SCENESETTER FOR SECRETARY BODMAN'S VISIT TO

C O N F I D E N T I A L SECTION 01 OF 03 ALMATY 000869

SIPDIS

SIPDIS

FOR SECRETARY BODMAN FROM AMBASSADOR ORDWAY

E.O. 12958: DECL: 03/06/2016
TAGS: ENRG EPET OVIP KZ
SUBJECT: SCENESETTER FOR SECRETARY BODMAN'S VISIT TO
KAZAKHSTAN


Classified By: Amb. John Ordway, reasons 1.4 (B) and (D).


1. (C) Summary: Embassy Almaty welcomes your upcoming visit
to Kazakhstan. We wanted to use this occasion to provide you
with background on some of the most important energy and
nonproliferation issues where your engagement with the
Government of Kazakhstan (GOK) could help us move forward.
Oil and gas transportation issues are critical to landlocked
Kazakhstan. The GOK is currently engaged in two sets of
pipeline negotiations -- with the Azeris to secure access of
Kazakhstani oil to the BTC pipeline, and with Russia and
consortium partners to expand the CPC pipeline -- which have
either stalled or are deadlocked. You might use your
conversations with GOK officials to solicit their views on
how to move these negotiations forward. We also have a keen
interest in moving Central Asian gas to market. One proposal
for doing so is building a Trans-Caspian gas pipeline from
Kazakhstan to Azerbaijan; a joint agreement for a U.S.-
sponsored feasibility study of the project might be a useful
deliverable for a Nazarbayev visit to Washington.


2. (C) Summary (continued): We would also appreciate your
advocacy to help secure ConocoPhillips' bid to develop the
offshore "N Block" in partnership with the national oil and
gas company, and to help resolve a long-standing legal case
against an American citizen oil executive. During her recent
visit to Kazakhstan, Secretary Rice encouraged increased
infrastructure ties between Central and South Asian
countries. We would appreciate your exploring this issue,
and in particular the possibility of expanding electricity
trade in the region, with your interlocutors. Finally, we
hope that your meetings with the GOK will provide an
opportunity to highlight our excellent record of
non-proliferation cooperation with Kazakhstan, dispel any
misperceptions about the BN-350 program, and obtain clarity
on the GOK's views regarding the Second Line of Defense
program.

Post-Election Overview
--------------


3. (C) President Nazarbayev officially won 91% of the vote
in December's presidential elections. Notwithstanding the
OSCE's determination that the election did not meet
international standards, as well as the skepticism of the
opposition and others about the official margin of victory,
no one questions that Nazarbayev's was a landslide victory; a
USG-financed exit poll showed the President getting 83% of
the vote. Nazarbayev's popularity is based in large part on
Kazakhstan's rapid economic expansion (9% GDP growth,
2002-2005) and political stability. Nazarbayev appears to
have a mandate to build upon his economic successes, which
include excellent macro-economic reform and successful
management of the country's oil revenues. In his annual
"Address to the Nation" on March 1, Nazarbayev revealed an
ambitious plan for further transformation of the economy,
outlining various microeconomic reforms, reiterating
Kazakhstan's ambition to join the WTO in 2007, and stressing
the need to diversify the economy away from its dependence on
the extractive industries.


4. (C) In terms of political reform, Nazarbayev is much more
cautious. The February 11 murder of opposition leader
Altynbek Sarsenbaiuly has clearly unsettled presidential
insiders. Although none of the evidence gathered so far in
the FBI-assisted investigation points toward either a
political motive or the involvement of presidential insiders,
rumors of both persist, and the President may be concerned by
the possibility that the crime was engineered to destabilize
his regime.


