KAZAKHSTAN - CASPIAN OIL PRODUCTION, PLANS, AND PROSPECTS

UNCLAS SECTION 01 OF 03 ASTANA 001868

SENSITIVE
SIPDIS

STATE PASS TO TDA FOR DAN STEIN
ENERGY FOR TYLER TILLER, COMMERCE FOR DANICA STARKS

E.O. 12958: N/A
TAGS: EPET EINV PGOV KZ
SUBJECT: KAZAKHSTAN - CASPIAN OIL PRODUCTION, PLANS, AND PROSPECTS


1. (SBU) Summary. Oil production at Tengiz has expanded to 540,000
barrels per day (bpd) and the Kashagan consortium is expected to
produce at least 150,000 bpd by 2013 and up to 1.5 million bpd by

2020. Tengizchevroil (TCO) could easily increase oil production to
600,000 bpd but is constrained by a lack of rail car and pipeline
capacity. TCO also faces ongoing issues with workforce development,
sulfur storage, and facility security. End summary.

PRODUCTION AT KAZAKHSTAN'S SUPER-GIANT FIELDS
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2. (SBU) Charge and Energy Officer toured Tengiz with TCO Deputy
Manager for Government and Public Affairs Linsi Crain on September

19. Total recoverable oil at the Tengiz and Korolev fields through
April 2033 is estimated at 750 million to 1.1 billion metric tons
(approximately 6 to 9 billion barrels). Current production capacity
is 70,000 metric tons (or 540,000 barrels) of oil per day and 22
million cubic meters (or 765 million standard cubic feet) of gas per
day. Crain confided that TCO could easily increase production to
600,000 bpd but is constrained by a lack of rail car and pipeline
capacity. The day of our arrival, TCO was expected to start
operation of a new sour gas injection and second generation plant,
but they postponed the start of operations until the day after our
visit, ostensibly for our own safety, given the large gas flares
that initial operations would produce. When asked how important TCO
was to Chevron, Crain, a Chevron employee seconded to TCO, said they
like to joke that "TCO feeds us Monday through Thursday, Gorgon
(Australia's large natural gas field) on Friday, and the other guys
take care of us on the weekend."


3. (SBU) Meanwhile, production at Kashagan, Kazakhstan's other
super-giant Caspian shore oil field, is expected to start in 2013.
Negotiations are ongoing to turn a January memorandum of
understanding (MOU) on restructuring Kashagan into a more formal
agreement, with the latest deadline set for October 25. The
Government of Kazakhstan and the Kashagan consortium -- Agip KCO --
have reportedly come to agreement on the details of a new operating
structure, but not on the terms and timing of production. According
to Agip KCO Public Relations Manager Richard Fritz, if the deal
holds up, ENI would continue to run the Experimental Program,
including onshore, offshore, and drilling operations, and would
produce up to 450,000 bpd by the end of that phase of the project.
Under Phase 2, ENI would manage onshore operations, while Shell and
ExxonMobil would lead offshore production, with ExxonMobil having
particular responsibility for developing the Kalamkas field. A new
joint operating company, led initially by Total, would be created
with overall management responsibility for the consortium.
KazMunaiGaz and Shell would also form a new company to manage
overall production operations.


4. (SBU) Agreement on production volumes and schedules, however, has
not been reached. Agip KCO's Fritz told us on September 20 that --
despite press reports -- the Agip KCO consortium is committed to
producing just 150,000 bpd by the end of the experimental phase in
2013, not 450,000 bpd, as Minister of Energy Mynbayev was quoted as
saying after his visit to Kashagan on September 19. Fritz confided
to us that Agip KCO could, if necessary, produce 170,000 bpd right
now, using existing appraisal wells. The Kashagan contract includes
rights to offshore oil-rich reservoirs at Kalamkas, Kairan, Aktote,
and Kashagan SW. In total, Kashagan has up to 38 billion barrels of
oil in place, of which 13 billion are potentially recoverable with
the use of gas re-injection. By 2020, peak production is expected to
be 1.5 million bpd. (Note: In a private dinner with Charge and
Energyoff on September 20, Steve Rose, General Manager for
ExxonMobil Kazakhstan, told us that he is not fully convinced that
Kashagan will live up to the hype. ExxonMobil will drill an
appraisal well at Kalamkas in 2009 "to see what we've got." End
note).

LIMITED RAIL AND PIPELINE CAPACITY CONSTRAIN TENGIZ PRODUCTION
-------------- --------------


5. (SBU) TCO currently owns or leases more than 22,000 railroad
cars to transport crude, liquid petroleum gas, and sulfur, making it
one of the largest rail car operators in the world. According to
TCO's Crain, with 4,000 more rail cars, TCO could increase
production to 600,000 bpd. Unfortunately, she said, there is a
shortage of rail transportation capacity in Kazakhstan and -- in
addition to oil and gas -- rail cars are in high demand for the
transportation of wheat and cement. Agip KCO's Fritz and Kairat
Urazbaev, First Deputy General Director of the Atyrau oil refinery,
both confirmed the lack of sufficient rail cars for oil and gas
transportation. Agip KCO intends to transport approximately 300,000
bpd of the initial 450,000 bpd production from Kashagan via rail.


