KAZAKHSTAN: EXXONMOBIL PURSUING ONSHORE

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000848

SIPDIS

NOFORN
SIPDIS

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

E.O. 12958: DECL: 04/02/2017
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: EXXONMOBIL PURSUING ONSHORE
PARTNERSHIP WITH KAZMUNAIGAZ SUBSIDIARY

REF: 06 ASTANA 3178

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


1. (C) Summary: Rick Vierbuchen, Vice President of ExxonMobil
Exploration Company, informed Ambassador Ordway on March 28
that ExxonMobil is negotiating a long-term partnership with
KazMunaiGaz's (KMG) onshore exploration and production
subsidiary (KMG E&P) to evaluate, acquire acreage, and
potentially develop, acreage on Kazakhstan's northern Caspian
shore. Vierbuchen told the Ambassador that he had traveled
to Kazakhstan hoping to finalize the deal, only to be told by
KMG (parent company) President Uzakbay Karabalin that, before
signing off on the deal, KMG needed to "sort out" KMG E&P's
relationship with the GOK, and with KMG, following KMG E&P's
partial privatization in September (reftel). In fact,
Vierbuchen explained, KMG appeared to be questioning whether
KMG E&P should, in principle, sign an "exclusivity" agreement
covering such a large area with an international oil company
(IOC),given that KMG E&P's "preferential rights" to that
acreage would then be conferred indirectly upon the IOC.
Vierbuchen asked for Embassy assistance in clarifying GOK
intentions, and, potentially, in pursuing the deal.
Ambassador Ordway agreed to help, while reminding Vierbuchen
of the requirements of the advocacy process. End Summary.

ExxonMobil VP Describes New Business Interest...
-------------- ---


2. (C) Vierbuchen, VP of the company's Caspian and Middle
East operations, opened the March 28 meeting with a smile,
telling the Ambassador that, though it might seem
"masochistic" in light of Kashagan delays and the stalled CPC
negotiations, he had come to Kazakhstan to seek new business.
ExxonMobil, he explained, was negotiating a "long-term"
partnership with KMG E&P to evaluate, acquire, and
potentially develop acreage on Kazakhstan's North Caspian
shore. (For details on the project, see paragraph 5.) The
deal had generated "a lot of low-level interest" in KMG,
Vierbuchen explained, and he had traveled to Kazakhstan in
hopes of finalizing the deal. However, Karabalin had told
him earlier in the day that KMG needed time to "sort out" KMG
E&P's relationship with KMG, and with the GOK, following KMG
E&P's partial privatization in September. (Note:
Approximately 40% of the company was sold on London's AIM and
the Kazakhstan Stock Exchange. End note.)


3. (C) Karabalin, Vierbuchen continued, had also voiced
concern whether KMG E&P should rightfully sign an exclusivity
agreement, governing such a large area, with an IOC,
particularly in light of KMG E&P's existing "preferential
rights" to onshore acreage. (Note: By virtue of a renewable,
one-year "services agreement" with KMG, KMG E&P enjoys
preferential access to unlicensed onshore oil and gas
acreage. The company is also the beneficiary of the State's
"right of first refusal" upon the transfer of existing
onshore contracts.)

..and Asks for USG Assistance
--------------


4. (C) Vierbuchen asked the Ambassador for help in discerning
whether Kazakhstan's decision-makers were, in fact, seriously
reassessing KMG E&P's role (and priority rights) in light of
the partial IPO. Vierbuchen also asked if, depending on the
answers received, the Embassy would be willing to advocate
for EM's business interest. Ambassador Ordway told
Vierbuchen that the USG would be happy to help in any way it
could, subject to the legal and formal requirements of the
advocacy process.

Details of ExxonMobil's Potential Project
--------------


5. (C) Vierbuchen characterized the new venture as "high
risk," in part because of the relative lack of seismic data
covering the deep strata. The venture was decidedly
long-term, he added, with "first oil" likely ten years away.
The partners would first perform a "Joint Technical Study,"
including a high-definition aeromagnetic survey, over a broad
section of the onshore. Once promising areas were identified
within a smaller (but still vast) "Area of Mutual Interest"
(AMI),the partners would pursue the rights to the relevant
acreage, either by farming-in with current owners or waiting
until the assets were sold or licenses expired (whereupon KMG

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E&P's preferential rights could be exercised). Only when
this was accomplished would full production begin.


6. (C) On March 29, ExxonMobil Exploration Company's
Astana-based representative, Peter Claypoole, showed Energy
Officer a map of the proposed AMI. The AMI extends
approximately 100-125 kilometers inland from the Caspian Sea
all the way around the North Caspian from the Tengiz oil
field to the Russian border. Claypoole explained that the
existing leaseholders -- including British "Max Petroleum"
and China's SINOPEC -- were currently producing oil from
technically-easy, shallow reservoirs, while attempting to do
what ExxonMobil was proposing to do -- conduct difficult,
expensive seismic surveys of the deep strata whose
characteristics were largely hidden from seismic view by
intervening "salt caps." These strata, Claypoole explained,
were the same strata in which the bulk of offshore Kashagan
reserves lay, as well as other major finds throughout the
geological basin. However, both because the strata were even
deeper onshore than off, and because the intervening salt
"cap" dissipated seismic signals, relatively little was known
about potential reserves. Claypoole noted that the technical
challenges also meant that companies like Max Petroleum or
SINOPEC -- or KMG E&P, for that matter -- were unlikely to be
able to analyze or develop the structures on their own,
making it more likely that the ExxonMobil/KMG E&P partnership
would be able to obtain the relevant acreage in time.


7. (C) Comment: It would surprise us if the GOK were
seriously considering rescinding KMG E&P's "preferential
rights" due to the company's 40% IPO. After all, KMG E&P
aggressively marketed the existence of those rights in the
run-up to the IPO, and their existence presumably does much
to justify the current share price. The GOK's more likely
concern is whether it makes strategic sense for KMG E&P to
bind itself to a single international company in the
development of such a large portion of its onshore.
Furthermore, it is one thing for ExxonMobil to succeed in
promoting itself at the "working" (KMG E&P) level for a
project like this; it is an entirely different matter to
succeed at the "political" level (Karabalin and above),where
ExxonMobil's current reputation as CPC expansion spoiler will
likely lengthen the odds against it in this bid for new
business. End comment.
ORDWAY