KAZAKHSTAN: A/S SULLIVAN DISCUSSES ENERGY,

C O N F I D E N T I A L SECTION 01 OF 05 ASTANA 000460

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DEPT FOR EB: A/S SULLIVAN; SCA/CEN (O'MARA)
DEPT PLEASE PASS USTDA/DSTEIN

E.O. 12958: DECL: 02/21/2016
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: A/S SULLIVAN DISCUSSES ENERGY,
ECONOMIC PARTNERSHIP WITH PRIME MINISTER


Classified By: Ambassador John Ordway; Reasons 1.5(b) and (d).


1. (C) Summary: In February 4-6 meetings in Astana with
Prime Minister Masimov and GOK cabinet members, A/S Sullivan
and delegation communicated strong USG support for multiple
oil and gas export routes (including potential Trans-Caspian
pipelines),Kazakhstan's efforts to diversify its economy,
and regional economic integration. Describing his visit as a
follow-up to President Nazarbayev's September visit to the
U.S., A/S Sullivan underscored USG commitment to
strengthening the broad U.S. - Kazakhstan strategic
partnership. The Prime Minister welcomed the idea of
expanded cooperation, noted that Nazarbayev had directed him
to implement the ideas discussed in Washington, and remarked
that it was important to strive for early, concrete results.
Masimov asked for USG assistance in identifying one or more
U.S. companies which might invest in the non-oil sectors of
Kazakhstan's economy. Masimov also reaffirmed the GOK's
vision of multiple oil and gas export routes, and Energy
Minister Izmukhambetov used the occasion to propose a way
forward on the Trans-Caspian gas pipeline project: upon
completion of the EU- and USG-sponsored feasibility studies,
he suggested, the EU, GOK, and USG should consult on a
strategy to counter Russian resistance to the project (For
more on the Masimov meeting, see par. 17).


2. (C) Summary (continued): Foreign Minister Tazhin raised
three topics for discussion with the delegation: the GOK's
drive to attract foreign investment and diversify the
economy; then-Director of National Intelligence Negroponte's
characterization of Kazakhstan as "authoritarian," which
Tazhin suggested was "hard to understand and hard to
explain"; and Kazakhstan's OSCE CiO bid -- the failure of
which, Tazhin warned, could create a "disincentive to further
reform," both in Kazakhstan and in the wider Central Asian
region. Izmukhambetov and KazMunaiGaz (KMG) President
Karabalin used back-to-back meetings with the delegation to
blame ExxonMobil for the current deadlock in CPC pipeline
expansion negotiations. While both men encouraged next steps
toward developing a Trans-Caspian gas pipeline, Izmukhambetov
termed the idea of an equivalent oil pipeline "unsolvable."
Minister of Trade and Industry Orazbakov told A/S Sullivan
that Kazakhstan was "at the finish line" of WTO accession,
while identifying three issues still "to be resolved." Both
Kairat Kelimbetov, Chairman of "Kazyna," Kazakhstan's
Sustainable Development Fund, and a group of U.S. business
executives found merit in the idea of a U.S. - Kazakhstan
"public / private partnership," with Kelimbetov remarking
that Kazyna embodied a similar goal of ensuring that the
government was responsive to the needs of business. End
Summary.

Delegation Members
--------------


3. (U) Delegation Members: Assistant Secretary of State for
Economic, Energy and Business Affairs Dan Sullivan;
Principal Deputy Assistant Secretary of State for South and
Central Asian Affairs Steven Mann; Deputy Assistant Secretary
of State for European and Eurasian Affairs Matt Bryza; USTDA
Regional Director for Russia and the CIS, Dan Stein; Lana
Ekimoff, Director of the Office of Russian and Eurasian
Affairs, Department of Energy; Steve Lucas, a USTDA
contractor; and Rob Garverick, EB/ESC/IEC/EPS.

Foreign Minister on Investment, Negoponte, OSCE CiO...
-------------- --------------


4. (C) FM Tazhin raised three topics in his February 5
meeting with A/S Sullivan. First, Tazhin identified economic
diversification and the attraction of foreign investment as a
"main" GOK priority. Tazhin heralded the idea of a new,
strengthened economic partnership as a replacement for the
"mostly failed" 2002 "Houston Initiative." Second, Tazhin
told A/S Sullivan that then-Director of National Intelligence
Negroponte's January 12 characterization of Kazakhstan as
"authoritarian" and "corrupt" was "hard to understand and
hard to explain," especially after Nazarbayev's visit to the
U.S. Ambassador Ordway replied that Negroponte's comments
were analytical and not a reflection of U.S. policy; rather,
they were best understood in the context of intelligence
community analysis -- which placed a premium, especially

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after 9/11, on independent analysis, free from any given
policy constraint.


