Identifier
Created
Classification
Origin
06MOSCOW12587
2006-11-22 13:01:00
CONFIDENTIAL
Embassy Moscow
Cable title:
RUSSIAN ENERGY: CRUNCH TIME FOR CPC
how-toVZCZCXRO6448 OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR DE RUEHMO #2587/01 3261301 ZNY CCCCC ZZH O 221301Z NOV 06 FM AMEMBASSY MOSCOW TO RUEHC/SECSTATE WASHDC IMMEDIATE 5383 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY RHEHNSC/NSC WASHDC PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012587
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 AND MCKIBBEN
E.O. 12958: DECL: 11/22/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: CRUNCH TIME FOR CPC
REF: A. MOSCOW 12442
B. MOSCOW 10777
Classified By: Amb. William J. Burns. Reasons 1.4 (b/d).
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012587
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 AND MCKIBBEN
E.O. 12958: DECL: 11/22/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: CRUNCH TIME FOR CPC
REF: A. MOSCOW 12442
B. MOSCOW 10777
Classified By: Amb. William J. Burns. Reasons 1.4 (b/d).
1. (C) Summary: On November 20, the Ambassador met with
Chevron Vice Chairman Peter Robertson and head of Chevron's
Russian operations, Ian MacDonald. The conversation centered
on CPC expansion but included brief discussions of the
Burgas-Alexandropoulis bypass pipeline (BAP),and the
on-going tax case against CPC (Ref B). There is real concern
that a last-minute GOR demand for higher transport tariffs
could scuttle plans for a signing of an MOU on CPC expansion
next week. If that happens, Chevron and other Kazakh-based
oil shippers may intensify their search for alternate export
routes. MacDonald was upbeat that BAP would be built. He is
resigned that CPC will lose an appeal on its tax case next
week and will need to take it to the Court of Cassation next
year. End Summary.
.
The MOU is Done, But...
--------------
.
2. (C) On CPC, MacDonald said that the text of an MOU on the
terms of expansion has been agreed by all (including the GOR)
with the exception of a couple minor governance issues (the
size of the Board and the definition of a quorum). The MOU
includes agreed language on all economic matters, including
tariffs. MacDonald said that next week's seniors' meeting
(chaired by the Russian and Kazakh energy ministers but yet
to be confirmed) could be an MOU signing ceremony.
.
A Wrench in the Works
--------------
.
3. (C) However, Robertson and MacDonald are worried that the
GOR will insist on raising tariffs above the agreed-upon
level just prior to next week's meeting. They said that the
letter Chevron received from Energy Minister Viktor
Khristenko (Ref A) and public comments last Friday from
Sergey Oganesyan, head of the Energy Ministry's Federal
Energy Agency (FEA),both hint at a GOR desire for higher
tariffs designed to accelerate the retirement of debt and
thus profits payable to the GOR. While these messages could
just be trial balloons, they could not rule out that Russia
would come in with such a last-minute demand and predicted
that, if it did, it could be a deal-breaker. Moreover,
Kazakhstan,s potential reaction to such a late tactic is
unknown. Since ultimately higher tariffs come out of
Kazakhstan,s hide, the reaction should be negative.
However, if the Kazakhs and Russians have agreed to higher
tariffs ahead of next week,s meeting, Chevron and all but
one of the other shareholders would probably go along.
.
Bypasses and Taxes
--------------
.
4. (C) When the Ambassador asked about progress on the BAP,
MacDonald said that there have been bumps along the way but
stated emphatically that "Burgas-Alexandropoulis will
happen." However, he was considerably less sanguine that CPC
would win an appeal to have overturned a back-tax claim
imposed in September. He told us that he was certain CPC
would lose at the Court of Appeals early next week and that
it would undoubtedly be forced to take the case to the Court
of Cassation in Spring 2007. MacDonald admitted that if the
tax case were ultimately lost, it would take a tariff at the
level the GOR is floating (USD 38/ton) to make CPC
profitable.
.
Comment
--------------
.