6. (SBU) In addition, failure to reach agreement on the expansion of

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the Caspian Pipeline Consortium (CPC) pipeline has become a serious
constraint to increased production for TCO. TCO currently ships 80%
of its oil via CPC and noted that it is already near full capacity.
Once Kashagan starts production, demand for pipeline capacity will
be even greater. Agip KCO's Fritz told us that they have an
agreement with CPC to use the pipeline to transport up to 66,000 bpd
of oil from Kashagan. Rail and pipeline constraints have encouraged
TCO to focus on other means of transport, including tankers. By
mid-October, TCO is expected to ship 20,000 bpd by tanker across the
Caspian to Baku, where Tengiz oil will flow into the
Baku-Tbilisi-Ceyhan (BTC) pipeline for the first time.

QUALITY OF LIFE AND WORKFORCE DEVELOPMENT
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7. (SBU) Crain described TCO as a $20 billion operation and
explained that the consortium has already invested $7 billion in
drilling, injection, transportation, and processing facilities at
Tengiz. The company recently completed construction of new housing
for its 3,000 employees on site. Each of the six new housing units
contains a fitness center, swimming pool, and community center.
Kazakhstani citizens hold 83% of TCO positions and represent 77% of
TCO's managerial workforce. For example, Kazakhstanis hold the
company's top positions in the legal, human resources, and public
relations departments. Crain said that TCO has made a concerted
effort to develop local engineering expertise, particularly among
female employees, but has had difficulty. For example, Kazakhstani
law prohibits pregnant women from working with or near heavy
machinery, which means in practice that as soon as a female engineer
discloses her pregnancy (or is found to be pregnant in a routine
medical checkup),she must be reassigned to another part of the
company. Agip KCO's Fritz also told us that they have had difficulty
developing a skilled local workforce, particularly welders and pipe
fitters. During the past three years, Agip KCO has trained more
than 700 workers for these positions at its Atyrau Training Center,
but once the workers find employment, turnover is extremely high.
"They don't want to work these long hours or under these difficult
conditions," according to Fritz.


8. (SBU) TCO has a modern medical center on site, with several
doctors on staff. Crain told us that local residents in and around
Tengiz come to TCO when they have a medical emergency and women have
been known to come to TCO to have their babies delivered. The
dining hall at TCO serves 3,000 people and offers Indian, Asian, and
Tex-Mex cuisine. The company prides itself on its safety record
There have been no TCO "days away from work" (DAFW) cases since
April 2007, which totaled to more than 12 million cumulative man
hours without a DAFW injury through July 2008. To promote traffic
safety, TCO plans to bring U.S. traffic safety engineers to Atyrau
and Almaty in October to conduct training seminars and evaluate
local traffic conditions. Crain welcomed the participation of
Embassy staff in those activities.

SULFUR STORAGE AND DISPOSAL STILL AN ISSUE
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9. (SBU) TCO continues to grapple with legal, financial, and public
relations issues stemming from the enormous production of sulfur
associated with Tengiz oil production. Sagyn Lukpanov, director of
the social entrepreneurial corporation Caspiy, reminded us on
September 18 that there are 9 million tons of sulfur stored above
ground at Tengiz. He acknowledged that for the past year, TCO has
been able to sell more sulfur than it produces, particularly to
China for agricultural purposes, but claims that the company has not
sufficiently addressed the long-term storage and health issues of
its sulfur production. (Note: TCO denies that there is any
environmental or health impact whatsoever from its on-site
above-ground sulfur storage. End Note.) Caspiy, which was created
with financial and material support from the local government and
remains 49% government-owned, established a working group with TCO,
Agip KCO, the Ministry of Energy and Mineral Resources, and the
Ministry of the Environment to draft a national strategy for sulfur
storage, transportation, and sales. According to Lukpanov, TCO
agreed in a meeting this summer with Minister of Energy Mynbayev to
eliminate all of the sulfur stored above-ground by 2013. Deputy
Akim Nurman Nurbekov told us on September 18 that TCO had agreed to
remove all sulfur by 2012. TCO's Crain insisted, however, that TCO
had made no firm commitments and that there was no agreement in
writing to remove all Tengiz sulfur by a certain date. She said that
Chevron's senior leadership is working directly with Deputy Prime
Minister Shukayev to resolve this issue. Crain reminded us that TCO
paid a fine of $370 million to the oblast government for alleged
violations of environmental regulations associated with its sulfur
production and storage, but maintained that the central authorities
have quietly agreed that TCO may deduct this amount from future
royalty payments to Kazakhstan. When asked whether Kashagan will

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produce the same levels of sulfur as TCO, Agip KCO's Fritz said,
"No, because we will re-inject 80% of the sulfur gas back into the
well from a very early stage. In case we do have to store sulfur
above ground, we will construct a temporary storage facility where
the sulfur blocks will be fully sealed and will have no contact with
the air."

SECURITY ISSUES AT TCO
--------------


10. (SBU) Security at TCO is tight, although there are areas of
vulnerability. The company strictly enforces a 100% id check policy
on site, even for VIP visitors touring the facility in a TCO vehicle
together with senior management. Nevertheless, TCO reports minor
problems such as the theft of scrap metals and other materials. A
public highway runs directly parallel to TCO's main production
facility and private vehicles can approach up to 200 meters of the
facility without encountering a roadblock. Steve Witham, TCO's
Security Manager, told us that they successfully relocated two local
villages before the facility was built and noted that the highway is
infrequently traveled. Nevertheless, he acknowledged that the
highway posed a security risk and Crain deliberately avoided taking
our party down that road for traffic safety reasons. Witham said
that cooperation with the local Kazakhstani law enforcement and
security forces was generally good, although he characterized them
as "inefficient" and "opportunistic."

MILAS