5. (C) Third, Tazhin lobbied for Kazakhstan's OSCE CiO bid,
arguing that, because Kazakhstan adhered to all OSCE rules,
there was no justifiable basis for USG opposition to its CiO
bid. Nor was there any precedent: only Turkey's 2003 bid had
ever been rejected, Tazhin argued, and then only because of
the "special circumstances" of Cyprus and Armenia. Tazhin
noted that Kazakhstan would undertake political changes "this
year," adding that further "liberalization" of the country
was a priority. Still, he argued, the U.S. position was hard
to understand, given that Kazakhstan had no political
prisoners, no "tragedies" (i.e., Andijon),a record of
religious tolerance and tolerance of minorities, an
opposition press which "writes anything" -- and had
participated in Iraq. If Kazakhstan doesn't get the CiO, he
warned, it will create a "disincentive" to further changes,
both in Kazakhstan and within the broader region. A segment
of the Kazakhstani political elite still adhered to the
Soviet past, he said, and if the CiO bid is rejected, it will
be hard to convince those elites to continue on the path of
liberalization. DAS Bryza responded, telling Tazhin that the
USG wanted Kazakhstan to become CiO. "We see a pattern of
liberalization," he acknowledged, "but we want the process to
move forward." A/S Sullivan added that the U.S. was
appreciative of Kazakhstan's economic accomplishments and
regional leadership. However, he concluded, economic
progress had to be accompanied by political reform.

...Regional Integration, Afghanistan, and Turkmenistan
-------------- --------------


6. (C) A/S Sullivan noted the small volume of intra-regional
trade and asked Tazhin about prospects for regional
integration. Tazhin mentioned that one of Nazarbayev's
efforts had been to establish "stable organizations" in the
region. Water resource management was one area where
cooperation was critical; power generation and trade were
others. As far as opportunities for Kazakhstani investment,
Tazhin noted that Krygystan offered some possibilities,
including the tourism industry around Lake Issyk Kul.
Uzbekistan, he said, had created "real problems" for
Kazakhstan to participate in privatizations.


7. (C) Deputy Foreign Minister Abdrakhmanov discussed
prospects in Afghanistan, noting that Kazakhstan's overall
approach was based on an assessment of how the GOK should
react to an "unstable situation." To that end, he said, the
GOK had adopted a government program aimed at creating
stability, and was thinking of investing up to $1 million in
humanitarian aid (likely schools or hospitals),probably
along with EurAsEC partners. Abdrakhmanov added that, while
the GOK couldn't make military contributions to a PRT,
civilian contributions might be possible. As far as private
investments, Kazyna was looking into opportunities; mining
was one attractive sector. Kazakhstani firms had bid on road
construction projects in Afghanistan, he said, but without
success, as funding countries preferred to give contracts to
their own companies. Turning to Turkmenistan, Tazhin
mentioned that Kazakhstan had discussed the idea of
constructing a gas pipeline from Turkmenistan through
Kazakhstan to China; now that Turkmenbashi was dead, however,
"those talks will have to be repeated." Asked his opinion
about Turkmenistan's future, Tazhin said that he expected
little change in the short-term. The new government would
likely focus on trying to solve social problems; however, he
added, expectations were too high, and the new government
would likely face mid-term power struggles.

Energy Issues: CPC and KCTS
--------------


8. (C) A/S Sullivan's meetings with Energy Minister
Izmukhambetov and KazMunaiGaz (KMG) President Karabalin
centered on oil and gas transportation issues. In his
opening comments, Izmukhambetov dwelled on problems
surrounding CPC expansion, telling the delegation that, while
the Government of Russian (GOR) had long held up the
negotiations, the GOR's current position on two key issues --
transit tariffs and the composition of the CPC-R Management
Committee -- was acceptable to the GOK. Now, Izmukhambetov

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declared, ExxonMobil was to blame for the deadlock. A/S
Sullivan expressed doubt that it was in ExxonMobil's interest
to delay CPC expansion. Izmukhambetov characterized the
present juncture in the negotiations as "urgent," noting that
Putin's term was drawing to a close, the pipeline was being
threatened with bankruptcy, and that shareholders still had
Russian Energy Minister Khristenko's bid to link CPC
expansion to a Burgas-Alexandropolis bypass to deal with.
(Izmukhambetov criticized ExxonMobil's position again during
the delegation's meeting with Masimov, prompting the latter
to laughingly clarify Izmukhambetov's intentions: he wants
the USG to pressure ExxonMobil to compromise, Masimov said.)


