KAZAKHSTAN SIGNS AGREEMENT ON CREATION OF

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SIPDIS

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DEPT FOR EB/ESC; SCA/CEN (O'MARA)

E.O. 12958: DECL: 05/28/2015
TAGS: ENRG EPET KZ RS
SUBJECT: KAZAKHSTAN SIGNS AGREEMENT ON CREATION OF
INTERNATIONAL URANIUM ENRICHMENT CENTER

REF: A. 06 ALMATY 602


B. 06 ALMATY 2673

Classified By: Acting DCM Deborah Mennuti; reasons 1.5(b) and (d).


1. (C) Summary: On May 10 representatives of the Government
of Kazakhstan and the Government of Russia signed an
Inter-governmental Agreement to set up an international
uranium enrichment center, under International Atomic Energy
Agency (IAEA) control, in Angarsk, Russia. For Kazakhstan's
state-owned atomic energy company, KazAtomProm, the agreement
represents an important step toward achieving its stated goal
of completing the nuclear fuel cycle, and thereby capturing
additional value in the processing of its natural uranium
reserves. In addition to completing the fuel cycle,
KazAtomProm is driven to become the world's largest
uranium-producing company, with company president Mukhtar
Dzhakishev announcing a production target of 18,000 tons of
natural uranium by 2010. KazAtomProm has signed several
uranium production agreements toward these ends in the past
year, primarily with Russian and Japanese companies.
According to a high-level KazAtomProm executive, the company
has also finalized terms of a deal to buy 10% of Westinghouse
from Toshiba. End summary.

International Uranium Enrichment Center
--------------


2. (SBU) On May 10, Kazakhstan's Energy Minister and
Russia's Director of the Federal Atomic Energy Agency
(ROSATOM) signed an Inter-governmental Agreement (IGA) on the
creation of an international uranium enrichment center in
Angarsk, Russia. The stated goal of the center is to provide
participating states with guaranteed access to enrichment
facilities for the purpose of creating nuclear fuel. (The
agreement also stipulates that participating states may, with
IAEA and Russian government approval, create stockpiles of
enriched uranium under the center's auspices.)


3. (SBU) The agreement specifies that the enrichment center
will be established using existing facilities at the Angarsk
Electrolysis Chemical Combine; media quotes from ROSATOM's
Director suggest that, while initial production will be
launched using the Combine's "unused capacities," the
Center's operations could be expanded in the future to new,
or other existing enrichment facilities -- likely with
funding from new partners. The agreement states that
additional countries without enrichment facilities of their
own may join the joint venture, provided they are in
compliance with the Nuclear Non-Proliferation Treaty. While
Kazakhstan and future partner governments may own equity in
the center, and participate in its management, the agreement
prohibits the transfer of Russian enrichment technology to
Kazakhstan and future joint venture partners.


4. (C) On May 18, KazAtomProm Vice President Dmitry Parfenov
told Energy Officer that the IGA had been "based on"
commercial negotiations between KazAtomProm and Russia's
Techsnabexport (TENEX). TENEX and KazAtomProm are already
majority shareholders (49.33% each) in the Zarechnoye mining
joint venture in Kazakhstan (where uranium production began
in December 2006) and in a new, 2006 JV to exploit
Kazakhstan's Budenovskoye mine, where production is scheduled
to begin in 2008. TENEX also signed a fifteen-year contract
in 2006 to deliver Zarechnoye uranium to Russia (exact
destination undisclosed) for enrichment. KazAtomProm and
TENEX's presence in each of these deals lends evidence to the
widespread conclusion that KazAtomProm envisions using the
Angarsk center for the enrichment of future volumes of
uranium mined at Zarechnoye and Budenovskoye, for onward sale
to interested nations.