5. (C) Clearly, any tariff increase above what is currently
in the MOU would dash any hope that the document will be
signed at next week's meeting. Such a demand from the
Russian side would not only show bad faith negotiating
tactics (nothing new) but could be the last straw for some of
the producing companies. Echoing what MacDonald has told us
many times, Robertson noted that Chevron is thinking more
seriously about alternate routes for oil from Kazakhstan's
Tengiz field, including the Baku-Tbilisi-Ceyhan (BTC)
pipeline. Oil from Kazakhstan will reach world markets
MOSCOW 00012587 002 OF 002
somehow. The question the Russians can help answer over the
coming weeks will be whether CPC gets a slice of that
business -- thereby benefiting Russia directly -- or whether
potential Russian hubris undermines that opportunity.
BURNS
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 AND MCKIBBEN
E.O. 12958: DECL: 11/22/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: CRUNCH TIME FOR CPC
REF: A. MOSCOW 12442
B. MOSCOW 10777
Classified By: Amb. William J. Burns. Reasons 1.4 (b/d).
1. (C) Summary: On November 20, the Ambassador met with
Chevron Vice Chairman Peter Robertson and head of Chevron's
Russian operations, Ian MacDonald. The conversation centered
on CPC expansion but included brief discussions of the
Burgas-Alexandropoulis bypass pipeline (BAP),and the
on-going tax case against CPC (Ref B). There is real concern
that a last-minute GOR demand for higher transport tariffs
could scuttle plans for a signing of an MOU on CPC expansion
next week. If that happens, Chevron and other Kazakh-based
oil shippers may intensify their search for alternate export
routes. MacDonald was upbeat that BAP would be built. He is
resigned that CPC will lose an appeal on its tax case next
week and will need to take it to the Court of Cassation next
year. End Summary.
.
The MOU is Done, But...
--------------
.
2. (C) On CPC, MacDonald said that the text of an MOU on the
terms of expansion has been agreed by all (including the GOR)
with the exception of a couple minor governance issues (the
size of the Board and the definition of a quorum). The MOU
includes agreed language on all economic matters, including
tariffs. MacDonald said that next week's seniors' meeting
(chaired by the Russian and Kazakh energy ministers but yet
to be confirmed) could be an MOU signing ceremony.
.
A Wrench in the Works
--------------
.
3. (C) However, Robertson and MacDonald are worried that the
GOR will insist on raising tariffs above the agreed-upon
level just prior to next week's meeting. They said that the
letter Chevron received from Energy Minister Viktor
Khristenko (Ref A) and public comments last Friday from
Sergey Oganesyan, head of the Energy Ministry's Federal
Energy Agency (FEA),both hint at a GOR desire for higher
tariffs designed to accelerate the retirement of debt and
thus profits payable to the GOR. While these messages could
just be trial balloons, they could not rule out that Russia
would come in with such a last-minute demand and predicted
that, if it did, it could be a deal-breaker. Moreover,
Kazakhstan,s potential reaction to such a late tactic is
unknown. Since ultimately higher tariffs come out of
Kazakhstan,s hide, the reaction should be negative.
However, if the Kazakhs and Russians have agreed to higher
tariffs ahead of next week,s meeting, Chevron and all but
one of the other shareholders would probably go along.
.
Bypasses and Taxes
--------------
.
4. (C) When the Ambassador asked about progress on the BAP,
MacDonald said that there have been bumps along the way but
stated emphatically that "Burgas-Alexandropoulis will
happen." However, he was considerably less sanguine that CPC
would win an appeal to have overturned a back-tax claim
imposed in September. He told us that he was certain CPC
would lose at the Court of Appeals early next week and that
it would undoubtedly be forced to take the case to the Court
of Cassation in Spring 2007. MacDonald admitted that if the
tax case were ultimately lost, it would take a tariff at the
level the GOR is floating (USD 38/ton) to make CPC
profitable.
.
Comment
--------------
.
5. (C) Clearly, any tariff increase above what is currently
in the MOU would dash any hope that the document will be
signed at next week's meeting. Such a demand from the
Russian side would not only show bad faith negotiating
tactics (nothing new) but could be the last straw for some of
the producing companies. Echoing what MacDonald has told us
many times, Robertson noted that Chevron is thinking more
seriously about alternate routes for oil from Kazakhstan's
Tengiz field, including the Baku-Tbilisi-Ceyhan (BTC)
pipeline. Oil from Kazakhstan will reach world markets
MOSCOW 00012587 002 OF 002
somehow. The question the Russians can help answer over the
coming weeks will be whether CPC gets a slice of that
business -- thereby benefiting Russia directly -- or whether
potential Russian hubris undermines that opportunity.
BURNS