KASHAGAN PARTIES ESTABLISH FRAMEWORK FOR CONTINUED

C O N F I D E N T I A L ASTANA 002932

SIPDIS

SIPDIS

SCA/CEN FOR M. O'MARA
DEPT PASS TO OPIC - BALLINGER
DEPT PASS TO TDA FOR STEIN, EXIM FOR GLAZER
DEPT PASS TO AID - EE-PHILLIPS/RUSHING
USDOC FOR 4231/ITA/MAC/MLONDON, 4201/BISNIS
USDOC FOR 6110/ITA/TD/BI/RHALPERN
ANKARA FOR CFC

E.O. 12958: DECL: 10/23/2017
TAGS: ECON EIND ENRG EPET EFIN KZ
SUBJECT: KASHAGAN PARTIES ESTABLISH FRAMEWORK FOR CONTINUED
NEGOTIATIONS

REF: ASTANA 2586

Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4 (B) and (D)


1. (C) Agip KCO and the Government of Kazakhstan signed a
memorandum of understanding on October 22 establishing the
framework for continued negotiations to resolve a dispute
over the exploration of the Kashagan oil field. The
memorandum calls for further talks "in a spirit of positive
and constructive cooperation" but is short on details.
Chevron Country Manager (Chevron is not part of the Agip
consortium) Zamira Kanapyanova told Poloff that she expects a
compromise will now be reached by the end of the year.


2. (C) The Kashagan dispute began in August when the GOK
expressed its dissatisfaction with the latest delays and cost
overruns at Kashagan, one of the world's largest oil
projects. Commercial production has been delayed from 2008
to 2010 (Comment: Even this date seems wildly optimistic) and
projected costs have jumped from $56 billion to $136 billion
over the life of the contract (reftel). In September, Prime
Minister Masimov called for negotiations with Agip, to last
until October 22.


3. (C) During the negotiations rumors have swirled in the
local press that the GOK would cancel Eni's concession as a
lead operator and that KazMunayGas (KMG) would have its stake
in the consortium increased. Both rumors can largely be
discounted. Kanapyanova told Poloff that she does not expect
the lead operator will be changed, a sentiment echoed by many
experts. ExxonMobil Government Relations and Public Affairs
Director Patricia Graham told the Ambassador that the stakes
in the consortium are likely to remain unchanged. (Note: If
KMG were to increase its stake, its cost burden for the
extremely expensive project would also increase.)


4. (C) Comment: The memorandum of understanding signed by
Agip and the GOK lacks in substance but reflects a shared
desire to reach a resolution. Temperatures have lowered
since August, and the chances of a Kashagan shutdown for
environmental reasons seem to have significantly diminished.
Difficult issues remain, particularly the question of the
amount of compensation due Kazakhstan for the latest delays
and cost overruns, but both sides have too much to lose not
to reach a compromise. End Comment.
Ordway