Identifier
Created
Classification
Origin
07ASTANA562
2007-03-02 10:53:00
CONFIDENTIAL//NOFORN
Embassy Astana
Cable title:  

KAZAKHSTAN: CONOCOPHILLIPS' "N BLOCK" BID ON HOLD

Tags:  ENRG EPET KZ 
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VZCZCXRO3231
PP RUEHDBU
DE RUEHTA #0562/01 0611053
ZNY CCCCC ZZH
P 021053Z MAR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 8623
INFO RUCNCIS/CIS COLLECTIVE 0043
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000562 

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/CEN (O'MARA)
COMMERCE FOR ADVOCACY CENTER:BLOPP

E.O. 12958: DECL: 03/01/2017
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: CONOCOPHILLIPS' "N BLOCK" BID ON HOLD

REF: 06 ASTANA 738

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

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000562

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/CEN (O'MARA)
COMMERCE FOR ADVOCACY CENTER:BLOPP

E.O. 12958: DECL: 03/01/2017
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: CONOCOPHILLIPS' "N BLOCK" BID ON HOLD

REF: 06 ASTANA 738

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


1. (C) Summary: Don Wallette, ConocoPhillips' (CP) Russia
and Caspian Region President, told the Ambassador on February
28 that the GOK had decided to postpone, indefinitely, its
selection of foreign partners to participate in the
development of the offshore "N" block, in order to
re-evaluate the reservoir in light of indications that the
block's reserves are larger than previously assumed. This
unexpected news follows high-level GOK assurances in
December, given both to CP and the Ambassador, that CP would
be given an initial 10% stake in the project, with the
details of CP's partnership with Shell and KazMunaiGaz (KMG)
to be worked out in early 2007. According to Wallette,
CP's main rival for the project, Shell, has received the same
bad news, leaving both companies in a state of uncertainty.


2. (C) Summary (continued): Discussing Kashagan, Wallette
noted that ENI's recent announcement of a late 2010 date for
"first Kashagan oil" was still "somewhat optimistic"; a
late-summer 2007 engineering review might bring more
certainty. Wallette explained that the North Caspian PSA
partners were increasingly interested in bringing Kashagan's
sister field, Kalamkas, online in the short term, even before
first Kashagan production. ENI was receptive to the idea of
another consortium partner operating Kalamkas, Wallette
explained, and Shell had approached CP with a joint
operatorship proposal. However, Wallette concluded, given
CP's small stake (9%) in the consortium, and Kalamkas's
relative insignificance in CP's global portfolio, the company
was unwilling to make the personnel commitments required of
an operator. End summary.

N Block: Back to Uncertainty
--------------


3. (C) Wallette informed the Ambassador on February 28 that
CP had recently been notified that, due to KMG's desire to
re-evaluate the "N Block" reservoir, further negotiations on
CP and Shell's participation in the project would be
postponed, "perhaps until May or June." (When CP first

learned of the postponement, KMG sources told CP Country
Manager Nick Olds that Kashagan delays had triggered a broad
GOK review of its offshore Caspian development plans; later,
however, CP received a more authoritative explanation: that
the GOK had reason to believe that "N" Block reserves were
larger than previously thought, and wished to re-evaluate the
available seismic data.) Olds told the Ambassador that, as
far as CP knew, KMG had not acquired any new data; rather, it
would re-interpret existing data. (Earlier in the week Olds
speculated to Energy Officer that perhaps KMG had acquired
new data from Chevron, which has been undertaking seismic
data collection over a broad portion of the Caspian,
overlapping "N" -- but by February 28 Olds seemed to have
dismissed the possibility that Chevron's study had provoked
the decision.)


