KAZAKHSTAN: KAZMUNAIGAS AND SOCAR SIGN AGREEMENT ON

UNCLAS SECTION 01 OF 02 ASTANA 002266 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC, SCA/PPD, EUR/CARC STATE PLEASE PASS TO USTDA DAN STEIN E.O. 12958: N/A TAGS: PGOV PREL ECON EPET EINV SOCI KPAO KZ SUBJECT: KAZAKHSTAN: KAZMUNAIGAS AND SOCAR SIGN AGREEMENT ON TRANS-CASPIAN TRANSPORTATION SYSTEM ASTANA 00002266 001.2 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On November 14, the state oil companies of Kazakhstan and Azerbaijan signed an agreement outlining the basic principles for implementation of a trans-Caspian oil transportation system. The agreement defines the respective roles and responsibilities of KazMunaiGas (KMG) and the State Oil Company of the Azerbaijani Republic (SOCAR),creates a joint venture between SOCAR and KMG, and defines financing, pricing, access terms, and phases for the development of KCTS. END SUMMARY. ¶3. (SBU) KCTS comprises an oil pipeline from Eskene to Kuryk, tanker shipments from Kuryk to Baku, and onward export to Western markets via the Baku-Tbilisi-Ceyhan pipeline and trans-Caucasian railway. KMG President Kairgeldy Kabyldin said that KCTS will ship 500,000 barrels of oil per day (bpd) perhaps as soon as 2012, with volumes eventually growing to 1.2 million bpd. KMG and SOCAR have not yet determined where the double-hull, 60,000 deadweight-ton tankers envisioned for KCTS would come from or who would build or operate them. The latest agreement follows months of ongoing negotiations and builds on a memorandum of understanding signed by presidents Nazarbayev and Aliyev on June 16, 2006. ¶4. (SBU) Kazakhstan's Minister of Energy and Mineral Resources, Sauat Mynbayev, said on November 14 in Baku, "We have high hopes for the trans-Caspian project, given Kazakhstan's annual increases in oil production, which are forecast to rise to 70 million tons (approximately 1.4 million barrels per day, mbpd) in 2008, of which 63 million tons (1.25 mbpd) will be exported. This agreement is the first practical step toward creation of a specific system for determining the terms of deliveries and tariffs." Also in Baku, KMG's Kabyldin drew attention to the new joint venture and announced that it will begin work right away on a feasibility study, as well as related construction and infrastructure projects. "Initial cost estimates for KCTS are approximately $3 billion," said Kabyldin. He noted that major improvements to port infrastructure will be required and said that KMG would attract financing and investment by guaranteeing an unspecified volume of crude throughput. ¶5. (SBU) Fouad Khodzhayev, a manager with SOCAR's representative office in Astana, confirmed to us on November 17 that the new joint venture will begin operations later this year with a feasibility study, which will inform the joint venture's decisions on pricing and profits. He admitted that the agreement signed on November 14 is very general in nature but said it indicated continued progress between the two national oil companies toward a shared vision of trans-Caspian transportation. ¶6. (SBU) Although the Government of Kazakhstan did not sign the Declaration of the Baku Energy Summit on November 14, both Minister of Energy Mynbayev and KMG President Kabyldin were in Baku that day to negotiate the new trans-Caspian transportation agreement with SOCAR, which Minister Mynbayev signed on behalf of the Government of Kazakhstan. ¶7. (SBU) COMMENT: The November 14 agreement is a significant step forward in the development of KCTS and further commits the two governments and their respective national oil companies to agreements first signed in July 2006. It is fully consistent with the government's "multi-vector" transportation policy and strengthens Kazakhstan's oil export options, particularly those that do not require the approval of the Government of Russia. We see the latest agreement as a positive development that will eventually enable more Kazakhstani crude to get to more markets more quickly. Although the Government of Kazakhstan did not sign the Baku Energy Summit declaration -- perhaps to avoid openly offending Russia -- we consider their actions to speak louder than words, with both the Minister of Energy and the President of KMG visiting Baku to negotiate and sign this important agreement to move KCTS forward. ASTANA 00002266 002.2 OF 002 END COMMENT. HOAGLAND