Identifier
Created
Classification
Origin
08ASTANA2176
2008-11-04 11:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:
KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED
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UNCLAS SECTION 01 OF 02 ASTANA 002176
SENSITIVE
SIPDIS
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC
STATE PLEASE PASS TO USTDA DAN STEIN
E.O. 12958: N/A
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED
REF: ASTANA 2025
UNCLAS SECTION 01 OF 02 ASTANA 002176
SENSITIVE
SIPDIS
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC
STATE PLEASE PASS TO USTDA DAN STEIN
E.O. 12958: N/A
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED
REF: ASTANA 2025
1. (U) Sensitive but unclassified. Not for public Internet.
2. (SBU) SUMMARY. On October 31, Minister of Energy Mynbayev and
Kashagan consortium partners KazMunayGas, ExxonMobil, Total,
ConocoPhillips, Shell, and INPEX signed four documents amending the
Kashagan production sharing agreement (PSA) to increase
KazMunaiGas's (KMG) stake from 8.33% to 16.81% and restructure the
management and operator leads for the project. Several of the
companies were represented at the signing ceremony by their CEOs,
some of whom expressed disappointment that they were unable to meet
with President Nazarbayev. Under the Kashagan PSA, the licensed
exploration and production area also includes the oil-bearing
structures Kalamkas, Aktoty, and Kairan, in addition to Kashagan
itself. According to current operator Agip KCO, recoverable oil
reserves at Kashagan are estimated at 7-9 billion barrels and total
oil in-place at 38 billion barrels. First oil production will be
150,000 barrels per day (bpd) in 2013, followed by 370,000 bpd in
2014, 450,000 bpd in 2015, and 1.5 million bpd under full field
development. END SUMMARY.
NEW OPERATORSHIP
3. (SBU) The October 31 agreement established a new joint venture,
the North Caspian Operating Company (NCOC BV),to assume the
Kashagan operator responsibilities currently carried out by Agip
KCO. The operatorship will transfer from Agip KCO to NCOC in
January 2009. NCOC will provide monitoring and oversight, project
planning, partner coordination, reservoir modeling, conceptual
studies, early development plans, and government affairs and public
relations services for the Kashagan venture. The Managing Director
of NCOC will initially be provided by Total and will rotate among
the partners every two to three years. The Deputy Managing Director
will always be a KMG executive. The NCOC will be staffed by
representatives of all partner companies and will be run according
to Total's corporate management system. (NOTE: The agreement calls
for the Managing Director to employ 350 staff, none of whom have yet
been recruited or hired. In addition, Shell and KMG will require
another 100 management staff by the end of 2009 and 1100 by first
oil in 2013. Privately, Shell executives told us that they are
concerned about the consortium's ability to attract, develop, and
retain enough qualified staff to fill these positions. END NOTE.)
INCREASED KMG EQUITY
4. (SBU) KMG increased its equity in the Kashagan project from
8.33% to 16.81%, using finance provided by the consortium at LIBOR
plus 3%. The new shareholder structure is as follows: Eni 16.81%,
ExxonMobil 16.81%, KMG 16.81%, Shell 16.81%, Total 16.81%,
ConocoPhillips 8.40%, INPEX 7.56%. Eni will retain responsibility
for the delivery of first oil under the Experimental Program (Phase
1) of the Kashagan Project. In Phase 2, Shell will lead offshore
development, Eni will run the onshore plant, and ExxonMobil will
manage drilling operations. In addition, Shell will manage
production operations after the start up of Phase 1, with KMG
progressively assuming greater responsibility. ConocoPhillips will
assume audit responsibilities for the new operatorship company
throughout the life of project. To carry out their respective
responsibilities, Eni, Shell, and ExxonMobil will have appropriate
authority on matters such as staffing, procurement, and operating
procedures, and will apply their own companies' management systems.
