KAZAKHSTAN: GOK CONFIRMS "N BLOCK" PROCESS DELAYED

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000684

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NOFORN
SIPDIS

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

E.O. 12958: DECL: 03/16/2017
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: GOK CONFIRMS "N BLOCK" PROCESS DELAYED

REF: ASTANA 562

Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5(b) and (d).


1. (C) Summary: On March 15, ConocoPhillips (CP) executives
briefed Energy Officer on CP CEO Jim Mulva's March 5 meetings
in Astana, during which GOK officials reiterated the recent
bad news about CP's "N Block" bid due to a GOK desire to
re-evaluate "N Block" reserves, all commercial negotiations
have been suspended for at least 4-6 months. Furthermore,
Mulva was told, the GOK could not guarantee that CP and Shell
would retain their current negotiating exclusivity when (and
even "if") discussions resumed. While all of Mulva's
interlocutors explained that a desire to reassess "N Block"
reserves had driven the GOK's decision to suspend
negotiations, Prime Minister Masimov also suggested to Mulva
that the GOK would use the 4-6 months to assess "N Block"
transportation options -- leading the CP executives to
speculate that CPC expansion delays may have contributed to
the "N Block" decision. The executives advanced other
hypotheses as well -- that Kashagan delays and cost overruns
have convinced the GOK that it must do more to extract
maximum value from future Production Sharing Agreements
(PSAs); that the GOK might be trying to slow the pace of
offshore development in the face of a shortage of skilled
Kazakhstani executives and laborers; and that the GOK is
determined to better leverage the competition for offshore
blocks to achieve economic diversification. The CP
executives concluded, however, that the GOK reversal remains,
fundamentally, a mystery, and asked for "high-level" USG
help, both to discover the full reasons for the "N Block"
policy shift -- and, if possible, to reverse it. End
summary.

Delays of 4-6 Months "Or More"
--------------


2. (C) Arne Holhjem (Caspian Region President),Tim Wallace
(Russia/Caspian Exploration Manager),and Nick Olds
(Kazakhstan Country Manager) briefed Energy Officer on CEO
Jim Mulva's March 5 meetings with Prime Minister Masimov,
Energy Minister Izmukhambetov, and KazMunaiGaz (KMG)
President Karabalin. Both Karabalin and Izmukhambetov had
repeated the basic bad news: all "N Block" negotiations had
been suspended, pending the completion of an "internal" (KMG)
study of the "N" block reservoir (reftel). Karabalin told
Mulva that the study would take 4-6 months to complete;
Izmukhambetov had warned that the process could take "a year
or two." "Don't get your hopes up," he warned Mulva.
Masimov had sounded an even more ominous note, suggesting
that, given transportation limitations, he could see no way
to monetize "N" hydrocarbons quickly. "I can't see the near
term value of 'N Block'," he said, adding that, in addition
to reassessing "N Block" reserves, the GOK would also be
taking a close look at available oil and gas transportation
alternatives. Masimov told Mulva that, in the face of all
these issues, "we may keep "N" for future generations."


3. (C) Karabalin and Izmukhambetov warned Mulva that CP
should not assume that, once resumed, the "N Block"
negotiation process would take up where it had left off.
Neither CP nor Shell were guaranteed preferential negotiating
rights; the GOK might decide to open up the process to
outside bidders. (Note: the CP executives told Energy
Officer that they were not aware of any new competitors
whose interest might have sparked the GOK's decision. While
the German company Wintershall was rumored to be interested,
the company had bid unsuccessfully on "N" years ago, and
didn't appear to bring much to the table. National Oil
Companies were a bigger potential threat, but CP had no
evidence that any were pursuing "N." End Note.) Finally,
Mulva was told, KMG might decide to develop "N" all by
itself.

Speculating on GOK Motives
--------------


4. (C) Wallace told Energy Officer that, while the GOK
appeared to have shifted its stance in "late December, it
wasn't clear why. CP, he said, had no evidence the KMG had
acquired new seismic data; their "internal study" would
likely only reinterpret existing data. Wallace speculated
that perhaps the intensity of Shell / CP competition for "N"
had spooked the Kazakhstani government into thinking that the
companies knew something about "N" reserves that it did not.
In general, the CP executives said, Kazakhstan's oil-and-gas

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decision-makers appeared afraid to sign any deal that might
later be seen has having conceded too much to an
international oil company. The GOK had long seen the Tengiz
deal in that light, Holhjem said, and the current Kashagan
delays and cost-overruns had focused the GOK's attention on
the fact that, given the cost-recovery provisions of the
Kashagan Production Sharing Agreement (PSA),it would not
receive substantial profits from the project for a decade or
more.


5. (C) Wallace explained that Mulva had also come away from
his Astana meetings, and subsequent consultations in Moscow,
with the impression that the Kazakhstanis were increasingly
troubled by CPC expansion delays and the effect failed
negotiations would have on Kazakhstan's oil transportation
plans. Masimov (para. 2) had raised the issue in terms of
"N's" oil output, while both Izmukhambetov and Karabalin had
placed new, strong emphasis on CP's need to develop "gas
transportation options" as part of any future "N" bid. While
Karabalin had noted that the Kazakhstanis supported the
Trans-Caspian gas pipeline initiative, Wallace explained, the
Kazakhstanis clearly were not focused solely on that project,
and had asked CP to look at Gas-to-Liquids (GTL) and
Liquefied Natural Gas (LNG) options as possible means to
transport "N" Block gas. "They are clearly very motivated to
get gas to market," Wallace concluded.


6. (C) Holhjem suggested that the GOK might be trying to slow
down the overall development of its offshore sector, in the
face of a shortage of not only skilled laborers and
engineers, but also of skilled managers and executives within
KMG and KazMunaiTeniz, its offshore operating subsidiary. The
Kashagan project alone was currently short "a couple of
thousand workers," he noted, and the Tengiz riots had made
the GOK authorities more loathe than ever to try to meet the
shortfall by bringing in foreign workers.


7. (C) Olds explained that, even in the best-case scenario,
CP would likely have to submit an entirely new, improved
proposal for "N" block development once KMG's reservoir study
was completed. Mulva's interlocutors had encouraged CP to
take a "holistic" approach in its future bids, "in line with
the President's recent address." Thus, CP's bid should
address the issues of economic diversification (principally,
but not exclusively, by means of a petrochemical proposal),
technology transfer, and the creation of infrastructure which
would benefit other, non-hydrocarbon, industries. As a
consequence, Olds said, CP would likely re-evaluate its
approach to the petrochemical issue. Olds reported that, to
Mulva's surprise, Karabalin had also underscored Kazakhstan's
interest in biofuel.


8. (C) Comment: While the CP executives -- clearly dejected
by this turn of events -- give the impression that the GOK
decision to suspend "N Block" negotiations is hard and fast,
we will, of course, use every suitable opportunity to remind
our GOK interlocutors of the high-level assurances we (and
CP) received in December. End comment.
ORDWAY