KAZAKHSTAN: HIGHLIGHTS FROM THE 2008 KAZAKHSTAN

UNCLAS SECTION 01 OF 03 ASTANA 002101 SIPDIS STATE FOR SCA/CEN, EUR/CARC, EUR/RUS, EEB STATE PLEASE PASS USTDA FOR DAN STEIN E.O. 12958: N/A TAGS: PGOV PREL EPET EINV RS GG KZ SUBJECT: KAZAKHSTAN: HIGHLIGHTS FROM THE 2008 KAZAKHSTAN INTERNATIONAL OIL AND GAS EXHIBITION AND CONFERENCE (KIOGE) ¶1. SUMMARY: The 16th annual Kazakhstan International Oil and Gas Exhibition and Conference (KIOGE) was held during October 7-10 in Almaty. The exhibition featured more than 550 companies from 30 countries and was visited by more than 15,000 oil and gas industry professionals. The conference included presentations by more than 50 high-level representatives from government, business, and academe, including State Department Coordinator for Eurasian Energy Diplomacy Ambassador Steve Mann. This cable summarizes the comments of several speakers, including Lyazat Kiinov, Kazakhstan's Vice Minister of Energy and Mineral Resources; Kairgeldy Kabyldin, President of KazMunayGas (KMG); Vadim Gustov, Chairman of the CIS Affairs Committee of Russia's Federation Council; and Alexander Mikheyev, Gazprom's First Deputy Chief for Marketing and Processing Gas and Liquid Hydrocarbons. END SUMMARY. KIINOV'S KEYNOTE ¶2. Lyazat Kiinov, Kazakhstan's Vice Minister of Energy and Mineral Resources, delivered a keynote address to the conference on "The Vital Role of Kazakhstan in the Global Petroleum Market." He announced that Kazakhstan expects to export 62.8 million tons of crude in 2008, while processing 13.8 million tons for domestic use. According to Kiinov, Kazakhstan's three oil refineries have a total processing capacity of 14.5 million tons of oil a year. By 2010, Kazakhstan expects to produce 80 million tons of crude and by 2015, 100 million tons. OIL TRANSPORTATION OPTIONS ¶3. Kiinov reiterated Kazakhstan's multi-vector transportation policy and listed the transportation capacity of several important oil pipelines: Atyrau-Samara (with a capacity of 15.9 million tons),Uzen-Samara (15 million tons),Ayrau-Novorossiisk (26 million tons),the Caspian Pipeline Consortium (CPC) pipeline (31 million tons, and up to 67 million tons with expansion),and Atasu-Alashankou (20 million tons, with construction of the final Kenkiyak-Kumkol segment currently underway). He called Atasu-Alashankou -- which is a Kazakhstan-China pipeline -- "a backup in case we transport less oil via Russia, but the Russian route is preferred." Kiinov was skeptical of Baku-Batumi's transit capacity, saying that even with expansion, that option would move only 10 million tons of oil per year. He referred to the Kazakhstan Caspian Transportation System (KCTS),noting that KMG is negotiating with Tengizchevroil and the Kashagan consortium to construct an Eskene (onshore) to Kuryk (sea port) oil pipeline to transport Tengiz and Kashagan crude. Kiinov also noted that Kazakhstan supplies oil to Iran via swaps and he announced that Kazakhstan is studying the possibility of increased oil shipments to the Persian Gulf via Iran. Kiinov dismissed the idea of a trans-Caspian oil pipeline, noting the financial, technical, environmental, and legal challenges of such a project. "We would have to have the agreement of all Caspian littoral states," he said. PROMISING PROVEN GAS RESERVES ¶4. Kiinov reported that Kazakhstan's proven reserves of natural gas total 3.3 trillion cubic meters, the majority of which is located at Tengiz, Kashagan, Karachaganak, and Zhanazhol. In 2007, according to Kiinov, Kazakhstan produced 29.6 billion cubic meters (bcm) of gas and expects to produce 42.6 bcm by 2010 and 61 bcm by 2015. Kiinov noted that Kazakhstan's northern regions are dependent upon gas from Russia, while its southern regions import gas from Uzbekistan. He said that imports from Uzbekistan will be significantly reduced with the construction of a Beyneu-Bozoy-Akbulak gas pipeline. Kiinov noted that on May 13, 2007, the Government of Kazakhstan signed an agreement with Russia and Turkmenistan to build the Prikaspiskyy gas pipeline, which could transport 20 bcm north to Russia (including 10 bcm of Kazakhstani gas) by 2010. He also said that construction of the ASTANA 00002101 002 OF 003 Kazakhstan-China gas pipeline has started and is expected to be completed by 2012, at which point Kazakhstan will export up to 2 bcm of gas to China. Kiinov noted that Kazakhstan's gas policy is driven by both political and economic factors. "We used to sell gas to Russia cheaply," he said. "Now, we get a market price." CROSS-CASPIAN POSSIBILITIES ¶5. In response to a question from an American lawyer about trans-Caspian pipelines, Kiinov said, "We are keeping our options open and listening to everyone. Yes, you are teaching us, but remember that you are not the only ones teaching us. Everyone is teaching us. Some day we might end up knowing more than you do." On the subject of cross-Caspian oil tankers, Kiinov said that Kazakhstan does not want ships from countries other than Kazakhstan or Azerbaijan to sail on the Caspian Sea. "No other shippers will be allowed to enter the Caspian Sea," he said. Kiinov announced that 60,000-ton tankers would be used and said that Kazakhstan is considering the possibility of building tankers in Russia and Iran and has plans for a ship yard facility in Aktau. Kiinov warmly welcomed British and Norwegian companies to help Kazakhstan build new tankers and promised that Kazakhstan would be open and transparent in its deals with foreign companies. He cautioned, however, that "the open market is a two-way road. If Kazakhstan is open to foreign business, other