KAZAKHSTAN: EXXONMOBIL UPDATES AMBASSADOR ON CPC

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000204 SIPDIS NOFORN SIPDIS DEPT FOR EB/ESC; SCA/CEN (O'MARA) E.O. 12958: DECL: 10/18/2015 TAGS: ENRG EPET KZ PGOV PREL SUBJECT: KAZAKHSTAN: EXXONMOBIL UPDATES AMBASSADOR ON CPC PIPELINE, KCTS PROJECT REF: A. ALMATY 1086 ¶B. MOSCOW 11079 ¶C. ALMATY 2273 ASTANA 00000204 001.3 OF 002 Classified By: DCM Kevin Milas; Reasons 1.5(b) and (d). ¶1. (C) Summary: In an October 18 meeting with Ambassador Ordway, ExxonMobil Country Manager David Willis described steps taken by his company to assert itself in the process of developing a Kazakhstan Caspian Transportation System (KCTS) to carry Kashagan (and now possibly Tengiz) crude to market. Willis also described how ExxonMobil had secured Chevron a place in the KCTS Host Government Agreement (HGA) negotiations -- a move which appears to signal both producers' interest in using the KCTS "Eskene to Kuryk" pipeline to ship Tengiz crude, at least during the time period between the pipeline's construction and CPC expansion. On the subject of CPC expansion, Willis acknowledged that a generally-acceptable possible compromise on the CPC governance issue had recently emerged, but told the Ambassador that ExxonMobil needed assurances that it had the backing of Russia's decision-makers before the company subjected the package deal to final scrutiny. Willis repeated his March comment (Ref A) that ExxonMobil had no interest in participating in a Burgos-Alexandropolis (B-A) Bosphorus bypass, stating that the company preferred to run the risk of an interruption in Bosphorus tanker traffic rather than incur the estimated $1 per barrel cost of a B-A bypass. End Summary. KCTS HGA Negotiations Underway -------------- ¶2. (C) Willis informed the Ambassador on October 18 that the KCTS HGA discussions had recently been launched in London. While TOTAL had led the IGA negotiations to date, Willis explained, with ExxonMobil playing a more passive role, ExxonMobil had decided to play a more active role henceforth, and had insisted on being a signatory to an eventual agreement. While the KCTS system had been originally designed for Kashagan production, Willis explained, the delays in both Kashagan production and CPC expansion meant that it made sense to build the Eskene (onshore from Kashagan) to Kuryk pipeline "early" -- rather than to time its completion to coincide with Kashagan production -- and to "anchor" it with Tengiz production. Counting both its Kashagan and its Tengiz shares, Willis noted, ExxonMobil "will be the biggest shipper of all" in the KCTS system. In recognition of Chevron's interest in moving Tengiz oil to market, Willis added, ExxonMobil had "brought Chevron" into the KCTS discussions as well. (Asked by the Ambassador whether exporting Tengiz's second-generation oil by the KCTS route would lessen the need for CPC expansion, Willis replied "no." By the time Kashagan and Tengiz reached full production, he said, Kazakhstani shippers would need four pipeline systems: KCTS/BTC, an expanded CPC, an expanded Atyrau-Samara pipeline, and a "completely new pipeline across Russia.") ¶3. (C) Willis explained that the KCTS project would likely end up consisting of two joint ventures. The Kazakhstanis, he said, wanted to build, own, and operate the Eskene to Kuryk pipeline. ExxonMobil, he said, would suggest that they also assume ownership of the storage tanks on the Kazakhstani shore, since the storage tanks need to be operationally integrated into the pipeline system, as well as to avoid the possibility that a private, profit-sapping partner might enter into the transportation chain. A different joint venture, he said, would likely build and operate the trans-Caspian portion (tankers and terminals) of the project. Willis indicated that the Azeris were interested in owning and operating the shipping portion of the project -- something ExxonMobil was keen to avoid. ¶4. (C) Willis also noted that ExxonMobil had approached KMG to propose that ExxonMobil represent the Kazakhstan-based oil producers in their negotiations with the BTC Corporation for onward shipment via the BTC pipeline. ExxonMobil and KMG had a unique alignment of interests in all of this, Willis explained. Not only did both companies own shares in both Kashagan and Tengiz, they (along with Shell) were the only Kashagan partners who did not also own shares in the BTC Corporation. Thus, ExxonMobil had argued to KMG, it made sense for ExxonMobil to represent the Kazakhstan-based producers in their negotiations with BTC Corporation. ASTANA 00000204 002.2 OF 002 CPC Negotiations: New Governance Proposal on Table -------------- -------------- ¶5. (C) Willis informed the Ambassador that a recent, new proposal on CPC corporate governance held some promise for unblocking the long-stalled expansion negotiations (Ref B). The proposal would arrange voting rights to ensure that the GOR did not have the ability to change the structure of the venture over the objections of the non-governmental shareholders. However, he said, before moving forward ExxonMobil needed assurances that the proposal had high-level Russian backing, and was not merely the creation of the working level team. If ExxonMobil received a signal however, that high-level Russian decision-makers backed the compromise, the company would "engage and go forward," with the remaining economic issues unlikely to present a serious obstacle to agreement. ¶6. (C) Willis assured the Ambassador that, on the issue of governance, at least, the major CPC partners were in sync. Willis explained that, of all the CPC partners, British Petroleum (BP -- with only a 2.5% share) was most ready to give in to Russia's demands, because BP was seeking to sell its share of both CPC and TengizChevroil (5%, held as a joint venture with Lukoil) and wanted a CPC deal in order to enhance the value of its holdings. ExxonMobil Not Interested in Bosphorus Bypass -------------- ¶7. (C) Continuing the conversation about CPC expansion negotiations, Willis told the Ambassador that ExxonMobil had no interest in participating in any Bosphorus bypass project, including Burgos-Alexandropolis. "We just can't see the economics," he said, suggesting that any company which joined the project would pay an additional $1 per barrel of oil to ship crude to the Black sea, while those which did not sign up would "just sail through the Bosphorus, waving." The Ambassador suggested that $1 per barrel seemed like a very reasonable "insurance premium" against the possibility that an accident or terrorist act might close the Bosphorus. Willis disagreed, replying that ExxonMobil "doesn't assess the risk as that great." ¶8. (C) Comment: We find it interesting that ExxonMobil is preparing to assert itself in KCTS negotiations -- both within the HGA process and, potentially, by leading negotiations between the Kazakhstan-based producers and the BTC Co. -- after playing only a passive role in the recently-completed BTC IGA negotiations. ExxonMobil, at least, seems to have seized on the future Eskene-Kuryk pipeline as a lower-cost way to ship second generation Tengiz production to market than the railroad-based route currently being negotiated and constructed (Ref C). Whether the HGA negotiations proceed rapidly enough to make KCTS a cost-saving alternative for Tengiz may depend on whether KMG -- as a Tengiz partner -- buys into ExxonMobil's (and, presumably, Chevron's) vision, and whether the Tengiz parties can impose their sense of urgency on other negotiating parties more habituated to the (receding) deadline of Kashagan's first production. End Comment. ORDWAY