PRIORITY PAYMENTS TO KAZAKHSTAN
5. (SBU) Bonus payments and schedules were not altered by the PSA
amendment, although a new priority payment was introduced according
to a Memorandum of Understanding signed in July. According to
Minister of Energy and Mineral Resources Sauat Mynbayev, "As soon as
oil from Kashagan is sold, a priority payment will immediately go to
the state budget." The priority payment is calculated as a
ASTANA 00002176 002 OF 002
percentage of the average global price of oil. If the price of oil
is less than or equal to $45 a barrel, the priority payment will be
3.5%. If the price of oil is higher than $45 but less than $85 a
barrel, the priority payment will be 5%; if the price is greater
than $85 a barrel, the priority payment will be 12%.
FIRM DEADLINE ON COMMERCIAL PRODUCTION
6. (SBU) Agip KCO initially promised to start commercial production
at Kashagan in 2005, but was forced to postpone that date several
times as the project encountered logistical and technical
difficulties and the cost of Phase I increased from an initial
estimate of $57 billion to the current estimate of $136 billion.
KMG vice President Maksat Idenov, who played a leading role in the
negotiations, announced that December 31, 2013 is the new deadline
for the beginning of commercial production. He said that first oil
will be produced on December 1, 2012, under the Experimental
Program. Idenov added that "if the consortium partners go beyond
that date, Kazakhstan will not reimburse their capital
expenditures."
7. (SBU) COMMENT. According to several of the companies which are
parties to the agreement, the terms and conditions of the deal were
agreed more than a week ago, but the Government refused to sign
unless their CEOs came to Astana for a signing ceremony. The oil
companies initially resisted this demand, with one calling it a
"blatant power play," but ultimately all the CEOs except
ExxonMobil's attended the signing ceremony and photo session with
Prime Minister Masimov. They were chagrined, however, when a
promised meeting with President Nazarbayev failed to materialize,
due to his attendance at a meeting of Shanghai Cooperation
Organization prime ministers taking place simultaneously in Astana.
Neil Carmichael, Shell's General Manager for Central Asian Business
Development, described the deal this way: "We gave them a loan at a
great rate in the middle of a financial crisis to buy an attractive
asset at a price well below its market value. And to top it all
off, we have to lower our equity share and increase the amount of
staff and management time we put in." Nevertheless, after months of
intense negotiations, the companies and the government were equally
eager to sign the documents that they hope will put Kashagan back on
track. END COMMENT.
HOAGLAND
SENSITIVE
SIPDIS
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC
STATE PLEASE PASS TO USTDA DAN STEIN
E.O. 12958: N/A
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED
REF: ASTANA 2025
1. (U) Sensitive but unclassified. Not for public Internet.
2. (SBU) SUMMARY. On October 31, Minister of Energy Mynbayev and
Kashagan consortium partners KazMunayGas, ExxonMobil, Total,
ConocoPhillips, Shell, and INPEX signed four documents amending the
Kashagan production sharing agreement (PSA) to increase
KazMunaiGas's (KMG) stake from 8.33% to 16.81% and restructure the
management and operator leads for the project. Several of the
companies were represented at the signing ceremony by their CEOs,
some of whom expressed disappointment that they were unable to meet
with President Nazarbayev. Under the Kashagan PSA, the licensed
exploration and production area also includes the oil-bearing
structures Kalamkas, Aktoty, and Kairan, in addition to Kashagan
itself. According to current operator Agip KCO, recoverable oil
reserves at Kashagan are estimated at 7-9 billion barrels and total
oil in-place at 38 billion barrels. First oil production will be
150,000 barrels per day (bpd) in 2013, followed by 370,000 bpd in
2014, 450,000 bpd in 2015, and 1.5 million bpd under full field
development. END SUMMARY.
