KAZAKHSTAN: AZERBAIJAN STILL SLOW TO COOPERATE ON

C O N F I D E N T I A L ASTANA 001212

SIPDIS

STATE FOR SCA/CEN M. O'MARA

E.O. 12958: DECL: 07/01/2018
TAGS: PGOV PREL EPET KZ
SUBJECT: KAZAKHSTAN: AZERBAIJAN STILL SLOW TO COOPERATE ON
TRANSPORTATION ISSUES

Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4 (B) AND (D)


1. (C) Summary: Azerbaijan has still not approved a Heads of
Agreement on trans-Caspian transportation despite assurances
to Kazakhstan that they would approve the agreement by June

15. Azerbaijan is also encouraging Kazakhstan to use the
Baku - Novorossiysk pipeline and downplaying Baku - Supsa, to
the chagrin of the Kazakhstanis. Kazakhstan faces another
conundrum on the Eskene - Kurik pipeline, as they juggle
commitments to Chevron and the Kashagan consortium. End
Summary.

Kazakhstan Still Worried By Azerbaijan Inactivity on
Trans-Caspian Transportation
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2. (C) Arman Darbayev, KazMunaiGas Executive Director for Oil
Transportation and Service Projects, told Poloff on July 1
that Azerbaijan has still not approved a draft Heads of
Agreement on Trans-Caspian transportation. According to
Darbayev, Kazakhstan presented Azerbaijan the draft in March.
In early June, SOCAR President Abdullayev told a Kazakhstani
delegation that Azerbaijan would approve the agreement by
June 15. Nevertheless, Kazakhstan has received no response
from Azerbaijan, said Darbayev. The agreement must be signed
by August, or the 2007 Memorandum of Understanding on
trans-Caspian transportation expires. Asked the reason for
the delay, Darbayev said that he believes the Azerbaijanis
are "playing games sometimes" but he offered no further
elaboration.


3. (C) Darbayev told Poloff that Kazakhstan is "very keen" to
use the Baku - Supsa pipeline. Again, however, Darbayev
suggested that the Azerbaijanis are creating obstacles.
According to Darbayev, Azerbaijan is trying to push control
of Baku - Supsa to SOCAR, and said that the Georgians believe
that the Azerbaijanis will soon be the operator of the
pipeline. Darbayev indicated that Georgia and Kazakhstan are
in agreement on Baku - Supsa and will try to work together to
push Azerbaijan.


4. (C) The Azerbaijanis have suggested that Kazakhstan
utilize the Baku - Novorossiysk pipeline. For Kazakhstan,
this is a non-starter, said Darbayev. He noted that
Kazakhstan can ship oil directly to Makhachkala without going
through Azerbaijan. In addition, Kazakhstan could just as
easily use the Atyrau - Samara pipeline, but it is looking to
reduce volumes transported through Russia.


5. (C) In Darbayev's view, Azerbaijan's first priority is BTC
expansion, but only to 1.2 million, and not 1.6, bbd. Their
second priority is to expand their railway system to
accomodate 25 million tons of oil a year and to fill the
Kuhlevi terminal. For Kazakhstan, a second BTC is too
expensive but a second Baku - Supsa might be an option. But
Darbayev identified a number of uncertainties - the real
production of Azerbaijan and Kazakhstan, BTC capacity, and
what volumes will be shipped to Iran.

Caught Between Chevron and the Kashagan Consortium
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6. (C) Despite recent press reports of a Chevron - Kazakhstan
partnership to build the Eskene - Kurik pipeline, Darbayev
admitted that Kazakhstan's obligations to the Kashagan
consortium muddy the waters. "If we go with Chevron," said
Darbayev, "we need to have NCO (North Caspian Consortium) on
board." At the very least, the consortium will need to be
given guaranteed access and stability assurances.


7. (C) Comparing Chevron and the Kashagan consortium,
Darbayev described the consortium as more flexible, and said
that Chevron has taken a "strong, tough position." According
to Darbayev, Chevron initially said that they wanted 10% of
the pipeline's capacity, but they now seek 15%. They also
have proposed establishing conditions for the pipeline now,
with the Kashagan partners joining later. Darbayev
acknowledged that the Kashagan partners will require
guaranteed volumes from the start and will want some input in
creating the conditions.


8. (C) Comment: With Azerbaijan seemingly inactive and the
Eskene - Kurik pipeline the subject of dispute, the
Kazakhstanis will need to push hard to maintain trans-Caspian
momentum. Nevertheless, the Trans-Caspian route is an
inevitability; even if other routes are expanded, including
CPC, the capacity will not be sufficient. The difficult
question to be solved now is what will happen to Kazakhstan's
oil beyond Baku. End Comment.
ORDWAY