KAZAKHSTAN: CHEVRON MANAGER DISCUSSES ORENBURG

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 001110 SIPDIS NOFORN SIPDIS DEPT FOR EB/ESC; SCA/CEN (O'MARA) E.O. 12958: DECL: 04/25/2017 TAGS: ENRG EPET KZ SUBJECT: KAZAKHSTAN: CHEVRON MANAGER DISCUSSES ORENBURG DEAL, KCTS REF: A. ASTANA 563 ¶B. 06 ALMATY 2273 ¶C. 05 ALMATY 4264 Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5 (b) and (d). ¶1. (C) Summary: Luis Coimbra, Marketing and Transportation Manager of Chevron's Eurasia Business Unit, briefed Energy Officer on April 24 on Chevron's vision for the Kazakhstan Caspian Transportation System (KCTS) and the status of the Gazprom-KazMunaiGaz (KMG) joint venture to expand the Orenburg Gas Processing Plant. Coimbra contested the conventional wisdom that shipping more than 500,000 barrels/day (b/d) of oil across the Caspian by tanker would create congestion and pose safety risks; with the planned 40-60,000 dead-weight ton (DWT) vessels and state-of-the-art mooring technology, he said, the KCTS system could easily transport 1.5 million b/d. On the Orenburg deal, Coimbra reported that the Karachaganak Petroleum Operating Company (KPO) had finally agreed on a price for the sale of its gas, but that the broader negotiations between Gazprom and KMG to expand the plant were "falling apart." Coimbra said that the Kazakhstanis were increasingly interested in building a $1.5 billion gas processing plant near Karachaganak in Kazakhstan. This plant would not only serve Kazakhstan's domestic needs, Coimbra said, but potentially feed gas into the Central-Asia-Center (CAC) pipeline in a "swap" arrangement, freeing Turkmen gas to be exported via a proposed pipeline to China. Coimbra confirmed that TengizChevrOil (TCO) had recently concluded a package of agreements for shipping second-generation Tengiz oil, including a two-year deal to ship approximately 90,000 b/d through the Baku-Tblisi-Ceyhan (BTC) pipeline. End Summary. Chevron's KCTS Vision -------------- ¶2. (C) Coimbra, TCO's lead negotiator in the KCTS discussions, described the process as "moving very slowly." TCO's entry into the negotiations, he said, had "saved a dying process," but there were still significant impediments to progress, including the Kazakhstanis' desire to consult with the Azeris "on every step," and Total's lack of efficiency in conducting assigned technical studies. Kazakhstan's failure to date to ratify the IGA (Ref A),he added, was an additional, looming problem. Among the substantive issues to be resolved, the maritime segment appeared to be the most complex, with the Azeris promoting the use of 12,000 DWT vessels (which the Azeris already owned),and the oil companies and the Kazakhstanis favoring larger, 40-60,000 DWT tankers. TCO, Coimbra said, was advocating the following compromise: in the initial stages of the project, when only Tengiz oil was available, the 12,000 DWT ships would be used, and would call exclusively at the Aktau port, which would be supplied by a spur of the main Eskene-Kuryk pipeline. (This pipeline would initially be built to carry one million b/d, expandable to 1.5 million.) Later, in anticipation of Kashagan oil production, a second, deep-water terminal would be built at Kuryk to accommodate the larger vessels. (Coimbra noted that it appeared as though the Kazakhstanis were intent on shipping their share of the oil -- which would increase when the "cost recovery" phase of Tengiz production ended -- by tanker to Iran. This oil, he said, would flow from the KazTransOil terminal in Aktau.) ¶3. (C) Asked whether the anticipated vessel traffic across the Caspian posed serious safety and environmental concerns, Coimbra acknowledged that using "fifteen" 12,000 ton vessels was not ideal. However, he said, once the 40-60,000 DWT vessels were incorporated, with dynamic positioning systems and state-of-the-art loading and unloading facilities, "even 1.5 million b/d" was feasible without significant risk. Orenburg Expansion "Falling Apart"? -------------- ¶4. (C) Coimbra informed Energy Officer that KPO had recently reached an agreement with KazRozGaz on a long-term price for delivery of gas to Orenburg. (Note: British Gas Deputy Asset General Manager Claire Hawkings confirmed on April 13 that the two parties had agreed on a short-term price, but told Energy Officer that they were still negotiating a formula for adapting that price to market prices. End note.) However, Coimbra said, negotiations between KazMunaiGaz and GazProm on ASTANA 00001110 002 OF 003 the broader terms of the joint venture to expand the Orenburg plant were "falling apart." While many issues remained unresolved, he said, one critical one concerned the pricing of Kazakhstani gas. Of the 16 billion cubic meters (bcms) of gas which KPO envisioned shipping to Orenburg, he explained, half was allocated to the Kazakhstanis: five for re-export to Kazakhstan for domestic use, and another three for sale to Europe at $147 / thousand cubic meters (tcm),the price which had been announced during the July 2006 G8 Summit. However, Coimbra said, the Kazakhstanis wanted to take the five bcms needed for domestic use at the front