KAZAKHSTAN: KAZMUNAIGAS FIRST VP IDENOV ON SWAPS WITH

UNCLAS SECTION 01 OF 03 ASTANA 002276 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 FIRST VP IDENOV ON SWAPS WITH IRAN AND TRANS-CASPIAN AGREEMENT WITH SOCAR REF: (A) ASTANA 2082 (B) ASTANA 2266 ASTANA 00002276 001.2 OF 003 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On November 19, KazMunaiGas (KMG) First Vice President Maksat Idenov briefed the Ambassador on KMG's trans-Caspian oil transportation agreement with the State Oil Company of the Azerbaijan Republic (SOCAR),indicated that Kazakhstan has no plans to increase oil shipments to Iran in the near future, and said he was ready to sign a heads of agreement with ConocoPhillips to explore the oil-rich N Block offshore in the Caspian Sea. END SUMMARY. GOOD NEWS FROM BAKU ¶3. (SBU) Idenov warmly welcomed the Ambassador to his office and noted that much has happened since Ambassador Mann's visit in October (reftel A). In particular, Idenov pointed to the successful Kashagan negotiations and the trans-Caspian agreement with SOCAR as positive developments, both of which he expects to have a lasting impact on Kazakhstan's development. Idenov confirmed that the November 14 agreement with SOCAR calls for the establishment of a 50-50 joint venture to expand port and terminal facilities in Kuryk and Baku (reftel B). He also said that the agreement allows either side to invite third parties to join the project, provided they commit to shipping a fixed amount of crude through the system. Idenov mentioned Conoco-Phillips, Total, Inpex, and ENI/Agip as potential partners, since they have upstream assets in Kazakhstan and are also shareholders in the Baku-Tbilisi-Ceyhan (BTC) pipeline consortium, but said that Shell and Exxon-Mobil may find themselves excluded from the Kazakhstan Caspian Transportation System (KCTS) since they chose not to invest in BTC. (COMMENT: It is odd that Idenov did not mention Chevron, which owns 50% of Kazakhstan's largest producing oil company, Tengizchevroil. Furthermore, Chevron and Exxon-Mobil were reported to be in talks over the Eskene-Kuryk pipeline, an essential element of the KCTS. END COMMENT.) Idenov said that KMG can "quite easily" transport 400,000-450,000 barrels per day (bpd) by tanker, but shipping greater volumes will require a trans-Caspian pipeline. TRANS-CASPIAN OIL PIPELINE ¶4. (SBU) When asked whether Kazakhstan felt it had the legal authority to build a trans-Caspian pipeline on the basis of its bilateral agreement with Azerbaijan and in the absence of a comprehensive demarcation agreement among all five littoral Caspian states, Idenov declined to comment directly. He said simply, "we would not want to offend our neighbors to the north." However, Idenov slyly noted that Russia is developing, together with KMG, three offshore Caspian oil fields within Russia's territorial waters (Khvalynskoye, Tsentralnaya, and Korchagin) and has plans to build undersea pipelines to transport oil from these fields to onshore pipelines and processing facilities. As soon as Russia does so, Idenov said, "we can go to Russia and say, 'You are building your undersea pipeline, now you cannot object if we build ours.'" NO PLANS TO INCREASE SHIPMENTS TO IRAN ¶5. (SBU) According to Idenov, Kazakhstan currently swaps "a very small amount" of crude with Iran -- about one million tons annually (or 20,000 bpd). Idenov said Kazakhstan has no immediate plans to increase that amount and noted that Iran would have to build a new refinery in the north to process Kazakhstani crude, which is high in mercaptan content. Idenov is skeptical about reports that Iran plans to build a pipeline from the northern port of Neka to the southern port of Jask, saying, "No one would build such a long, expensive pipeline without a commitment of oil -- and who would commit the oil?" When reminded that Total insisted during the Kashagan negotiations on its right to ship its product anywhere, including Iran, Idenov dismissed the suggestion with a wave of the ASTANA 00002276 002.2 OF 003 hand, "That's just a French thing. They always make a lot of noise and never do anything." In the long-term, Idenov did not rule out the possibility that Kazakhstan might ship greater volumes of oil to Iran, but he said their preference is to increase the capacity of the BTC and Baku-Supsa pipelines, as well as a pipeline that would ship oil east to China. PRE-CASPIAN GAS PIPELINE ¶6. (SBU) According to Idenov, the development of the Prikaspiskii gas pipeline (Caspian Littoral Pipeline) is still in its early stages. (NOTE: The Prikaspiskii pipeline would carry natural gas along the shore of the Caspian Sea from Turkmenistan through Kazakhstan to Russia. Each country would build, operate, and own the pipeline on its territory. Kazakhstan's segment of the pipeline would have a capacity of up to 20 billion cubic meters and would connect to the Central Asia-Center pipeline at Beineu. END NOTE). Idenov said Gazprom is currently carrying out a feasibility study, but noted that no one has answered the following critical questions: Where will the gas come from? Who will invest in the project? Who will implement and manage the project? Idenov said it will take some time for Turkmenistan to develop its natural gas resources and will require opening up to foreign investment and shedding the closed, provincial mentality inculcated under former President Niyazov. FINANCIAL CRISIS WILL NOT IMPACT KMG INVESTMENTS ¶7. (SBU) Despite the global financial crisis and Kazakhstan's withdrawal of $10 billion from the National (Oil) Fund to finance various stabilization measures, KMG will have no difficulty meeting its cash calls, dividend obligations, interest payments, and investment plans, said Idenov. He noted that KMG has increased its revenue from the Tengiz and Karachaganak fields and reminded the Ambassador that he was able to raise easily more than $3 billion earlier this year for KMG's exploration and production company. Idenov said he plans to raise additional funds on the international market at the end of 2009. KMG READY TO SIGN N BLOCK DEAL ¶8. (SBU) Although he was confident that KMG would weather the financial storm and move forward with its ambitious strategy, Idenov seemed frustrated that many of his plans were subject to government approval and personnel changes. For example, KMG's Board of Directors yesterday approved a heads of agreement with ConocoPhillips and Mubadala to develop the N Block offshore in the Caspian Sea that would guarantee a 12% annual rate of return for the government. Idenov said he was "ready now" to sign the deal, but still needed to get the approval of "Mr. Government," which he said was shorthand for the Council of Ministers, the Minister of Economy, the Minister of the Environment, and the Prime Minister. Idenov confided that he would present the terms of this "excellent deal" to Prime Minister Masimov today and would warn him that if the government insisted on harsher terms or announced other cash calls, that could destroy the deal. He said he expected the government "would probably agree" to the terms of the N Block deal by the end of the year, but he said he would recommend extending the deadline to January 2009. ¶9. (SBU) COMMENT. Idenov was very frank and open during his first formal conversation with the Ambassador. He answered the Ambassador's questions as directly and candidly as possible in fluent English, frequently smiling and gesturing to underscore a point. We have no specific reason to doubt his claims that Kazakhstan has no firm plans to increase oil shipments to Iran, although we also understand Kazakhstan's desire to keep this option open. We thus need to encourage continued Kazakhstani-Azerbaijani engagement to expedite implementation of the KMG-SOCAR agreement. END COMMENT. ASTANA 00002276 003.2 OF 003 HOAGLAND