4. (C) Wallette termed the GOK stance "an abrupt change,"
recalling that CP had received clear notice in December, both
from Energy Minister Izmukhambetov and Presidential
son-in-law Timur Kulibayev, that CP would receive an initial
10% share of the project, and partner with both Shell and
KMG; further, CP had been told that detailed negotiations
among the three partners, leading to signature of a "Heads of
Agreement" (HOA),would commence in January. While Mulva had
not accepted that CP would receive only 10%, arguing instead
for a 20% (CP),20% (Shell),60% (KMG) initial split, the
company had weathered the delays caused by the January change
of government fully expecting to reach closure on a deal soon
after. (Note: On December 15, both Izmukhambetov and Prime
Minister Akhmetov told the Ambassador, as well, that CP would
get an initial 10% of "N." The same day, President Nazarbayev
also informed the Ambassador that CP would be included. End
note.)


5. (C) Wallette noted that "N" block rival -- and potential
partner -- Shell had also been caught off-guard by the
announcement; Shell's Country Manager, Martin Ferstl, had
called Olds in an attempt to understand the GOK's decision.
(Olds reported that a KMG source had told him that, upon
hearing the news, Prime Minister Blair had called Nazarbayev,
only to be told the same thing -- that KMG was re-evaluating
the field.)


ASTANA 00000562 002 OF 002



6. (C) Olds told the Ambassador that KMG sources had informed
him that the GOK's "N" block strategy was dependent on the
outcome of the reevaluation. If the reserve estimates grew
substantially, the GOK would either launch an entirely new
tender process, split the block in two and run separate
tenders -- or, conceivably, "stay the course" with Shell and
CP. Ambassador Ordway raised the possibility that this
latest news was (another) GOK tactic designed to squeeze the
maximum amount of money out of Shell and CP before going
forward. Did it not make sense, he asked, for Shell and CP
to join forces, both to consolidate their position and to
eliminate the possibility of being played off against one
another? Wallette and Olds agreed that it was time to
re-evaluate CP's strategy, and that approaching Shell with
such an offer was certainly worth another look.

Kashagan: Kalamkas Oil First?
--------------


7. (C) Turning to Kashagan, Wallette suggested that operator
ENI's recent announcement that first oil would be delayed
until 2010 "meant December 31, 2010," and, even at that, was
still "somewhat optimistic." The consortium would likely
know more by the end of the summer, he said, after further
engineering work was done. Wallette added that the
consortium would have to provide the GOK with a revised
development plan and budget during the summer -- which would
likely provoke a "tough" GOK reaction.


8. (C) Wallette told the Ambassador that a recent appraisal
well at Kashagan's sister field, Kalamkas, had been "very
successful." Furthermore, he said, unlike Kashagan, Kalamkas
gas was "sweet," making overall field development "no harder
than routine North Sea work." As a consequence, the
consortium partners were seriously considering bringing
Kalamkas oil to market early, ahead of Kashagan first oil.
ENI, Wallette added, was open to the idea of appointing a
sub-contractor as Kalamkas operator, so long as the field
remained under the Kashagan Production Sharing Agreement, and
so long as the operator adhered to the current development
concept -- i.e., so long as Kalamkas oil was produced early,
in order to help compensate for Kashagan delays. (Wallette
pointed out that accelerating the date of Kalamkas production
was not necessarily the best economic decision.)


9. (C) Shell had approached CP with a proposal to jointly
operate Kalamkas, Wallette said. Given their respective
shares in the AGIP KCO consortium, and Kalamkas's relatively
small size, neither company wanted to operate alone. In
fact, Wallette added, CP had turned down Shell's offer,
unwilling to commit large numbers of its skilled personnel to
operate what was, in global terms, a relatively insignificant
project. The CP executives reported that ExxonMobil was also
rumored to be a candidate for the Kalamkas operatorship.


10. (C) Comment. The GOK's decision to delay a "N" Block
deal is, of course, disappointing. It is also mysterious --
is there, in fact, new seismic data? Is this move a GOK ploy
to squeeze more money out of CP and Shell, or perhaps to
introduce new partner companies into the deal? However, it
is too early to assume that the GOK's promise of 10% CP
participation has been broken. While CP may find itself
forced to raise its offer in the face of new reserve
estimates, or even match another company's better offer in
order to secure its promised 10%, we continue to take some
comfort, at least, in the high-level promises made in
mid-December. End comment.
ORDWAY