Identifier
Created
Classification
Origin
06ALMATY886
2006-03-07 11:43:00
CONFIDENTIAL
US Office Almaty
Cable title:  

CHEVRON'S EURASIA MANAGER OFFERS INSIGHT INTO CPC

Tags:  ENRG EPET KZ RS 
pdf how-to read a cable
VZCZCXRO0697
PP RUEHDBU
DE RUEHTA #0886/01 0661143
ZNY CCCCC ZZH
P 071143Z MAR 06
FM AMEMBASSY ALMATY
TO RUEHC/SECSTATE WASHDC PRIORITY 4412
INFO RUCNCIS/CIS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 000886 

SIPDIS

SIPDIS

DEPT FOR EB/ESC; EUR/SNEC (MANN); SCA/CACEN (MUDGE)

E.O. 12958: DECL: 03/06/2015
TAGS: ENRG EPET KZ RS
SUBJECT: CHEVRON'S EURASIA MANAGER OFFERS INSIGHT INTO CPC
DEADLOCK

REF: A. MOSCOW 1931

B. ALMATY 4264

Classified By: Ambassador John Ordway for reasons 1.4(B) and (D)

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 000886

SIPDIS

SIPDIS

DEPT FOR EB/ESC; EUR/SNEC (MANN); SCA/CACEN (MUDGE)

E.O. 12958: DECL: 03/06/2015
TAGS: ENRG EPET KZ RS
SUBJECT: CHEVRON'S EURASIA MANAGER OFFERS INSIGHT INTO CPC
DEADLOCK

REF: A. MOSCOW 1931

B. ALMATY 4264

Classified By: Ambassador John Ordway for reasons 1.4(B) and (D)


1. (C) Summary. Guy Hollingsworth, Chevron's Eurasia
Business Unit President, told Ambassador on March 2 that he
believes that Russia is conditioning CPC pipeline expansion
on the construction of a Burgas-Alexandroupolis (B-A) bypass
in part because both Energy Minister Viktor Khristenko and
Transneft President Simon Weinstock have personal financial
stakes in the construction and operation of a B-A bypass,
which would lessen tanker traffic through the Bosphorus
Straits. Hollingsworth echoed CPC General Director Ian
McDonald (Ref A) in saying that Chevron wasn't opposed in
principle to a bypass; in fact, a bypass was critical, if
only as insurance against the risk of a Bosphorus closure.


2. (C) Summary (continued): Hollingsworth updated the
Ambassador on several Tengiz oil field issues. Chevron and
the GOK had finally reached a compromise on the GOK's
long-standing demand that Tengiz supply the Atyrau refinery
with discounted Tengiz crude; the two sides had agreed on the
supply of lower-cost Karachaganak crude instead.
Hollingsworth told the Ambassador that he was balking at
paying the GOK its Tengiz royalties in-kind (as the GOK was
asking,) due to Chevron's concern GOK intended to ship the
oil to Iran. Finally, Hollingsworth commented that, in his
opinion, Timur Kulibayev, the President's son-in-law, would
soon re-emerge on the public scene with more power than he
had previously held as KazMunaiGaz (KMG) Vice-President. End
Summary.

Explaining Russian Motivation in CPC Negotiations
-------------- --------------


3. (C) Hollingsworth told the Ambassador that he believed
Russia's recent conditioning of CPC pipeline expansion on the
construction of a B-A bypass could be explained by the fact
that both Khristenko and Weinstock had personal financial
stakes in the construction and operation of a B-A bypass.
"Weinstock wants to run the bypass," he said, "and Khristenko
is sitting on expansion to force the bypass." Hollingsworth
said that he had been relieved to learn of Khristenko's and

Weinstock's personal stakes in the B-A project, because the
information implied that Russia did not have deeper, more
intransigent objections to CPC expansion. "I don't care what
they do with their deals," he concluded -- it is good to
finally understand what is motivating the Russians. Chevron,
Hollingsworth said, would go along with a bypass "just as
insurance" against a shut-down of the Bosphorus straits. The
difficulty with moving forward with the B-A option, he mused,
was Turkish opposition.

