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

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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.


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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