KazAtomProm: Completing the Fuel Cycle
--------------


5. (SBU) KazAtomProm President Mukhtar Dzhakishev has been
outspoken about his company's ambition to complete the
nuclear-fuel cycle, articulating the goal as a logical
business strategy: maximizing the value added in Kazakhstan's
natural uranium reserves. The Angarsk deal clearly gives
KazAtomProm a share of the value-added by the uranium
enrichment process, while the deal's prohibition on
enrichment technology transfer appears to adhere to
international non-proliferation standards, while also having
the effect of precluding KazAtomProm from emerging as a
direct competitor to Russia's enrichment industry. In

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general, both Dzhakishev and officials of both governments
have explained the Angarsk and Budenovskoye JV's (along with
a third, to design and market small- and medium sized
reactors, announced simultaneously in July 2006) as
exploiting a complementarity in the Russian and Kazakhstani
nuclear industries created in the Soviet era. In a December
2006 interview with BBC, for example, Dzhakishev credited the
joint ventures as the outcome of a realization that,
"..during Soviet times our enterprises were meant to be part
of...a single nuclear-fuel cycle, and that both the Russian
and Kazakh sides can, by being mutually complementary, get a
competitive advantage in the market."


6. (C) However, it is clear that KazAtomProm is not limiting
its pursuit of the complete nuclear fuel cycle to those
projects which "complement" existing Russian ventures.
Parfenov told Energy Officer that KazAtomProm had recently
finalized negotiations to purchase 10% of Westinghouse from
Toshiba; the deal, he said, was awaiting USG approval. Prior
to Toshiba's October 2006 acquisition of Westinghouse,
KazAtomProm partnered with General Electric to make a
competitive bid for the company. In a January 2006 interview
with "Nuclear.Ru" Dzhakishev explained that, if KazAtomProm
succeeded in its bid to buy Westinghouse, the company would
enter into direct competition with Russia's TVEL in the
production of fuel assemblies. KazAtomProm is also pursuing
deals in other aspects of the fuel cycle with non-Russian
partners. Parfenov told Energy Officer that the company
would soon announce a "Memorandum of Intent" with Canada's
CAMECO for the creation of a conversion facility in
Kazakhstan, "or elsewhere, if it isn't profitable in
Kazakhstan." The April visit of Japan's Minister of Economy,
Trade, and Industry, Akira Amari, Parfenov explained, had
yielded a "strategic understanding" with the Japanese
companies NFI and Sumitomo on "the most difficult part of the
fuel cycle," the fabrication of fuel assemblies. (Note: The
Japanese Minister's visit also resulted in an announcement by
Dzhakishev that KazAtomProm would dramatically increase the
exports of uranium and uranium value-added products to Japan,
to reach 40% of the market share of the former by 2010. And
on April 24, Japan's Marubeni Corporation, Tokyo Electric
Power Company, and Chubu Electric Power Company announced
their joint acquisition of an indirect ownership interest in
the companies developing Kazakhstan's Kharasan mine,
projected to produce 750 tons of uranium by 2012. End note.)

Uranium Production: Doubling in Three Years?
--------------


7. (U) According to the Ministry of Energy and Mineral
Resources, Kazakhstan produced 5,279 tons of uranium in 2006,
an increase of 21% above 2005. Output in 2007 is expected to
reach 6,937 tons, an additional rise of 31%.
KazAtomProm has set forth lofty mid-term production goals. In
an April 2007 interview with a Kazakhstani newspaper,
Dzhakishev announced that KazAtomProm's uranium production
would reach 18,000 tons by 2010. In 2004, Dzhakishev
explained, KazAtomProm had announced a 2010 target of 15,000
tons, but "we recently reviewed our plans and raised the bar
a little more." Dzhakishev has also articulated the related
goal of transforming KazAtomProm into the world's largest
uranium producing company in the same time frame. (According
to the World Nuclear Association, KazAtomProm currently ranks
a distant second to Canada's CAMECO.) In order to realize
these production goals, KazAtomProm will depend heavily on
newly-opened uranium mines, including Zarechnoye, Mynkuduk,
Budenovskoye, and Kharasan.
GILMER