CPC AND SHTOKMAN: SOME RESIGNATION, SPRINKLED WITH

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 011079

SIPDIS

SIPDIS

DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF/PISCITELLI
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR GRAHAM, MCKIBBEN, MCCORMICK, AND COEN

E.O. 12958: DECL: 09/28/2036
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CPC AND SHTOKMAN: SOME RESIGNATION, SPRINKLED WITH
HOPE

REF: MOSCOW 10777

Classified By: Amb. William J. Burns. Reasons 1.4 (b/d).


1. (C) SUMMARY. On September 28, Ambassador met with
Chevron's VP for Business Development Jay Pryor and the
company's Russia chief, Ian MacDonald. On Shtokman, Chevron
believes it has little chance of affecting the outcome of the
now-politicized deal, but noted that market realities
(missing the Atlantic Basin LNG window) and any good news on
WTO may be the catalyst allowing Gazprom to announce
consortium members by year's end. Chevron seems resigned to
the Kremlin-inspired linkage between the
Burgas-Alexandroupolis (BA) bypass pipeline and CPC expansion
but maintains that now the bypass discussion is driving
expansion and not the other way around. In Athens, Pryor
said that Putin tasked Transneft with finding a way to get BA
built, thus putting the pipeline company on the hot seat and,
perhaps, provides the incentive to get CPC done.
Nevertheless, the final go-ahead on expansion will not
require a BA deal alone but will undoubtedly hinge on
upcoming discussions between Putin and Nazarbayev. END
SUMMARY.
.
Shtokman: High Politics and Rhetoric Meet Market Realities
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.

2. (C) Pryor said that Chevron recognizes the Shtokman
decision is not for Gazprom to make and is now resigned to
the fact that encouraging WTO passage and maintaining contact
with Gazprom is all they can do at this point. If it were
Gazprom's decision to make, Chevron believes it stands a very
good chance of getting in as senior Gazprom officials have
confided to Chevron that its offer is the best of the five,
Pryor said. Presidential energy advisor Igor Yusufov
confirmed this to Pryor in a recent meeting and added that
the Kremlin's aim was to use the various delays and confusing
cues to do little more than squeeze the best offer from the
companies. To reinforce this view, MacDonald said that Putin
shopped Chevron's offer to Total during his recent trip to
France, hoping Total would up the ante. For this reason,
MacDonald and Pryor are not concerned about Putin's efforts.


3. (C) Pryor noted that the Kremlin is playing a dangerous
game delaying Shtokman because it could well miss the market
window for Atlantic Basin LNG. This would consign Russian
exports from Shtokman to be piped to Europe and thus would
move Russia off of Shtokman's original purpose -- to
diversify exports away from Europe. Putin's statement in
France about possibly diverting Shtokman volumes by pipeline
to Europe would have the same negative effect, although
MacDonald pointed out that there is no inconsistency between
the volumes Putin mentioned and longstanding plans to
consider shipments of gas from Shtokman to Europe by pipeline
in subsequent phases of the field's development after the
first phase firmly targets LNG to North America. Pryor noted
that Japan's offered prices for LNG have risen 20 percent in
the last two weeks -- the sort of market force that will pull
Middle Eastern and Asian LNG to Asian markets, starving the
U.S. west coast and thus driving Atlantic LNG to the U.S.
East and Gulf coasts, leaving little market for Russia during
the current window.


4. (C) As for Shtokman's linkage to WTO, Pryor added that
Chevron's sense is that Gazprom itself (and many senior GOR
officials) really want Shtokman decided this year. At the
same time, it is clear beyond doubt now that Russia needs
massive new supplies like Shtokman to come online to meet its
myriad gas commitments. Looking forward, Pryor added that
part of Chevron's offer to Gazprom involves assets in the
U.S. and he said that Gazprom is "amazingly scared" about
U.S. corporate governance requirements. The Ambassador
replied that this is understandable, but that it is precisely
this sort of integration that can have a disciplining effect
on Gazprom and Russia over time, hopefully making Shtokman
both the first and the hardest such deal to cut and the
future somewhat easier.
.
Life and Taxes? CPC's Future
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.