Tengiz Update
--------------


4. (C) Hollingsworth noted that, even if CPC expansion got
underway soon, it wouldn't be complete until 2009. With
Tengiz production due to double in Summer 2007, Chevron would
be forced to ship Tengiz volumes by rail and vessel to Baku.
(See Ref B for details of this plan.) The timing of Tengiz
expansion had slipped, he admitted, in part because of
difficulties in obtaining work permits for expatriates.
(According to its founding contracts, TengizChevroil (TCO) is
not required to obtain work permits for its expatriate
employees. As recently as February, however, the GOK had
temporarily blocked the entrance of 30 employees. TCO
appealed to Foreign Minister Tokayev to resolve the issue.)
The expansion project had also experienced cost overruns,
growing from $4.1 to 5.5 billion -- which was "nothing,"
Hollingsworth laughed, in comparison to Kashagan. (cost
update on Kashagan will be sent via Septel.)


5. (C) Hollingsworth reported that TCO had finally reached a
compromise on the long-standing GOK demand that TCO deliver
crude to the Atyrau refinery at below-market cost. The GOK
had upgraded the refinery, Hollingsworth explained, under the
assumption that it would be able to obtain crude at 40% of
international prices. TCO, in turn, had held fast to the
terms of its founding contract, which granted TCO the right
to sell any oil it produced at market prices. As a
compromise, Hollingsworth explained, Chevron had offered to
supply the refinery with Karachaganak crude -- much of which
"is sold at Orenburg for Atyrau prices anyway." Last week,
Hollingsworth said, KMG had finally agreed to accept delivery
of Karachaganak crude.


ALMATY 00000886 002 OF 002



6. (C) Hollingsworth briefed the Ambassador on an emerging
issue of concern to TCO. According to the terms of the
Tengiz contract, the GOK can take its royalty payments either
in dollars or in-kind. Hollingsworth explained that the GOK
had recently asked to be paid in-kind, with oil delivered to
Atyrau -- leading Chevron to suspect that the GOK intended to
ship it to Iran. Chevron was thus in a difficult position.
In 1996, Hollinsgworth recounted, the GOK had wanted to ship
its in-kind TCO oil to Iran, and, after a long process, "the
USG signed off." Now, Hollingsworth said, Chevron was seeking
assurances from the GOK that the TCO royalty oil would not be
shipped to Iran. However, Hollingsworth added, if the GOK
forced the issue, Chevron would likely be found in breach of
contract if it refused. Ambassador offered USG assistance in
resolving the issue with the GOK. "Our lawyers are getting
together on the issue," Hollingsworth concluded, leaving open
the possibility that Chevron would request USG assistance in
the future.

Timur Kulibayev: Consolidating Power?
--------------


7. (C) Hollingsworth remarked that, in his opinion,
presidential son-in-law Timur Kulibayev would soon re-emerge
on the public scene with even more influence than he had
possessed prior to his October resignation as KMG Vice
President. Hollingsworth said that Nazarbayev had asked
Kulibayev to form an association ("KazEnergy") representing
the "big players" in the energy field. The association would
determine "how to solve key energy issues as a group" -- for
example, how to overcome Kazakhstan's shortage of skilled
workers. Furthermore, Hollingsworth added, Kulibayev would
soon be announced as the Vice-President of the new state
holding company, Samryk. (Note: On February 24 an assistant
to Samryk's president, Sauat Mynbayev, confirmed to Energy
Officer that Kulibayev would, in fact, be appointed as Samryk
VP. End Note) The Ambassador commented that, given that one
of the presumed objectives of forming Samryk was to prepare
state companies for foreign IPOs, insiders (like Kulibayev)
would be in a good position to get wealthy. Hollingsworth
concluded the topic with a political prediction: "Nazarbayev
and Kulibayev are consolidating power," he said. "Kulibayev
will be the next president."


8. (C) Comment: Russia's conditioning of CPC expansion on a
B-A bypass is justification enough, in our view, for the USG
to "take sides" on the bypass issue and push for the B-A
route. If, as we believe, oil volumes will eventually
justify the construction of both Bosphorus bypasses, we might
skirt our political problem by quietly telling the Turks
that, once B-A gets built, we will throw our weight behind a
Samsun-Ceyhan bypass as well. In recent days, we've had two
area oil managers voice their concern about the vulnerability
of the Bosphorus and the potentially serious consequences of
even a short-term shutdown of the Straits (Shell's concerns
will be provided via Septel.). If, as it appears, there are
willing private partners for a B-A deal, it may make sense
for the USG to weigh-in and try to move the deal forward.
End comment.
ORDWAY