KAZAKHSTAN: SHELL'S CANDID CONVERSATION WITH UK EURASIAN

1. (U) Sensitive but unclassified. Not for public Internet.



2. (SBU) SUMMARY. On October 31, energy officer was the only
non-British government official invited to a briefing by Neil
Carmichael (protect), Shell's General Manager for Business
Development in Central Asia, given to British energy officers
covering Eurasia. Carmichael provided an overview of Shell's
projects and prospects in Kazakhstan and Turkmenistan and delivered
a withering critique of the European Union's energy policy. END
SUMMARY.

ABUNDANT OPPORTUNITIES IN KAZAKHSTAN



3. (SBU) Carmichael was excited about the company's portfolio in
Kazakhstan, where Shell has invested approximately $3 billion in
four projects: the Kashagan Production Sharing Agreement (16.81%
ownership), the Arman Joint Venture with Canada's Nelson Resources
(50%), the Pearls Block (40%), and the Caspian Pipeline Consortium
(5.5%). He said that Shell will announce the results of appraisal
drilling in the Pearls Block in early November and claimed that
there is "a significant amount of oil and gas in Kazakhstan yet to
be discovered." For example, Carmichael said that in the
pre-Caspian basin, Shell expects there are fields the size of "two
or three Karachaganaks" and in the Amu Darya basin, up to "four or
five Astrakhans." (NOTE: DOE's Energy Information Administration
estimates that Karachaganak contains up to six billion recoverable
barrels of oil and gas condensate reserves and up to 1.3 trillion
cubic meters of recoverable natural gas reserves. The Astrakhan Gas
Condensate Field is estimated to contain commercial reserves of up
to 2.5 trillion cubic meters of gas and 400 million tons of gas
condensate. END NOTE).

A SHELL GAME IN TURKMENISTAN



4. (SBU) Commenting on the recent Gaffney Cline audit of
Turkmenistan's gas reserves, Carmichael expressed skepticism about
the accuracy of the report. He alleged that it was based entirely
on documents provided by the government, and wryly observed that
audit findings were announced on the eve of Turkmenistan's annual
oil and gas exhibition and just ahead of the annual renegotiation of
gas contracts with Russia, China, and Iran. "They're talking up
their reserves and using expressions of interest from foreign
companies to strengthen their position. We're a useful negotiating
tool," he said. (NOTE: Gaffney Cline announced on October 13 that
it estimates reserves at the South Yolotan-Osman field at 4 to 14
tcm and reserves at Yashlar at 700 bcm to 1.5 tcm. END NOTE).
Carmichael said that Shell will continue to be patient as it pursues
projects in Turkmenistan, although he does not anticipate a deal
anytime soon: "Their concept of foreign investment is bringing in a
French construction company to build shiny new marble buildings," he
said. "They have no understanding of the role that foreign
investment can play in freeing up domestic government spending for
schools, education, or health care."

BRUSSELS OFFICIALS HARSHLY CRITICIZED



5. (SBU) When asked by one of the UK energy officers how European
policymakers could assist Shell in the region, Carmichael replied
with disdain, "Brussels is no help at all. They've actually
undermined our ability to make money. All they do is pontificate
about the nature of the human soul. They need to get serious and
get engaged -- like the Americans." Carmichael cited the EU's
refusal to support the development of an energy research and
technology transfer center and called EU energy officials "mostly
rubbish," with the notable exception of Commissioner Andris
Piebalgs, whom Carmichael praised for his diplomatic skills, Russian
language ability, and personal charisma. "He was even able to charm
President Berdimukhamedov, which takes a special talent."

EU URGED TO FOCUS ON CASPIAN OIL NOT GAS

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6. (SBU) Noting that both Kazakhstan and Turkmenistan are at best
several years away from exporting significant quantities of natural
gas to Europe, Carmichael urged the assembled UK energy officers to
focus their efforts instead on promoting a new oil transportation
system from Central Asia to Europe. "Unless someone creates an
alternative route," he warned, "Central Asia's hydrocarbons will go
to Russia and be controlled by Russia." Carmichael acknowledged
that it would take a "massive diplomatic and commercial effort"
similar to the construction of the Baku-Tbilisi-Ceyhan pipeline to
provide a proper framework for a fully-functioning Kazakhstan
Caspian Transportation System (KCTS) or a trans-Caspian oil
pipeline, but he insisted that oil would pay more dividends than
gas. His audience was sympathetic, but said their policy was plain:
"Europe is worried about its dependence on Russian gas," one
explained. "We don't have an oil shortage."



7. (SBU) COMMENT. The British energy officers candidly
acknowledged their limited diplomatic resources and the EU's
bureaucratic shortcomings in front of an American colleague, but
were defensive when Shell's Carmichael suggested that U.S. energy
policy was more forceful and more effective in the region than
Europe's. They noted that their policy mandate was to focus on gas
shipments to Europe. They also pointedly criticized the
"non-transparent" manner in which ConocoPhillips was awarded
negotiating rights to Kazakhstan's onshore Caspian N Block, which
Shell had pursued for years. END COMMENT.

HOAGLAND