9. (C) Karabalin updated A/S Sullivan on the Kazakhstan
Caspian Transportation System (KCTS) Project, explaining that
the recently-signed MOU (between Tengiz producers, Kashagan
producers, and KMG) envisaged the creation of two working
groups -- one to tackle design issues and the other to
negotiate with the GOK. Karabalin expressed concern with the
number of actors involved in the project, as well as with
Azeri demands for high transit tariffs. Both the Azeris and
the BTC Co. needed to accept that the biggest profits should
come from oil production itself, Karabalin concluded, and not
from fees and tariffs levied on the use of the BTC pipeline.

Energy: Trans-Caspian Pipelines
--------------


10. (C) Discussion of Trans-Caspian pipeline options was
framed by A/S Sullivan's observation that, given that the
vast majority of Kazakhstan's oil and gas exports transited
Russia, the country would be well-served by alternate routes.
DAS Bryza articulated USG motives for backing a gas pipeline
as a desire to provide secure gas supplies to Europe, while
ensuring that producers earned fair market value for their
gas. Izmukhambetov's assessed prospects for a seabed oil
pipeline differently than those for a gas pipeline. Russian
and Iranian opposition, as well as a "five-country agreement
to coordinate all Caspian Sea infrastructure projects,"
rendered the idea of an oil pipeline "unsolvable." To press
forward with the idea of a Trans-Caspian oil pipeline, he
added, would be to "risk the gas pipeline project." PDAS
Mann replied that the USG was not aware of any "five-country
coordination agreement." Neither Iran nor Russia would ever
give Kazakhstan approval to go forward with a Trans-Caspian
pipeline, he added -- nor was their approval necessary.
Legally, he said, a pipeline could be built upon the
agreement of only two Caspian littoral states.


11. (C) In contrast to Izmukhambetov's skepticism about a
Trans-Caspian oil pipeline, all of the delegation's GOK
interlocutors encouraged further progress on the gas pipeline
project. However, both Karabalin and Izmukhambetov expressed
doubts about short-term Kazakhstani gas supplies. Karabalin
explained that most of the country's gas would be reinjected
in the near-term, making the development of the pipeline
"depend mostly on Turkmenistan's position," while
Izmukhambetov noted thqt supplim{(fzgm Kazakhspen#s lergewtQeas dkenf."Jbr`ciafan`j,wr!coitetlont: It isn't immediately evident why
Izmukhambetov would reject the idea of a Trans-Caspian oil
pipeline as "unsolvable" while supporting progress on a gas
pipeline. One possible explanation lies in the fact that
Kazakhstan gets market prices for its oil which transits
Russia, but far from market prices for its gas -- making both
the benefits of a gas pipeline more evident, and the effects

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of possible Russian reprisals in the gas sphere less severe.
The GOK may also be accepting at face value the oft-repeated
argument that the environmental risks of an oil pipeline
exceed those of a gas pipeline. As A/S Sullivan pointed out
to Tazhin, however, the correct comparison to make is between
the environmental and safety risks of an oil pipeline and
those posed by tanker shipments. The fact that Tazhin eagerly
asked for information backing this argument is promising.
(Tazhin also asked for an elaboration of the USG's legal view
of the Caspian delimitation issue, as it related to the
pipeline projects.) The GOK's strongest objection to the
idea of a Trans-Caspian oil pipeline, however, may be that
GOK insiders appear well-poised to profit from the port and
tanker traffic now planned to transport Kashagan and
second-generation Tengiz oil to Azerbaijan, while no
equivalent profit-making opportunities exist -- at least yet
-- in the transport of gas. Failure to agree on CPC
expansion, however, could re-focus the GOK on an oil pipeline
if there are no other feasible routes with the capacity to
accomodate Kazakhstani volumes after Kashagan production
ramps up, sometime in 2011 or later. End Comment.

WTO, Trade, Diversification
--------------


13. (C) Minister of Industry and Trade Orazbakov told the
delegation that, as robust as Kazakhstan's "strategic"
economic relationship was with the U.S., Kazakhstan wanted to
expand economic ties. 2006 trade turnover was $1.6 billion,
he said; "we want 3-4 billion in a few years." The U.S. had
invested $10.3 billion in Kazakhstan, Orazbakov remarked, but
with Kazakhstan's drive to diversify the economy, much more
was needed. (Note: our figure is higher, around $14
billion.) Orazbakov lauded General Electric plans to assemble
locomotives in Kazakhstan, suggesting that the transportation
sector offered additional investment opportunities.
Kazakhstan, he remarked, was seeking a U.S. partner to enter
the small (2-4 person) business airplane market. Turning to
WTO accession, Orazbakov told A/S Sullivan that Kazakhstan
was "at the finish line." Orazbakov cited "three issues that
need to be resolved": Kazakhstan's need for transitions on
"banking / insurance branching" and "an economic needs test
for labor," and "GMO's": "we don't know what this issue is
about," he confessed.


