KAZAKHSTAN: CHEVRON MANAGER DISCUSSES ORENBURG

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 001110

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NOFORN
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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

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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

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-------------- --------------


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