5. (C) Looking outward, Nazarbayev has long played an artful
balancing act among Russia, China, and the U.S. Visits like
yours -- along with the invitation he hopes to receive this
spring to the Oval Office -- are important to him as a means
of counter-balancing Russia and China's enormous gravity.
Nazarbayev speaks often of increasing Kazakhstan's stature in
the world community. In concrete terms, Kazakhstan is
bidding for the OSCE Chairmanship in 2009; we are quietly
encouraging them to delay until 2011, conditioning our
support on further political reform. The U.S. - Kazakhstan
relationship, though underpinned by our energy interests, is
broad and deep. Kazakhstan is an ally in the War on Terror,
maintaining a 29-member ordnance disposal contingent in Iraq
and allowing no-cost overflights for Operation Enduring
Freedom in Afghanistan. We enjoy excellent, and growing
cooperation with Kazakhstan's intelligence agencies. And
Kazakhstan's non-proliferation accomplishments make it a

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"success story" among post-Soviet States.

Oil and Gas Transportation Issues
--------------


6. (C) You are likely familiar with Kazakhstan's oil wealth:
reserves are estimated at 40 billion barrels. From its
current production of 1.2 million bpd (1 million of which is
exported),Kazakhstan's output is projected to reach world
top-ten levels, at 3.5 million bpd, by 2015. However, as a
landlocked country far from world markets, Kazakhstan is
critically dependent on pipelines to deliver its oil to
market. Currently the bulk of Kazakhstani crude is exported
via Russia, both through the Transneft system and the
independent Caspian Pipeline Consortium (CPC) pipeline.
Kazakhstan's ability to get its increased volumes of crude to
market will depend, in the near future, on (a) CPC expansion
and (b) successful negotiations to secure access of
Kazakhstani oil to the BTC pipeline.


7. (C) Both set of negotiations have stalled. Russia is
playing hardball in the CPC expansion negotiations, demanding
favorable fiscal terms and, recently, adding the condition
that CPC expansion be linked to the construction of a
Burgos-Alexandroupolis (Bosphorus bypass) pipeline. The BTC
negotiations appeared near completion in September, when the
GOK and the Azeris initialed the Inter-Governmental Agreement
(IGA). However, since September little progress has been
made, and we now hear that the Azeris are considering
re-opening key agreed-upon parts of the IGA. In neither of
these cases do we perceive that the GOK is the fundamental
obstacle to concluding negotiations. It would be very
useful, however, to hear your interlocutors' views on how to
unblock the current stalemates.


8. (C) Finally, though Kazakhstan has sizable gas reserves (3
bcms proven),it currently exports very little gas, serving
principally as a transit country for Turkmenistan's and
Uzbekistan's gas. The GOK has an ambitious plan, however,
for increasing gas production, both for export and for
developing a local petrochemical industry. (Western oil
companies view a Kazakhstani petrochemical industry as
largely uneconomic, due to distance from market.) You may
wish to use your visit to gauge GOK interest in a
Trans-Caspian Gas Pipeline, running from Kazakhstan to
Azerbaijan. While the GOK is also studying the possibility of
a gas pipeline in China, only a Western route would deliver
Kazakhstani gas to world markets. A joint agreement for a
U.S.-sponsored feasibility study might be a useful
deliverable for a Nazarbayev visit to Washington, giving the
project greater political cover against near-inevitable
strong Russian opposition.

Opportunities for Advocacy
--------------


9. (C) ConocoPhillips (CP) is currently in the last stages of
a bid competition (against Shell) to partner with the
state-owned oil company Kazmunaigaz (KMG) in developing the
offshore Caspian "N Block." Secretary Rice raised this issue
with Nazarbayev during her visit in October, and both she and
Secretary Gutierrez wrote letters in support of CP's bid to

SIPDIS
President Nazarbayev in early February. CP tells us that
their bid is fiscally and technically superior to Shell's,
and CP has the added advantage of already having done
extensive geophysical and geological work on the block.
Securing CP a place in the Production Sharing Agreement (even
if in partnership with Shell) would be a geopolitical as well
as a commercial triumph: CP estimates N Block reserves a 2
billion barrels, and the field is expected to anchor future
development in Kazakhstan's Southern Caspian region.
Furthermore, the gas-rich field would be ideally located to
supply gas to a future Trans-Caspian pipeline.


