KAZAKHSTAN - KMG EXPRESSES OPTIMISM ON CPC EXPANSION

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TAGS: EPET EINV PGOV KZ
SUBJECT: KAZAKHSTAN - KMG EXPRESSES OPTIMISM ON CPC EXPANSION


1. (SBU) KazMunaiGas (KMG) head Kairgeldy Kabyldin told the
Ambassador on September 2 that progress was being made in
negotiations over the expansion of the CPC pipeline. Transneft CEO
Nikolay Tokarev was in Astana, along with ExxonMobil and Chevron
executives, to continue discussions on the issue. Kabyldin said
that all of the consortium members have reached agreement in
principle to expand capacity from 690,000 barrels per day to 1.3
million barrel per day by 2015. (Note: Energy Minister Mynbayev
echoed these comments on September 4, in remarks he made to
KazEnergy Forum in Astana, explaining that only "technical details"
still needed to be worked out. End Note.) The negotiations,
Kabyldin maintained, had been complicated by expected changes to the
equity structure of the CPC consortium: the purchase of Oman's 7
percent stake will result in Transneft's share increasing to 27.1
percent and KMG's to 22.9 percent -- i.e., a 50 percent overall
stake for the two companies. Kabyldin expressed optimism that an
agreement would be finalized in the very near future.


2. (SBU) Arman Darbayev, KMG Executive Director for Oil
Transportation and long-time deputy to Kabyldin, told us on
September 3 that KMG drafted a Memorandum of Understanding (MOU) on
CPC expansion in July and circulated it for review among the CPC
consortium members. According to Darbayev, all but one of the
companies had accepted the terms of the memorandum. LUKARCO, a
joint venture of British Petroleum and Lukoil, has expressed
reservations and is holding out until it is satisfied on several
issues, including volume allocation and access rights; tariff
increases tied to capital expenditure increases; financial penalties
to guarantee oil flow quantities; and the refinancing of equity debt
through third-party project finance vehicles. According to
Darbayev, KMG and other CPC partners are exerting pressure on
LUKARCO to sign the MOU as soon as possible. Darbayev expressed
hope that the parties would reach consensus on these issues by the
end of September, but he noted that time is running out. The
current feasibility study for CPC expansion expires in October and
if negotiations continued past that deadline, the parties would need
to commission a new feasibility study, which could delay
negotiations still further.


3. (SBU) Jonathan Popper, British Petroleum's lead negotiator on CPC
expansion, confirmed to the DCM on September 4 that LUKARCO is not
satisfied with the current terms, but did not want to block CPC
expansion entirely. He explained that LUKARCO is not a significant
shareholder in Tengizchevroil (TCO) -- its stake is just 5 percent
-- and thus does not need CPC expansion to accommodate LUKARCO's
share of increased TCO production. Popper said that LUKARCO had met
with Kabyldin on September 4 and offered to sell to KMG its share in
CPC as a way to resolve the impasse. Popper said he told Kabyldin
to "make us an offer so we can exit gracefully."

ORDWAY