CONOCO-PHILLIPS VIEWS OF THE KAZAKHSTAN-AZERBAIJAN

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000663

SIPDIS

SIPDIS

USDOE FOR FE - SWIFT AND OS - WILLIAMSON
USTDA FOR DAN STEIN

E.O. 12958: DECL: 05/02/2016
TAGS: EPET ENRG PREL EWWT EINV AJ KZ
SUBJECT: CONOCO-PHILLIPS VIEWS OF THE KAZAKHSTAN-AZERBAIJAN
OIL-TRANSPORT NEGOTIATIONS


Classified By: Charge d'Affaires Jason P. Hyland, reasons 1.4 (b),(d)
and (e).


1. (C) SUMMARY. ConocoPhillips executives believe the
Azerbaijan-Kazakhstan IGA for trans-Caspian oil transport
must be signed this year if the needed maritime
infrastructure is to be ready by the time the oil flows,
although they concede the deadline may be more flexible.
Major issues for ConocoPhillips include whether it will be
allowed to own or exclusively charter the giant tankers built
for the program, and newly-appointed Finance Minister Samir
Sharifov's idea to impose both transit fees and a profit tax
on the project instead of just one or the other.
ConocoPhillips is interested in possibly a TDA study of the
potential benefits of improved maritime infrastructure in the
Caspian. Post supports the idea of such a study because of
the potential for this project to assist in Azerbaijan's
development and economic diversification beyond the energy
sector. END SUMMARY.

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IGA NEEDED "THIS YEAR"
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2. (C) In a recent meeting with Charge, ConocoPhillips
Russia/Caspian Region President Dr. Kevin Meyers said that
the InterGovernmental Agreement (IGA) between Azerbaijan and
Kazakhstan for trans-Caspian oil transport needs to be signed
this year. This will allow the necessary investments to be
made in marine infrastructure before Kazakhstan's Kashagan
field goes into production. Meyers also expressed the worry
that the IGA negotiations could "punt" too many difficult
issues to the follow-on Host Government Agreements (HGA)
negotiated separately with Azerbaijan and Kazakhstan.
ConocoPhillips wants to see a strong IGA that definitively
addresses and settles the issues involved in the project.


3. (C) Regarding the selection of a tanker system as opposed
to a pipeline as the method for bringing Kazakhstan's oil
into BTC, Meyers said firmly "there is no technical or
economic reason not to build a pipeline from Kazakhstan to
Azerbaijan." Meyers said he felt the two countries had
decided on shipping for different reasons, perhaps political
ones connected to Caspian delimitation. Meyers also stressed
that BTC expansion is critical -- without expanding the
capacity of the line, there naturally will be no room for
Kazakhstan's oil.

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AREAS OF INTEREST: OWNING SHIPS
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4. (C) In a meeting April 22 with Energy Officer,
ConocoPhillips Russia/Caspian Transportation Manager John
Dabbar identified four areas in the draft IGA of particular
interest to ConocoPhillips. The first of these is what the
IGA refers to as the "Marine Transporter." ConocoPhillips
had proposed language addressing the right of the north
Caspian producers to own and/or charter ships to transport
the oil. This language has been deleted and the issue
essentially kicked to the HGAs. ConocoPhillips is worried
about this because it does not want to invest vast sums to
develop a tanker fleet for Azerbaijan and Kazakhstan that it
then does not own or control. ConocoPhillips feels this
issue has to be addressed. Until it is, Dabbar pointed out,
ConocoPhillips and other investors will be reluctant to put
money into maritime infrastructure for the project. The
result is that, even if the IGA is signed in the very near
future, the project will be pushed further into the future.


5. (C) Energy officer asked if the deadline of Kashagan
production in 2009 is really a "hard" deadline, pointing out
arguments by Azerbaijani officials in septel that production
will take a while to build up. Dabbar conceded that the
deadline is more flexible than the north Caspian producers
imply in their public statements. However, Dabbar also noted
that "time kills all deals" and the longer it takes to get
this project going, the more likely that some north Caspian

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producers will look at other potential export routes for
their oil.

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SPECIFYING KASHAGAN AND BTC?
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6. (C) The second issue is the question of whether the IGA
will specify the Kashagan field as the source of oil coming
from Kazakhstan and whether it will specify BTC as the
transportation mechanism across Azerbaijan. Dabbar said that
his understanding is that the IGA now speaks of "any oil from
Kazakhstan" and identifies the transportation mechanism as
"primarily BTC." ConocoPhillips does not have a problem with
this language and feels it will allow for rail transportation
in extremis.

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KARACHAGANAK
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7. (C) A third issue involves a request by Kazakhstan that
the IGA include language saying "this agreement is executed
without prejudice to any border disputes." Dabbar feels this
is about eventually bringing oil from the Karachaganak field,
near the Kazakhstan-Russia border, into BTC without getting
caught up in border issues. The GOAJ, says Dabbar, wants to
look at this carefully and consult with its MFA, which has
not been involved in the negotiations, before agreeing to it.

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FEAR OF "DOUBLE TAXATION"
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8. (C) The final issue leads back to Samir Sharifov, formerly
head of the State Oil Fund and now Minister of Finance.
Sharifov is talking about imposing both a transit fee on the
north Caspian producers as well as a profit tax. Dabbar
points out that, normally, either a transit fee or a profit
tax is imposed on the transportation of oil across a second
country's territory -- not both. This amounts to double
taxation and ConocoPhillips is strongly opposed to it.
Dabbar pointed out that this matter is not addressed in the
IGA but is still of concern. This may simply be a case of
Sharifov asserting himself to get attention, said Dabbar.
ConocoPhillips will be meeting with him to see "what it is he
is really after."

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MARITIME INFRASTRUCTURE: ROLE FOR TDA?
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9. (C) Dabbar said that ConocoPhillips is seriously looking
at the question of shipbuilding in Azerbaijan for this
project. Even if the actual hulls are assembled elsewhere,
Dabbar pointed out, there is the question of training
sailors, upgrading ports, and other related matters. Dabbar
asked if it might be possible for TDA to undertake a study of
the conditions necessary to re-establish Azerbaijan's
shipbuilding infrastructure, which died out after the Second
World War. Such a study would help Azerbaijan realize the
positive effects of the project. It would also give
ConocoPhillips and Chevron, pursuing its own trans-Caspian
project, a framework in which they could cooperate.

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COMMENT
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10. (C) Although Azerbaijani officials did not mention it
during their discussions with energy officer (septel),the
issue of who can own the shipping infrastructure for the
project is clearly an important one for ConocoPhillips.
Chevron does not evidence such concern for its own
trans-Caspian project from the Tengiz field, but Chevron's
project is smaller-scale and requires much less investment.
On a related issue, a maritime infrastructure study by an
objective body such as TDA would obviously serve the

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interests of ConocoPhillips. Following one, however,
Azerbaijan might realize that this project would bring it
more benefits than just transit fees. Post has for a long
time argued that the trans-Caspian projects could play a
positive role in Azerbaijan's development. A serious study
would help solidify and quantify such a concept, serving not
only our energy agenda but our larger agenda of economic
diversification. For these reasons, post supports the idea
of such a study by TDA.
HYLAND