5. (C) Moving to CPC expansion, Pryor and MacDonald both

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claimed that the government and all but one western partner
(unspoken, but it is ExxonMobil) have agreed on the economic
terms for expansion. On the twin issue of agreeing with the
GOR on corporate governance -- something that has long
plagued negotiations -- Chevron believes the GOR is about to
present a scheme that will be acceptable to the other
shareholders. This twin deal would complete the technical
package necessary for CPC expansion. Chevron believes the
next milestone could be Putin's upcoming meeting with
Nazarbayev in Uralsk where inter alia they will cut a deal on
Karachaganak gas sales. In addition to adding to political
momentum for CPC expansion, Chevron expects Nazarbayev to
soon pressure the last western partner holding out on the
economic terms for CPC expansion to give in since the
sticking points are economically immaterial given the scope
of the project.


6. (C) Chevron is less sanguine about the tax case against it
(reftel),but still hopeful on that front as well. The
Ambassador noted that he had raised the case with Finance
Minister Kudrin this week and that Kudrin said he understood
and would look into the situation. One of Kudrin's aides
downplayed the likelihood that the tax case would ever go as
far as converting to a criminal case. The Ambassador opined
that Kudrin is effective at ensuring that tax prosecutors
double-check with those (like his ministry) that offer some
checks and balances to this sort of untethered law
enforcement activity.
.
Burgas-Alexandroupolis Bypass: CPR for CPC?
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.

7. (C) Pryor said that meetings in Athens between President
Putin and the president of Greece and Prime Minister of
Bulgaria appear to have gone well and that the
Burgas-Alexandroupolis (BA) pipeline concept is moving along
well. The force of events has essentially driven Chevron to
accept that CPC expansion is now inextricably linked to BA
pipeline's success, rather than Chevron's longstanding
position that causality should be the other way around.
Pryor noted that Transneft's President Vainshtok appears to
have been given the order by Putin to "make BA work" and is
now a man in a hurry (Note: On September 27 another Chevron
source very close to BA negotiations verified this in no
uncertain terms. End Note). MacDonald noted that Bulgaria's
EU accession timeline is also motivating the Russians to move
fast before the roles of Russian companies there comes under
official EU scrutiny.


8. (C) But Chevron still holds key cards in this poker game.
MacDonald observed that Russian officials now realize fully
that BA cannot be realized without Caspian oil, and that, in
turn, means oil through CPC, and in the Russians' mind that
means Chevron. Partly in recognition of this, Russia,
Greece, and Bulgaria have nominally carved out an early
position for Chevron, albeit largely in absentia. According
to MacDonald and Pryor, the Russians want 17 percent each for
Rosneft, Gazpromneft, and TNK-BP for a total of 51 percent
Russian equity. Greece and Bulgaria seem content at this
stage with 16 percent each, leaving Chevron with 17 percent,
or parity with each of Russia's shippers. Pryor and
MacDonald agreed with the Ambassador that this is not a bad
starting point for negotiations over equity control. (Note:
Shawn McCormick of TNK-BP -- please protect -- told us on
September 29 that sources very close to the negotiations say
the equity split would be 51 percent Gazprom/Rosneft, 25
percent TNK-BP/Chevron, and 24 percent Greek/Bulgarian
companies, with Transneft assigned to coordinate the
arrangement. This conflicting account seems to indicate the
contours of the deal are not decided yet. End Note)


9. (C) This need for CPC to make BA work could resolve some
related issues -- MacDonald said that Chevron believes that
should a Bosphorus bypass go forward, the tax case will
"vanish." Pryor suggested that the USG need not do anything
at this point, but clearly as negotiations continue, USG
efforts at the right moment to promote the pipeline with
relevant governments -- including Turkey -- would be most
effective. BA will clearly need political heavyweights to
assist in achieving something akin to an international
treaty. Regarding Turkey, Pryor said Chevron is still
strongly engaged on a Samsun-Ceyhan option, and MacDonald

MOSCOW 00011079 003 OF 003


added that Chevron still is considering the tempting merits
of pursuing both bypasses.
.
COMMENT
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.

10. (C) Putin's shopping of Chevron's offer on Shtokman
certainly points to the Kremlin's desire to maximize rents
from the project. That said, there is little doubt that the
Kremlin has taken ownership of the Shtokman decision and
hopes to leverage this into concessions from the U.S. and
others on WTO and other issues. Regarding CPC and BA,
confusing signals about equity ownership means the economic
viability of the project is unknown at this point and
probably warrants caution on our part. When and if Chevron
climbs on board, then we can offer our political support. In
the meantime we should watch how the governments (Russia,
Bulgaria, Greece, the EU, and Turkey) proceed and how the
three Russian shippers (GazpromNeft, Rosneft, and TNK-BP) and
the other actors (Chevron and Transneft, for example) hash
out their interests.
BURNS