TENGIZ UPDATE: RIOT DELAYS PRODUCTION INCREASE

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000737

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/CEN (O'MARA)

E.O. 12958: DECL: 12/05/2015
TAGS: ENRG EPET KZ
SUBJECT: TENGIZ UPDATE: RIOT DELAYS PRODUCTION INCREASE

REF: A. ASTANA 501


B. ALMATY 2273

Classified By: DCM Kevin Milas; Reasons 1.5(b) and (d).


1. (C) Summary: TengizChevrOil (TCO) General Director Todd
Levy told DCM on November 27 that the October 20 riot at
Kazakhstan's Tengiz oil field (Ref A) -- and the subsequent
exodus of site workers -- would likely delay "second
generation" Tengiz production from 4-6 months, until year-end

2007. Levy was more sanguine about TCO's ongoing dispute
with the GOK about sulfur disposal, reporting that the GOK
appeared satisfied with work being done on the subject by a
recently-created Joint Task Force. Levy described how,
following a request from President Nazarbayev to Chevron
Chairman David O'Reilly, TCO had entered into negotiations to
supply ethane (on "uneconomic terms") to a planned
petrochemical plant near Atyrau. The negotiations, Levy
predicted, would fail absent renewed high-level political
pressure. TCO has identified several other promising oil and
gas fields within its license area; however, with production
"limited by surface facilities," development of these fields
is unlikely until Tengiz is in decline. Levy's comments on
TCO's oil transportation vision reported septel by Embassy
Moscow. End summary.

Brawl Delays Second-Generation Production
--------------


2. (C) Astana DCM and Energy Officer, along with Moscow
Energy Officer, called on Levy in Atyrau on November 27.
Levy informed the DCM that the recent riot at Tengiz would
likely delay the start-up of "second generation" Tengiz
production "four to six months" from the target date of June
2006 (Ref B). (Note: the production increase, which will
roughly double TCO's current output of 270,000 barrels/day,
will occur in two stages, with an additional 100,000 b/d
added in 2007, and another 130,000 b/d added in 2008. End
note.) The brawl had not interrupted current production,
Levy explained -- TCO would meet 98.5% of its targeted 2006
output. However, the construction project was suffering from
the absence of workers who had left the site after the
incident. (TCO Government Relations Director Anthony
Palmeirim later specified that 1600 expatriate workers -- the
vast majority Turks -- had left the site and had yet to
return. On December 1, ExxonMobil's Government Relations
Director, Patty Graham, told Energy Officer that a total of
4000 workers were absent, many of them Kazakhstani workers
finding themselves without supervision.)


3. (C) Levy explained that, as a consequence of the incident
and pressures from both the central and the oblast
governments, TCO had doubled the minimum construction wage at
the site to roughly 54,000 tenge a year (USD 420). Levy
noted that TCO was actively seeking to replace Turkish
workers on site with those of other nationalities,
"particularly Poles and Hungarians," as the site's
Kazakhstani workers were more accepting of non-Turkish
supervisors. TCO was also taking a general (and much-needed,
Levy admitted) look at the overall living conditions at the
contractor work camps. While the local akim would
undoubtedly continue to get "political mileage" out of the
incident, and made occasional threats about withholding
low-skilled work permits, Levy was optimistic that the
political aspects of the crisis were under control, leaving
him to wrestle with the issue of labor supply.


4. (C) Note: On November 28, Richard Fritz of AGIP KCO (the
Kashagan field operator),told DCM that AGIP had suffered
labor unrest a few days after the Tengiz incident. Turkish
workers had complained that they "felt threatened," he
explained, and 3-4,000 Turkish workers had refused to report
to work. In the end, he said, AGIP had managed to get the
vast majority back to work, losing only 200 permanently.
ExxonMobil's Graham worried about another consequence of the
riot in a November 29 conversation, telling Energy Officers
that the Ministry of Education had recently published a
document in response to the riot which called on greatly
increased private sector (read: oil company) financing of
vocational education programs. The document, she said, would
likely be a topic of conversation at the upcoming Foreign
Investor Council meeting, where it would likely draw
Nazarbayev's attention. End note.)

Sulfur Disposition On Track
--------------


5. (C) Levy told DCM that, notwithstanding the GOK's very

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vocal late-summer criticism of TCO's sulfur stockpiles, the
issue seemed to be under control. TCO had formed a Joint
Task Force with various government ministries on the issue
two months previous, he said, which seemed to have satisfied
the GOK of TCO's intent to resolve the problem. TCO, Levy
explained, was working through the Task Force to fund an
environmental impact assessment, and to otherwise ground the
discussion on the real (scientific) impact of the stored
sulfur. Levy emphasized that TCO was continuing to meet its
contractual obligations to dispose of sulfur -- in 2006, he
said, TCO would likely sell 104% of the sulfur it produced,
while working on a sales expansion project that would
eventually raise that rate to 125%. Levy pointed out that,
by the time the "Second Generation Production / Sour Gas
Injection" project was completed, Tengiz alone would produce
15% of the world's supply of sulfur. Selling the
newly-produced sulfur would be a daunting task in itself, he
concluded, even without working to reduce the estimated 8
million tons of sulfur stored on site.

Petrochemicals -- With Political Pressure
--------------


6. (C) Asked about reports that TCO had agreed to supply 3
billion cubic meters (bcm) of gas annually to a planned
petrochemical complex in Atyrau (to be built by "Kazakhstan
Petrochemical Industries (KPI)" -- which, in turn, is owned
by Basell, SAT & Co., and KMG E&P),Levy confirmed that
negotiations were ongoing. Nazarbayev had "pressed"
Chevron's Chairman "to be supportive" of the venture, Levy
said, adding that "the only reason we are doing this is
politics -- just to support the President."


7. (C) Levy explained that TCO and KPI had already agreed on
a sales price, "$30-40 / thousand cubic meters," which was
roughly half of what KPI would pay to draw gas from the
nearby Central-Asia-Center pipeline. In the short-term, Levy
said, KPI would sell the unused gas fractions (once the
ethane and/or propane was extracted) on the market. However,
in the medium term TCO would need the gas for re-injection,
and so would require KPI to "backfill" the volumes it
received, purchasing additional gas on the open market, if
necessary, to replace the extracted fractions. All of this,
Levy concluded, meant that the project was probably
"uneconomic." KPI would likely ask for a lower gas price and
relief from the backfill obligations, he said, "but we're
unlikely to reach agreement" -- unless the issues resolved at
a political level; i.e., between Nazarbayev and Chevron
Chairman David O'Reilly.

Other Promising Oil Fields
--------------


8. (C) DCM met separately with a team of TCO geologists, who
reviewed the characteristics of eight additional "prospects"
within the license area, including "Ansagan," which had
excited Levy during conversation in June (Ref B). All of the
prospects appeared to have between 200 million and 1 billion
barrels of oil, "not enough to warrant the construction of
stand-alone facilities." Tengiz production, in turn, was
already limited by surface facilities ("and not by reservoir
performance"),making it unlikely that the Tengiz facilities
would be used to process oil from a new find. (Note: Oil
from Korolev, a field 10 kilometers from Tengiz, is already
being produced using Tengiz facilities.) Meanwhile, TCO was
under pressure from regulators to either develop more fields
or to allow other operators in the area. TCO is contractually
obligated to relinquish percentages of its license area over
time -- 50% by 2008, for example. While TCO was yet to
relinquish acreage it thought was promising, the challenges
of "managing the exploration license" would grow with time.
ORDWAY