14. (C) Kairat Kelimbetov, Chairman of "Kazyna," Kazakhstan's
Sustainable Development Fund, described for the delegation
how the various Kazyna entities had been established to
target key development needs: one issued long-term debt
beyond the reach of private banks; another provided non- oil
and gas equity financing; a third funded development of SMEs;
another, state insurance for exporters; and, finally, the
National Innovation Fund attempted to bring new technologies
to Kazakhstan. Kelimbetov then explained how Kazakhstan had
used Michael Porter's "cluster theory" to identify seven
priority sectors for economic diversification. A/S Sullivan
asked Kelimbetov how Kazyna and the private sector worked
together, explaining the USG idea of a "public/private
partnership" as a way to involve companies, with their
"action / transaction" orientation, in the realm of
policy-making. Kelimbetov voiced enthusiasm for the
approach, noting that Kazyna, as well, strives to create a
forum in which business could discuss and recommend changes
in government regulations and procedures.

U.S. Business Perspectives
--------------


15. (C) Before his discussions with GOK officials, A/S
Sullivan met with representatives of U.S. businesses
operating in Kazakhstan. The business executives described
several challenges to doing business in Kazakhstan --
including ever-changing central and local government
interpretation of the law, and a tendency of the authorities
to use environmental fines and tax audits to erode contract
sanctity -- while characterizing the situation as "business
as usual" rather than "a crisis state." An oil and gas
lawyer described the Chinese as "very active" in Kazakhstan,
retelling how a "high-ranking" Chinese National Petroleum
Company (CNPC) official had told him that China's drive to
acquire oil and gas assets was motivated by a fear of being
"blockaded."

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16. (C) The executives lauded Kazakhstan's goal of economic
diversification, but identified more obstacles -- including
an immigration policy that was too restrictive for a country
with a booming economy and small population -- than concrete
opportunities. Similarly, regional integration would be a
challenge, they suggested, given the current low volume of
intra-regional trade and the challenges posed by Kazakhstan's
neighbors, especially Uzbekistan. Asked about U.S. efforts
to encourage Kazakhstan to assume a regional leadership role,
the executives suggested that, while there was no historical
precedent, Nazarbayev clearly wanted to enhance Kazakhstan's
regional and global status. On balance, the objective was
laudable, but perhaps only realizable long-term. Finally,
the executives reacted positively to the idea of a USG-GOK
'public / private partnership." Ken Mack, President of the
American Chamber of Commerce, and Dennis Price, Chairman of
Kazakhstan's Foreign Investors' Council Association, briefed
A/S Sullivan on their organizations, with an eye toward
playing a role in such a partnership.

Masimov: Summing Things Up
--------------


17. (C) A/S Sullivan concluded his visit by meeting Prime
Minister Masimov, who convened all of the GOK officials who
had met separately with the delegation earlier in the day.
Masimov focused on results, asking each minister to summarize
the outcome of earlier discussions with A/S Sullivan. He
then pointed out that the list of topics discussed was a
"familiar one." "I already have a directive from the
President to implement these ideas," he said, "and I will try
to fulfill it." Masimov explained that his emphasis was on
delivering practical results "within a two-year period."


18. (C) Turning to specific issues, Masimov declared that
U.S.- Kazakhstani energy cooperation was "progressing" toward
a shared vision of multiple export routes. On the topic of
gas transportation, Masimov declared that, personally, he
preferred the idea of CNG or LNG to a pipeline, but the
actual means of transportation was "negotiable." (Later in
the meeting, Dan Stein summarized a USTDA-sponsored study
demonstrating that a pipeline presents better netbacks than
other gas transport options. Earlier in the day, Steve Lucas,
a USTDA contractor, presented the study to an audience of KMG
and Energy Ministry experts.) On the KCTS process, Masimov
mused that perhaps the GOK "should cooperate more" with the
Azerbaijani government and private companies in order to move
forward. Regarding diversification, Masimov asked for USG
help in attractive one or more large companies to invest in
the non-oil economy -- perhaps in agriculture -- as a
showcase to attract further U.S. investment. Finally,
Masimov reaffirmed his approval of the idea of a
"public/private partnership,"


19. (U) A/S Sullivan has cleared this cable.
MILAS