C O N F I D E N T I A L ALMATY 002687

SIPDIS

NOFORN
SIPDIS

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

E.O. 12958: DECL: 07/25/2016
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: CONOCOPHILLIPS UPDATE: N BLOCK,
KASHAGAN

REF: A. ALMATY 2157


B. ALMATY 1085

Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.4 (b)
and (d).


1. (C) Summary: Outgoing ConocoPhillips (CP) Country Manager
Hakim Janah told Econoff on July 21 that the company had
improved the financial terms of its bid for a share of
Kazakhstan's offshore "N" block (Ref A), following Shell's
rejection of a CP proposal that the two companies cease
competing and submit a joint bid to KazMunaiGaz (KMG). Janah
remains optimistic about a favorable outcome to the bid
process. Regarding Kashagan, Janah reported that the
consortium is considering four alternative development plans
to minimize the safety risks recently discovered in the
design of the projects offshore facilities (Ref B). Janah
explained that project operator AGIP was courting consortium
partner KMG with a proposal that would allow "first oil" to
flow in 2009, albeit in small volumes (150,000 bpd), while
other project partners preferred the economics of a robust
production schedule beginning in 2011. End summary.

N Block: Shell Refuses to Submit Joint Bid
--------------


2. (C) Janah told Econoff (in strict confidence) that CP CEO
James Mulva had called his Shell counterpart in June with a
proposal that the two companies submit a joint bid to KMG for
the "N" block, with each company receiving 25% of the
project. The Shell CEO refused, Janah reported, and Mulva
had authorized a significant improvement in the financial
terms of CP's bid. Janah noted that CP had not included a
proposal to build a petrochemical facility, as sought by at
least some in the GOK (Ref A). CP had instead repeated the
position Mulva had taken in conversation with Prime Minister
Akhmetov: CP was committed to "gas monetization," but would
have to judge the quantity and quality of "N" block gas
before advancing on a petrochemical project. Janah professed
to be mystified by Shell's strategy, telling Econoff that, as
far as he knew, Shell had not submitted an improved offer.
Janah was optimistic that CP's bid could win the company a
35% share in the project, thus presenting Shell with the
choice of swallowing its pride and accepting 15%, or
abandoning its bid entirely.

Kashagan: AGIP to Try to Save Face with Early "First Oil"
-------------- --------------


3. (C) Janah reported that, following the Spring 2006
revelation that the Kashagan offshore facilities contained a
serious design flaw and would have to be reworked, a
contractor had submitted four alternative proposals for
re-engineering the offshore facilities to bring the safety
risk to acceptable levels. Operator AGIP, Janah explained,
favored an approach which would allow "first oil" to flow in
2009, albeit at very low levels (150,000 bpd). This scheme
would allow AGIP to "save face" by minimizing the production
delays -- an outcome, Janah suggested, which was likely to
tempt the GOK and project partner KMG. Other project
partners, Janah said, favored setting the "political"
dimensions of the question aside and choosing the option with
the highest Net Present Value -- likely one which delayed
production until 2011, but launched at significantly-higher
volumes. Janah expressed skepticism about the outcome of the
consortium decision process, telling Econoff laughingly that
"the only thing AGIP does well is play off one partner
against another," with complex, behind-the-scenes deals.
ORDWAY