KAZAKHSTAN: KMG EXECUTIVE DISCUSSES KCTS PROCESS

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000563

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

E.O. 12958: DECL: 03/01/2017
TAGS: ENRG EPET KZ AJ
SUBJECT: KAZAKHSTAN: KMG EXECUTIVE DISCUSSES KCTS PROCESS

REF: A. 06 ALMATY 1835


B. 06 ALMATY 1934

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


1. (C) Summary: Arman Darbayev, KazMunaiGaz (KMG) Executive
Director of Transportation Infrastructure, discussed KMG's
vision of the Kazakhstan Caspian Transportation System (KCTS)
process with Energy Officer on March 1. Darbayev (strictly
protect) acknowledged that the Kazakhstanis intend to use the
fact the IGA has not yet been ratified in Kazakhstan as
leverage in early negotiations with the Azeris --
negotiations which, given the minimalist nature of the IGA
and apparent differences of opinion on key issues (Darbayev
focused on the marine transportation concept),were likely to
be difficult. Darbayev explained that KMG hoped to get GOK
approval on a general set of negotiating principles in the
coming weeks, then launch preliminary talks with the Azeris;
should the Azeris support a set of "minimal guarantees"
(which had been written into the IGA at one time, but removed
to facilitate agreement),then full HGA negotiations could be
launched with both governments. Darbayev indicated that KMG
viewed the two KCTS segments -- the Eskene-Kuryk pipeline and
the "Trans-Caspian Project" -- as requiring separate
negotiating processes. The pipeline, he said, would not need
to be covered by an HGA. The GOK was prodding KMG to move
quickly on KCTS, he said; at the same time, many in power
believed that the GOK had erred in rushing to sign a
stripped-down IGA in Spring 2006, and were determined not to
give anything away in future negotiations. End summary.

IGA Ratification as Negotiating Leverage
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2. (C) Darbayev, who as Kairgeldy Kabyldin's Deputy, is an
active participant in the KCTS negotiations, acknowledged in
confidence that KMG, at least, viewed the fact that
Kazakhstan's Parliament had failed to date to ratify the IGA
as useful leverage in negotiations with the Azeris. Darbayev
told Energy Officer that he had heard, indirectly, that
during his recent visit to Kazakhstan, the Azeri Prime
Minister had raised the issue of IGA ratification with Prime
Minister Masimov. While Darbayev wasn't sure what Masimov's
had replied, he was "worried that Masimov had not been
properly briefed" about the strategic value of leaving the
IGA unratified for the time being.

KMG's Vision of Next Steps
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3. (C) Darbayev explained that the Kazakhstanis needed all
the leverage they could get in what he predicted would be
difficult negotiations with the Azeris. Darbayev described
how KMG envisioned the negotiating process: his office was
currently drafting a "high-level" set of negotiation
principles for approval by the GOK. Once the GOK approved
the principles, preliminary discussions with the Azeris would
be launched. (Darbayev suggested this could occur as soon as
late March.) Once the Azeris accepted in principle the
"basic guarantees" that had been excluded from the IGA
following Vice-Minister Kiinov's replacement of Kabyldin as
lead Kazakhstani negotiator in May 2006 (Ref A),then HGA
negotiations with both governments could begin.

Major Differences on Shipping?
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4. (C) Darbayev identified four points to be addressed in
negotiations with the Azeris: (a) the "basic guarantees" had
to either be included in the HGA, or adopted by means of a
Government of Azerbaijan (GOAZ) decree; (b) the GOAZ had to
create a special tax regime for the project; (c) basic
investor rights would have to be elaborated; and (d) the two
sides would have to agree on a marine transportation concept.
Darbayev noted that the last issue was likely to be
problematic. The GOK and investors envisioned joint
ownership of the terminals on both sides of the Caspian, he
said, but SOCAR President Abdullayev had recently lauded the
planned construction of an entirely new, Azeri-owned terminal
to receive Kazakhstani oil -- suggesting the Azeris had
different ideas in mind. Further, Darbayev said, the
Kazakhstanis planned to use 40,000 - 60,000 DWT vessels to
transport oil; the Azeris, confident that their existing,
10-15,000 DWT fleet would dominate if tanker size were
restricted, were likely to object.

Two KCTS Segments, Two Negotiation Processes

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5. (C) Darbayev told Energy Officer that the two components
of the KCTS Project -- the Eskene-Kuryk pipeline and the
"Trans-Caspian Project" (comprising a terminal at Kuryk, the
tankers, an unloading terminal in Azerbaijan, and onward
pipeline interconnections) -- called for different
negotiating processes. For example, he said, the pipeline
project would not have to be covered under an HGA;
"regulation under national legislation" would suffice.

No Specific Deadline for KCTS Completion
--------------


6. (C) Darbayev explained that, while including
TengizChevrOil (TCO) in the KCTS process had added a sense of
urgency, no specific completion date -- Kashagan "first oil"
or other -- was driving the process. At best, he estimated,
the negotiations could be finished and construction completed
in 2011. (Note: ConocoPhillips' Country Manager Nick Olds
recently confirmed to Energy Officer that Kashagan producers
are counting on the fact that first Kashagan oil, in fact,
will be shipped to market by some other means, with the
Eskene-Kuryk pipeline coming on-line afterwards. End note.)
The GOK was urging KMG to move the KCTS process forward
quickly, Darbayev said. At the same time, he added,
"Nazarbayev and other officials recognize that we made a
mistake in rushing to sign the IGA, and we're determined not
to make the same mistake again."


7. (C) Comment: As Kabyldin's loyal deputy, Darbayev is
likely still smarting from Kabyldin's dismissal as lead IGA
negotiator last Spring, and the subsequent signature of a
revised IGA under Kiinov's leadership. For that reason, his
comments about Nazarbayev's -- and the GOK's -- overall
assessment of the IGA probably cannot be taken as
authoritative. End comment.
ORDWAY