CPC UPDATE: FURTHER MOVEMENT TOWARD FINISH LINE?

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012763

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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: 12/01/2026
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CPC UPDATE: FURTHER MOVEMENT TOWARD FINISH LINE?

REF: MOSCOW 12587

Classified By: Econ M/C Quanrud. Reasons 1.4 (b/d).


1. (C) SUMMARY. On December 1, Ian MacDonald, head of
Chevron Russia and former head of CPC told us that the
hoped-for "seniors'" meeting -- at which a CPC expansion MOU
may have been signed -- did not come off this week. However,
CPC shareholders held a highly positive meeting which cleared
away several lingering issues, including approving funding to
fix a deteriorating stretch of the pipeline and reaching
agreement on a budget for the first quarter of next year.
However, as expected (reftel),the GOR insisted on a transit
tariff of USD 38/ton. MacDonald views this stance as firm
and expects the Kazakhstanis to agree to it but predicted
ExxonMobil would resist. On other issues, he said that the
GOR deferred the tax case against CPC until December 25 and
Chevron will soon inform interested parties of its official
negotiating stance on the construction of the
Burgas-Alexandroupolis pipeline (BAP). END SUMMARY.
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SHAREHOLDERS' MEETING BREAKTHROUGHS
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2. (C) MacDonald told us the shareholders met on November
28-29 and agreed on a number of long-outstanding items.
First, they approved funds and the contract for the purchase
of pipe for the rehabilitation/replacement of a 116-kilometer
stretch of pipeline in Kazakhstan. Without this approval,
MacDonald said CPC would have been forced to reduce the
entire pipeline's throughput, which would have thrown CPC's
finances into a tailspin. Second, shareholders approved a
USD 150 million operating budget. Although only for the
first quarter and slightly less than Chevron had proposed,
approval of the budget means another mini-crisis in the near
term avoided. Third, they approved the 2005 financial
statement, which Russian reps had been holding up under what
some suspected were reasons linked to the tax suits against
CPC (see below).
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MOU PROGRESS
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3. (C) According to Chevron, the GOR and GOK have agreed to
do some final editing of the MOU in the very near future.
The central changes relates to Russia's "firm government
position" that CPC's debt must be repaid by 2014. This date
appears to be immutable in the Russians' mind, and it appears
Kazakhstan will agree to it. As reported reftel, this would
precipitate a tariff increase to USD 38/ton, the maximum
allowed in the founding agreement. Given the fact that the
bulk of the higher transportation costs would be paid by
Kazakhstan, MacDonald expects that if the Kazakhstanis agree
to pay the higher tariff, then the others will follow suit.
He noted that compared with the previous unanimously-agreed
tariff, this increase amounted to significantly less than a
dollar a barrel, which is acceptable in the current price
environment. He opined nonetheless that resistance from
ExxonMobil, or at least extra time for them to agree to this
latest increase, could be expected.


4. (C) Beyond the tariff level, the last issues being
discussed are the size of the board (western firms want 22,
the GOR wants 20 or 16, and Lukoil wants 16) and some rules
about quorums. Chevron proposed to the GOR, outside the
formal meeting, that the GOR accept the westerners'
preference for board size in return for shareholders'
acceptance of Russia's preferred quorum modalities. A few
other very minor technical issues on corporate governance
remain, but Chevron notes that while they are not important
to Russia they are important to the companies.
.
CPC TAX CASE
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5. (C) The November 29 court of appeal hearing on the tax
claim against CPC was deferred to December 25 because the
Russian Property Agency did not appear in court after having
been called to court as a witness for the GOR. While many
interpretations could be placed on this deferral, Chevron and
most others believe it most likely that the GOR did not want
the result of the case to influence finalizing the MOU, as
the deferral puts additional pressure on the producing

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company-owners to concede to the MOU. Moreover, the MOU will
be perceived as evidence that CPC can be profitable, and thus
will influence the court's decision in a good way, but
nonetheless no one is ruling out a negative court decision.
.
PROGRESS ON BAP
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6. (C) Separate from the CPC talks and shareholders'
meetings, MacDonald informed us that he had a very positive
and constructive talk with Sergei Oganesyan, head of the
Federal Energy Agency, about both CPC and the BAP pipeline.
Oganesyan appeared not well educated on BAP (whereas, by
comparison, Transneft is quite well-versed, according to
MacDonald). Oganesyan casually remarked that BAP does not
need Chevron because it would be built anyway, but by the end
of the conversation came to see the need for Caspian oil via
CPC to fill BAP. In fact, he agreed fully that KazMunaiGaz
should be a partner in BAP along with Chevron, the two
companies comprising the "Caspian partners" in BAP. In the
end, both agreed that the main problem was that there is not
enough equity to go around for the parties interested in
participating. MacDonald informed us Chevron is in contact
with parties in Greece and Bulgaria and intends this week in
a series of meetings in London to decide on its formal
approach to all parties. He promised that contacting our
embassies in the region would be on their agenda.
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COMMENT
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7. (C) As in our previous updates, CPC is not appealing for
any particular advocacy or help at this point but wants to
keep the USG informed. While this deal will not be over
until it is over, progress in the shareholders' meetings,
coupled with a positive (even joking) meeting with Oganesyan
-- long one of the bete noire's of the CPC story -- and the
apparent near-finality of the $38/ton tariff and the 2014
debt retirement date, may mean that we are only mechanical
steps away from final approval of expansion.
BURNS