end of the deal, and then split the remainder (11.5 bcms) with the Russians for sale at $147/tcm. (Note: Prime Minister Masimov recently announced that the Orenburg discussions were near completion, and that the Orenburg joint venture could be finalized by mid-May. End note.) ¶5. (C) Coimbra told Energy Officer that the Kazakhstanis appeared to be serious about constructing a five bcm, $1-2 billion gas processing plant near Karachaganak, on Kazakhstani soil. The plant would be built under terms of the KPO Production Sharing Agreement, he said -- and thus KPO partners would be able to recover the construction costs. The Kazakhstani vision was to reduce gas injection at Karachaganak (provided the field engineers confirmed that this would have minimal impact on oil production) and thus obtain an additional five bcms of gas, beyond the 16 bcms destined for Orenburg. The plant would be designed to be easily expanded to process much larger volumes of gas, should the Orenburg deal fall through. (In this "worst case" scenario, Coimbra explained, KPO could reinject the gas until the proposed gas processing plant could be brought on-line.) ¶6. (C) While the GOK idea was to use the proposed plant to serve domestic needs, Coimbra said, there was discussion of linking the plant to the nearby Central Asia Center (CAC) gas pipeline, and even of using the Karachaganak gas in a "swap" operation with Turkmen gas: five bcms would be pulled from the CAC in to supply the proposed pipeline to China; these volumes would then be replaced in the CAC pipeline by Karachaganak gas. Coimbra rated the Chinese gas pipeline project as "likely," explaining that, even though Turkmen gas supplies might be doubtful, "the Chinese are ready to pay to build the whole thing anyway." Under those terms, he said, the project was attractive to the Kazakhstanis, who were seeking not only to export gas, but also to supply gas to Almaty and other southern population centers. ¶7. (C) Coimbra mentioned that Chevron was conduction a "Caspian area gas utilization study." One of the feasible options being looked at, he said, was to locate a gas-to-liquids (GTL) plant in Aktau, and export diesel across the Caspian. Transport Solutions for Second Generation Tengiz Oil -------------- -------------- ¶8. (C) Coimbra told Energy Officer that TCO had recently concluded a series of deals for the transportation of "Second Generation" Tengiz production. Of the 100,000 b/d that would be shipped South (by rail to Aktau, then by tanker to Baku), he said, around 90,000 b/d would be shipped onward via the BTC pipeline, with the remainder sent by rail from Baku to both the Batumi and Kulevi terminals on the Black Sea. Coimbra indicated that TCO had signed a two-year deal with BTC, obtaining a "favorable" $3.50 / barrel "third party" price, rather than the $7 / barrel "owners' rate." (In addition to shipping oil South, TCO will send second generation oil North, by rail to Odessa. Refs B,C.) ¶9. (C) Coimbra confirmed media reports of a growing rivalry between the SOCAR-owned Kulevi terminal and the Batumi terminal, now partially-owned by KMG, suggesting that the Batumi terminal now looked far less profitable than when KMG had bought its stake. (Note: In a March 13 conversation with Energy Officer, KazTransOil Executive Director Sabr Yessimbekov admitted that Kulevi appeared destined to be the principal oil-export terminal on the Black Sea. KMG was adapting, Yessimbekov explained, by pursuing a deal to construct a 5-7 million ton oil refinery adjacent to the Batumi terminal, with an eye toward eventually exporting refined products from the Batumi terminal -- effectively ceding the crude export market to Kulevi. End note.) Regional Pipelines: Keen Interest in BTC Expansion ASTANA 00001110 003 OF 003 -------------- -------------- ¶10. (C) Coimbra informed Energy Officer that pre-FID (Final Investment Decision) work was underway on BTC expansion, with approval by partners targeted for early 2008. In order to make any progress on expansion, he confided, those BTC Co. partners with Caspian volumes to ship (like Chevron) would likely have to compensate those partners which did not. Coimbra added that Chevron, Exxon, and Shell were forming a consortium and performing pre-FID work for "another (35 million ton) Baku-Supsa" pipeline. The ongoing problems with the existing Baku-Supsa line (which has been down since November),he said, along with a longer and larger projected plateau for Azeri oil production, was driving increased interest in both BTC expansion and the second Baku-Supsa pipeline. ExxonMobil and Shell were logical partners for the second Baku-Supsa project, he noted, because neither had BTC pipeline access. ¶11. (C) Comment: The fact that Coimbra judges the prospects of KPO building a gas processing plant near Karachaganak to be realistic is interesting. The presence of gas processing infrastructure at that site, which could be expanded relatively cheaply when KPO's deal to supply gas to Orenburg expires (if, indeed, it is ever finalized),would contribute significantly to prospects for a Trans-Caspian gas pipeline. End Comment. ORDWAY