10. (C) We also ask for your assistance in resolving a
long-standing legal case against Tom Dvorak, an American
citizen executive of mid-sized PetroKazakhstan, Canadian
company recently sold to China. The GOK has filed both
criminal and civil charges against Dvorak for alleged
violations of the anti-monopoly law. While we have not taken
a position on Dvorak's guilt or innocence, we do feel that it
is inappropriate for the Kazakhstani authorities to file
criminal charges in what is a civil dispute. Dvorak recently
applied to benefit from a December 2005 Amnesty Law; despite
the fact that his case seems to fit under the terms of the
Amnesty, his application and subsequent appeal have been
denied. (Not for discussion with the GOK: We feel that Dvorak
is likely being used as a pawn in ongoing negotiations

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between the GOK and the Chinese oil company over terms of the
latter's October 2005 purchase of PetroKazakhstan.) If you
get an opportunity with the President, it might be helpful if
you were to suggest that, should Dvorak's case proceed to
trial, the resulting coverage in the Western media might
reduce investor enthusiasm for the Kazakhstani market.

Regional Infrastructure Integration
--------------


11. (C) During her October 2005 visit, Secretary Rice
announced a new "Central Asia Infrastructure Initiative,"
with the objective of encouraging increased infrastructure
(energy, transportation, communication) linkages between
Central and South Asian countries. President Nazarbayev, in
turn, has spoken favorably of Kazakhstan assuming a larger
regional role, and during a recent conference on Afghanistan
reconstruction, Foreign Minister Tokayev pledged Kazakhstan's
assistance. In terms of energy initiatives, Kazakhstan is
well-placed to trade electricity with its Central Asian
neighbors. A 500 kV North-South transmission line currently
being built in Kazakhstan could be used to transmit
electricity from Kyrgyzstan and Tajikistan to Russia;
however, the GOK would have to grant access to its lines.

Non-Proliferation Issues
--------------


12. (C) Threat reduction and non-proliferation have been a
cornerstone of the bilateral relationship since Kazakhstan's
independence. Nazarbayev's 1991 decision to give up
Kazakhstan's nuclear arsenal was groundbreaking. Kazakhstan
returned all tactical nuclear warheads to Russia by January
1992, and all strategic nuclear warheads by April 1995.
Through the Nunn-Lugar CTR program the U.S. assisted
Kazakhstan with the destruction of bombers, missiles, and
silos. Cooperation continues under the CTR program to secure
the former Soviet nuclear weapons test site at Semipalatinsk.
Through the Biological Weapons Proliferation Prevention
program, we are working with the GOK to combat bioterrorism
and prevent the proliferation of biological weapons
technology, pathogens and expertise. Under the recently
signed Proliferation Prevention Initiative agreement
(WMD-PPI),we will work with Kazakhstan to strengthen its
ability to prevent proliferation of WMD and related materials
across its borders by enhancing its WMD detection and
interdiction capabilities along the Caspian Sea border.


13. (C) DOE's programs in Kazakhstan, including the
decommissioning of the BN-350 reactor in Aktau; materials
protection, control, and accountability assistance; and the
proposed LEU conversion of the Alatau research reactor, of
course represent a significant portion of our
non-proliferation cooperation with Kazakhstan. While the
latest BN-350 program review showed the project to be on
schedule, contacts at the Ministry of Energy and Mineral
Resources are prone to complain of delays and a lack of USG
commitment to the full scope of the project. Your visit will
be a valuable opportunity to update the GOK on the successful
progress of the project and to reiterate the USG's support
for the move of spent fuel to the Baykal-1 facility in
Semipalatinsk.


14. (C) Post hopes that you will also use your meetings to
push for conclusion of a Second Line of Defense (SLD)
Implementing Arrangement. Negotiations with the GOK have
dragged on for several years, apparently due to a lack of
motivation on the GOK side. Although President Nazarbayev's
positive response to you on SLD in Baku in May 2005 prompted
an additional round of negotiations in September 2005, the
GOK has not yet approved the resulting revised draft
agreement. Contacts at the Ministry of Foreign Affairs and
the Customs Control Committee have been saying informally for
several months that there are no remaining substantive issues
to be resolved with the draft agreement. Post hopes that
your meetings will reveal whether there is political will
within the GOK to conclude and implement an SLD agreement, or
whether it is time to redirect the USG's limited resources
elsewhere.
ORDWAY