NEW OPERATORSHIP
3. (SBU) The October 31 agreement established a new joint venture,
the North Caspian Operating Company (NCOC BV),to assume the
Kashagan operator responsibilities currently carried out by Agip
KCO. The operatorship will transfer from Agip KCO to NCOC in
January 2009. NCOC will provide monitoring and oversight, project
planning, partner coordination, reservoir modeling, conceptual
studies, early development plans, and government affairs and public
relations services for the Kashagan venture. The Managing Director
of NCOC will initially be provided by Total and will rotate among
the partners every two to three years. The Deputy Managing Director
will always be a KMG executive. The NCOC will be staffed by
representatives of all partner companies and will be run according
to Total's corporate management system. (NOTE: The agreement calls
for the Managing Director to employ 350 staff, none of whom have yet
been recruited or hired. In addition, Shell and KMG will require
another 100 management staff by the end of 2009 and 1100 by first
oil in 2013. Privately, Shell executives told us that they are
concerned about the consortium's ability to attract, develop, and
retain enough qualified staff to fill these positions. END NOTE.)
INCREASED KMG EQUITY
4. (SBU) KMG increased its equity in the Kashagan project from
8.33% to 16.81%, using finance provided by the consortium at LIBOR
plus 3%. The new shareholder structure is as follows: Eni 16.81%,
ExxonMobil 16.81%, KMG 16.81%, Shell 16.81%, Total 16.81%,
ConocoPhillips 8.40%, INPEX 7.56%. Eni will retain responsibility
for the delivery of first oil under the Experimental Program (Phase
1) of the Kashagan Project. In Phase 2, Shell will lead offshore
development, Eni will run the onshore plant, and ExxonMobil will
manage drilling operations. In addition, Shell will manage
production operations after the start up of Phase 1, with KMG
progressively assuming greater responsibility. ConocoPhillips will
assume audit responsibilities for the new operatorship company
throughout the life of project. To carry out their respective
responsibilities, Eni, Shell, and ExxonMobil will have appropriate
authority on matters such as staffing, procurement, and operating
procedures, and will apply their own companies' management systems.
PRIORITY PAYMENTS TO KAZAKHSTAN
5. (SBU) Bonus payments and schedules were not altered by the PSA
amendment, although a new priority payment was introduced according
to a Memorandum of Understanding signed in July. According to
Minister of Energy and Mineral Resources Sauat Mynbayev, "As soon as
oil from Kashagan is sold, a priority payment will immediately go to
the state budget." The priority payment is calculated as a
ASTANA 00002176 002 OF 002
percentage of the average global price of oil. If the price of oil
is less than or equal to $45 a barrel, the priority payment will be
3.5%. If the price of oil is higher than $45 but less than $85 a
barrel, the priority payment will be 5%; if the price is greater
than $85 a barrel, the priority payment will be 12%.
FIRM DEADLINE ON COMMERCIAL PRODUCTION
6. (SBU) Agip KCO initially promised to start commercial production
at Kashagan in 2005, but was forced to postpone that date several
times as the project encountered logistical and technical
difficulties and the cost of Phase I increased from an initial
estimate of $57 billion to the current estimate of $136 billion.
KMG vice President Maksat Idenov, who played a leading role in the
negotiations, announced that December 31, 2013 is the new deadline
for the beginning of commercial production. He said that first oil
will be produced on December 1, 2012, under the Experimental
Program. Idenov added that "if the consortium partners go beyond
that date, Kazakhstan will not reimburse their capital
expenditures."
7. (SBU) COMMENT. According to several of the companies which are
parties to the agreement, the terms and conditions of the deal were
agreed more than a week ago, but the Government refused to sign
unless their CEOs came to Astana for a signing ceremony. The oil
companies initially resisted this demand, with one calling it a
"blatant power play," but ultimately all the CEOs except
ExxonMobil's attended the signing ceremony and photo session with
Prime Minister Masimov. They were chagrined, however, when a
promised meeting with President Nazarbayev failed to materialize,
due to his attendance at a meeting of Shanghai Cooperation
Organization prime ministers taking place simultaneously in Astana.
Neil Carmichael, Shell's General Manager for Central Asian Business
Development, described the deal this way: "We gave them a loan at a
great rate in the middle of a financial crisis to buy an attractive
asset at a price well below its market value. And to top it all
off, we have to lower our equity share and increase the amount of
staff and management time we put in." Nevertheless, after months of
intense negotiations, the companies and the government were equally
eager to sign the documents that they hope will put Kashagan back on
track. END COMMENT.
HOAGLAND