markets must be open to Kazakhstan. Our companies would like to enter Europe, but for now, Kazakhstan has investments only in Romania." KAZAKHSTAN COMPANIES TO REMAIN IN GEORGIA ¶6. When asked about reports that Kazakhstan may sell its investments in Georgia, Kiinov answered directly, "Kazakhstan is not going to pull out of Georgia. We are not leaving. Someone apparently wants Kazakhstan and Georgia to fight, but we have no conflict in Georgia." KMG'S LONG-TERM STRATEGY ¶7. Kairgeldy Kabyldin, President of KazMunayGaz (KMG),said that KMG's long-term strategy includes the consolidation and optimization of KMG assets, investment projects, and further growth. Kabyldin reminded participants that KMG retains a preemptive right to acquire oil and gas assets. He said that KMG has established itself as an industry leader by building a berth for offloading construction materials, a base for the supply of offshore operations in the Caspian, a landfill for toxic industrial waste, a filling station for sea vessels, and an oil spill response center. Kabyldin announced that KMG, ConocoPhillips, and Mubadala from Abu Dhabi signed a memorandum of understanding on October 3 for the exploration of the N Block. Kabyldin also noted that, in order to expand its business geographically, KMG acquired the Batumi oil terminal and 70% of Rompetrol in Romania, and established a joint venture with Gazprom at the Orenburg Gas Processing Plant. RUSSIA'S GUSTOV CRITICIZES CROSS-CASPIAN INITIATIVES ¶8. Following Ambassador Steven Mann's presentation, Vadim Gustov, Chairman of the CIS Affairs Committee of Russia's the Federation Council (and former Deputy Prime Minister under Prime Minister Primakov),discussed the outlook of Russian-Kazakhstani cooperation in the oil and gas sector. Gustov noted that in 1997-98, Russia experienced tough times. "We were on our knees," he said, "and Kazakhstan was still a developing country. But we never abandoned our friends. We have been here in good times and in bad." Gustov was dismissive of Ambassador Mann's support for a possible trans-Caspian pipeline, saying, "Some people may not like the fact that Russia has invested in infrastructure in Kazakhstan, but it is a fact. It is a fact." Gustov claimed that for the next 20-30 years, Russia, Kazakhstan, Uzbekistan, and Turkmenistan will ensure ASTANA 00002101 003 OF 003 the energy security of Europe. He then observed that politics and energy are interrelated, saying, "Whoever owns the energy, defines the political structure." Gustov noted that Russian companies are important investors in several major energy projects, including the Atyrau-Samara pipeline (which he said was "very important" to expand),the CPC pipeline, the Karachaganak project, the Ekibastuz coal-fired power plant, an ore processing joint venture, and the Orenburg Gas Processing Plant. Gustov said that Russia and Kazakhstan will work closely to deliver energy resources to China to meet its growing demand and he called for a new "energy alliance" between Russia and Kazakhstan for the joint development of energy and mineral resources. Finally, Gustov said that any decisions regarding transportation of oil and gas across the Caspian Sea would require the consent of all five littoral states, "particularly given the potential environmental impact on the Caspian's sensitive ecology." KASHAGAN OPERATOR REPORTS PROGRESS ¶9. Umberto Carrara, Managing Director of Agip KCO, which operates the Kashagan field, said that up to 80% of Kashagan's sour gas will be re-injected to maintain well pressure; 80% of AgipKCO's labor force is local; construction of the Bautino Support Base, Koshanai sewage facility, and Bolashak processing plant is more than 70% complete; and 100% of the sulfur derived from Kashagan will be stored in airtight containers and sold as a component in fertilizer. BRITISH GAS GROUP TO STUDY DOMESTIC GAS MARKET ¶10. Clare Young, Commercial Manager for Downstream Business Development with British Gas Kazakhstan (BG Group),announced that KMG asked the BG Group to prepare a natural gas market study and long-term strategy for domestic gasification. According to Young, the Government of Kazakhstan is keenly interested in promoting domestic gas consumption for a variety of environmental, economic, and social reasons. GAZPROM'S INVESTMENT STRATEGY IN EURASIA ¶11. Alexander Mikheyev, Gazprom's First Deputy Chief for Marketing and Processing Gas and Liquid Hydrocarbons, discussed the strategic partnership between Russia and Kazakhstan in the natural gas sector. According to Mikheyev, Gazprom's strategy in Eurasia is to invest in gas infrastructure projects "regardless of location, in order to optimize the gas system." Mikheyev said that Russia and Kazakhstan signed an inter-governmental agreement on gas cooperation on November 28, 2001. He also said that Kazakhstani gas is supplied via KazRosGas, noted that Russian gas exports to Kazakhstan and transportation volumes from Central Asia to Russia are growing, and disclosed that the Orenburg Gas Processing Plant processes up to 1 bcm of gas annually. According to Mikheyev, Gazprom is currently involved in the following projects in the region: (1) construction of the Prikaspiskyy gas pipeline with Kazakhstan, Russia, and Turkmenistan; (2) development of a gas transportation system in Central Asia with Kazakhstan, Russia, Turkmenistan, and Uzbekistan; (3) a new joint venture with KMG based at the Orenburg Gas Processing Plant; (4) exploration of the Tsentralnaya offshore field in the Caspian Sea; and (5) the use of an underground gas storage facility at Bozoy. HOAGLAND