KAZAKHSTAN - NEW PRESIDENT OF KAZMUNAIGAZ ON NATIONAL OIL

UNCLAS SECTION 01 OF 02 ASTANA 001702

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET EINV PGOV KZ
SUBJECT: KAZAKHSTAN - NEW PRESIDENT OF KAZMUNAIGAZ ON NATIONAL OIL
COMPANY'S PLANS AND PRIORITIES

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SUMMARY
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1. (SBU) New KazMunaiGas (KMG) head Kairgeldy Kabyldin outlined for
the Ambassador his company's strategic priorities in a September 2
meeting. He said that despite the conflict in Georgia, Kazakhstan
remained committed to exporting crude through the Caucasus.
Kabyldin explained that the Kazakhstan-China oil pipeline is moving
forward, and that Kazakhstan's new crude export duty is only having
a limited impact on KMG. Kabyldin's comments on CPC pipeline
expansion are reported septel. End Summary.

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KMG'S STRATEGIC PRIORITIES
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2. (SBU) New KazMunaiGaz (KMG) head Kairgeldy Kabyldin told the
Ambassador on September 2 that he believes President Nazarbayev
selected him to replace Serik Berkitbayev because of his technical
knowledge of the energy industry, expertise in transportation
issues, and more than 30 years of management experience with KMG and
with the Samruk state holding company, which is the 100 percent
owner of KMG. (Comment: Samruk Board of Directors Chairman Sir
Richard Evans told the Ambassador on September 8 that with the
appointment of Kabyldin, Samruk has completed the removal of the
"old guard" from control of KMG, and is now in a much better
position to move the company forward. Samruk President Kanat
Bozumbayev was himself just named Chairman of KMG's Board of
Directors, and Samruk recently arranged for an independent audit of
KMG. End Comment.)


3. (SBU) Describing his vision for the future of KMG, Kabyldin
emphasized the importance of MangistauMunaiGaz (MMG). KMG has
previously announced its intent to purchase 51 percent of MMG's
shares, with the remainder likely to be sold to Gazpromneft or
Mittal. Kabyldin also stressed the need to conclude negotiations to
restructure the management and operatorship of the Kashagan project
by October 25. Kabyldin noted that KMG aspires to become an
independent or lead operator for major new fields in Kazakhstan,
mentioning in particular the N Block, Pearls field (Zhemchuzhina),
and Darkhan. Regarding the N Block, Kabyldin said that
Conoco-Philips was awarded a small contract to serve as a technical
advisor during the initial stages of the project. Kabyldin was also
enthusiastic about KMG's downstream investments in Ceyhan, in
particular, in refinery operations that will eventually be able to
refine up to 100 million tons of crude annually. He also said that
KMG plans to double the number of KMG gas service stations in
Kazakhstan to 330 by 2012, increasing its domestic market share of
retail gasoline sales from 6 percent to 15 percent. He eagerly
described KMG's plans to develop petrochemical products, mentioning
KMG's investments to upgrade a factory in Atyrau. Kabyldin
acknowledged that KMG will have to make significant financial and
human capital investments in the near future to conclude these
transactions, but he does not anticipate difficulty raising
financing for the deals, despite Fitch's recent decision to
downgrade the credit rating of KMG Exploration and Production to
"BBB-."

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NO PLANS TO RETHINK MULTIPLE EXPORT ROUTES
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4. (SBU) Commenting on the impact of the conflict in Georgia,
Kabyldin said that KMG had absolutely no plans to rethink its
strategy to develop multiple export routes, including via the
Kazakhstan Caspian Transportation System (KCTS) to the
Baku-Tbilisi-Ceyhan (BTC) pipeline. Although Kabyldin emphasized
the importance of political stability in the Caucasus region to
KMG's long-term investment plans, he stressed that exports to the
West via the Caucasus route are critically important to KMG's
multi-vector export strategy and will remain so in the future.
Kabyldin likewise emphasized the importance of using the existing
Baku-Supsa pipeline to accommodate current and future oil exports
from Kazakhstan. He said that Baku-Supsa has been underutilized for
two years, but that KMG and the Georgian government are quite
interested in making use of this infrastructure. The Azerbaijanis,
however, have not been as eager. Kabyldin explained that oil
shipments via the Baku-Supsa pipeline are much cheaper than
shipments by rail (transportation via the Baku-Supsa pipeline costs
approximately $0.30 per barrel, whereas shipments by rail cost $5.00
per barrel). Kabyldin noted that the current capacity of Baku-Supsa
is 6 million tons per year, but could be expanded to 10 million tons
per year. As he explained it, "there is no need to build a new
pipeline -- we should use this existing one."

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CHINA PIPELINES MOVING FORWARD
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ASTANA 00001702 002 OF 002



5. (SBU) Kabyldin maintained that final agreement on the
Prikaspiskiy gas pipeline from Turkmenistan through Kazakhstan to
Russia along the Caspian shoreline has stalled due to disagreements
among the parties. Meanwhile, work on gas and oil pipelines to
China are moving forward, Kabyldin said. Stroytransgaz, a
subsidiary of Gazprom, had previously begun construction of the
Turkmenistan section of the Turkmenistan-Uzbekistan-Kazakhstan-China
gas pipeline, while Asia Trans Gas, a joint venture of Uzbekneftegas
and China's CNPC, started construction of the Uzbek section in June.
CNPC and KMG began construction of the Kazakhstan section of this
pipeline in July. The Chinese are also financing a Kazakhstan-China
oil pipeline to bring crude from Atyrau to Alashankou in China's
Xinjiang Uygur Autonomous Region. The final section -- from Keniyak
to Kumkol -- is already under construction. The oil pipeline is
expected to be completed in October 2009 and to reach full capacity
in 2011. It remains to be seen, however, whether the Chinese will
be willing to pay competitive market prices and whether
Tengizchevroil will receive a better offer for its crude from the
Chinese than from Western customs, Kabyldin contended.

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LIMITED IMPACT FROM EXPORT DUTY
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6. (SBU) Kabyldin commented that Kazakhstan's new duty on the export
of crude and crude products is having some impact on KMG's revenues,
but it will not have a significant impact unless oil falls below $80
per barrel, at which point the tariff will affect credit costs,
input costs, and other costs. Kabyldin could not say definitively
that the Kashagan project will be exempt from the export duty. He
maintained that Karachanak's existing Production Sharing Agreement
(PSA) does have a tax stability clause, but it does not explicitly
state that production is exempt from export duties.

ORDWAY