KAZAKHSTAN: KAZMUNAIGAS VICE PRESIDENT IDENOV

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 002082

SIPDIS

STATE FOR SCA/CEN,EEB/ESC

E.O. 12958: DECL: 10/20/2018
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: KAZMUNAIGAS VICE PRESIDENT IDENOV
CONFIDES ON KASHAGAN

Classified By: Ambassador Richard Hoagland, Reasons 1.4 (b) and (d)


1. (C) SUMMARY: On October 6, Maksat Idenov, First Vice
President of Kazakhstan's national oil company KazMunaiGaz
(KMG) and Chairman of KazTransOil, told Ambassador Mann his
frustrations and expectations for the future development of
Kashagan, the largest oil and gas field outside the Middle
East and the most complex and expensive exploration and
production project in the world. END SUMMARY.

KASHAGAN: AGREEMENT REACHED ON MOST ISSUES


2. (C) Maksat Idenov met with Ambassador Mann on the top
floor of KMG headquarters and spoke freely in fluent English
for nearly two hours about the ongoing negotiations on
Kashagan. He said that agreement has been reached on all
major issues -- unconditional access to pipelines, guaranteed
tax stability, and a special tariff methodology -- with the
notable exceptions of transportation and material redesign
terms, but he did not expect these issues to prevent a final
agreement before the deadline of October 25.

TOTAL WANTS RIGHT TO SHIP TO IRAN


3. (C) Idenov was harshly critical of the Western partners
leading the negotiations, particularly ExxonMobil, which was
appointed to lead the transportation negotiations on behalf
of the Western investors. According to Idenov, the impasse
on transportation has been due to the insistence of France's
Total that it be able to ship its crude product wherever it
wants, including Iran. Kashagan's American partners
initially said they could not agree to this, due to the U.S.
embargo on trade and investment in Iran. However, Idenov
said that after a thorough review of relevant U.S. law,
ExxonMobil finally agreed to terms. Idenov warned, however,
that the parties have been "fighting furiously" for the past
five months to resolve the transportation issue and even now
the agreement is "very fragile."

NEW DETAILS ON AGIP'S MISPLACED ISLANDS


4. (C) The delays and cost overruns at Kashagan are
well-known, but Idenov disclosed details about the project
that were not previously documented. For example, he said
that even after conducting a technical audit and value
assurance, lead operator Agip "put the offshore islands in
the wrong place," locating residential facilities dangerously
close to the sour gas injection plant. "If there were a
leak," explained Idenov, "they would have to shut the entire
operation down -- just stop everything. And if there were an
explosion, they would not be able to evacuate people quickly
enough." Once Agip realized their error, they redesigned the
layout of the facility, removed the tons of rock and concrete
they had just put down, and rebuilt the islands at a safer
distance. Then, according to Idenov, Agip asked KMG to cover
the $3.7 billion cost of the redesign. Idenov also disclosed
that the Kashagan fields hold reserves of up to 130 trillion
cubic feet of natural gas, although he did not specify how
much of that will be reinjected to maintain pressure for
pumping oil.

MISSED DEADLINES


5. (C) At this point in the meeting, Idenov took a napkin
and wrote out two columns, the first listing Agip's promised
date of first oil and the other listing the expected cost of
the project. Idenov's napkin showed four missed deadlines,
with production originally scheduled for 2005 now expected to
begin in 2013, and a dramatic increase in the cost of the

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Experimental Program, from an initial estimate of $2 billion
to current projections of $40 billion. Furthermore, Agip
initially informed KMG that it expected to produce just
75,000 barrels per day (bpd) for the first 30 days of
production in 2013. Idenov said he was offended by this
proposal. "What am I supposed to do after 30 days," he
asked? "What would a deep-sea diver do once his supply of
oxygen has run out?" Idenov told Agip that those terms were
unacceptable, calling it a "violation of the technical
integrity of the contract." (NOTE: Minister of Energy and
Mineral Resources Sauat Mynbayev is on record as saying that
the Experimental Program will produce 450,000 bpd by 2013.
END NOTE). Despite the long delays and the incredible costs,
Idenov is optimistic and excited about the future of
Kashagan. "The project has finally started to move," he told
us. "I have insisted on quality decisions, internal
controls, and strict oversight. Finally, we have people who
understand these basic principles and are willing to be held
accountable."


6. (C) COMMENT: The meeting with Idenov was the usual
impressive performance with the KMG First Vice President, in
which he demonstrated both his extraordinary command of the
issues as well as a touch of the prima donna that has
garnered sniping from both inside and outside the Government
of Kazakhstan. The meeting also provided accurate and
persuasive insight into the resentment the Government, from
President Nazarbayev down, has long harbored toward the
Kashagan partners and toward Eni-Agip in particular because
of production delays and unreliable target dates. This
resentment aside, Idenov's professional approach to the
Kashagan impasses have contributed greatly toward the project
moving back on track. END COMMENT.


7. (U) Ambassador Mann has cleared this cable.
HOAGLAND