KAZAKHSTAN: CONOCOPHILLIPS UPDATE: N BLOCK,

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