cause of the delay, Levy
explained, was that TCO's contractors could not find
sufficient workers to staff the project, despite the fact
that TCO was offering more and more incentives.


3. (C) Levy explained that the SGI facilities would undergo
critical tests in the coming months. Of the additional gas
that would be produced by SGP, he said, roughly two-thirds
would be treated in newly-built gas processing and
sulfur-removal facilities, while one-third would be
reinjected as untreated, "sour" gas. There was no industry
precedent for injecting such high-pressure, highly-sulfurized
gas at such depths, Levy observed. The SGI facilities had
been completed, he said, and TCO would spend the next five
months testing (and debugging) the system with sweet gas
before beginning processing of the poisonous sulfurous gas.

Temporary Transportation Options Up in the Air
-------------- -


4. (C) Levy voiced frustration with arrangements to transport
second-generation Tengiz oil to market in the years before
CPC expansion is completed (Ref A). Two-thirds of the SGP
oil would be railed to Odessa, he said, and Kazakhstan's
national railway company, KazTemirZholy, seemed to be
expanding the necessary track on schedule. Far more
problematic, Levy noted, was the one-third of SGP oil that
would be exported via the BTC pipeline. At one point, he
explained, TCO had signed a contract with SOCAR to ship TCO
oil via the BTC; however, the Azeri authorities had
subsequently voided the contract, telling TCO that their
interlocutors had not possessed the authority to negotiate
the deal. Lately, Levy said, the Azeris had been telling TCO
that "the economics of the pipeline didn't foresee the
shipment of Third Party oil" -- a worrisome, and in Levy's
view, not fully comprehensible stance.


5. (C) Levy told Econoff that TCO lawyers hadn't yet seen a
copy of the newly-signed IGA, adding that he was anxious to
confirm that the agreement covered oil shipped from any
source, and not just Kashagan. (Note: By Econoff's read, it
does. End note.) TCO had also reached an agreement regarding
TCO oil shipments with Timur Kulibayev's Mobilex Aktau
terminal, Levy explained, only to learn that a group backed
by Prime Minister Akhmetov had won an "invisible power
struggle" against Kulibayev and KMG, and had now replaced the
latter in negotiations. Despite these setbacks, Levy was
able to laugh: "at least we have fewer problems that
(Kashagan operator) AGIP KCO."

GOK Pushes on Tengiz on Sulfur Removal
--------------


6. (C) Levy told Econoff that the GOK continues to pressure
TCO to reduce its sulfur stockpiles (Ref B). Levy explained

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that TCO had thought the two sides had reached an agreement
by which TCO would expand its sulfur handling capabilities
(both to transform the powder to granules, and to transport
the granules to market) in order to remove 125% of its annual
sulfure production, thus eliminating existing stockpiles by

2023. However, the GOK had recently informed TCO that 2023
"wasn't fast enough," warning that the GOK would "create
incentives" for TCO to remove the sulfur more quickly. (The
"incentive," Levy indicated, might be annual fines, based not
just on the incremental sulfur added to the stockpiles each
year, but on the entire volume of stockpiled sulfur.)


7. (C) Levy explained that TCO and GOK authorities would soon
meet to negotiate a new solution. However, it looked like the
GOK might be push for the annual removal of 150%, or even
200%, of production. To remove 150%, Levy noted, would
require much more capital investment -- and an entirely new
plan -- than 125%, while advancing the project's completion
by only four years, to 2019. In fact, Levy added, the GOK's
approach made little economic sense at all, as the GOK would
end up paying for a large part of any removal project through
lost royalties and taxes and a reduced KMG profit share. In
the end, Levy said, he could only conclude that the GOK's
objection to the sulfur was based on genuine (if misguided)
environmental concerns.

Little Enthusiasm for Trans-Caspian Gas Pipeline
-------------- ---


8. (C) Asked his view of a proposed Trans-Caspian gas
pipeline, Levy laughingly said, "I'd rather have another oil
pipeline, thank you." Reinjection provided TCO with its best
gas value, he said, and would probably continue to do so for
the forseeable future. Not only did reinjection help
maintain oil reservoir pressure, he explained, it also
avoided the (costly) necessity of gas processing and sulfur
removal. Levy admitted, however, that it was hard to predict
the future effectiveness of reinjection, as reinjected gas
often found an unanticipated path back to the surface, where
it had to be treated and sold. TCO would soon undertake a
new survey of the underground reservoir with an eye to
estimating the effectiveness of reinjection, Levy said.
After the study's completion, TCO would likely know far more
about possible gas volumes available for export.

Chevron's Promising New Onshore Discovery
--------------


9. (C) Levy told Econoff (in strictest confidence) that
Chevron executives were "beside themselves" with excitement
over the results of exploratory drilling at a new, onshore
field. The field "could hold 100 million barrels," Levy
estimated, had "good porosity," and, perhaps the best news of
all, contained sweet, non-sulfurous gas. Chevron's discovery
would be the subject of a press release soon, Levy said, but
in the meantime was being kept secret even from the majority
of company employees.
ORDWAY