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 ASTANA 00002082 002 OF 002 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