KAZAKHSTAN: CIVIL NUCLEAR ENERGY SECTOR OVERVIEW

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SUBJECT: KAZAKHSTAN: CIVIL NUCLEAR ENERGY SECTOR OVERVIEW

REF: (A) SECSTATE 127423 (B) 2006 ALMATY 2673 (C) ASTANA 2232 (D)
ASTANA 2126

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1. SUMMARY: In response to reftel A, this report summarizes the
structure, plans, projects, and players of Kazakhstan's civilian
nuclear energy sector. Kazakhstan has the world's second largest
uranium reserves after Australia and is currently the world's third
largest uranium producer after Canada and Australia. Once the owner
of the world's fourth largest nuclear arsenal, Kazakhstan
voluntarily decommissioned its own weapons and continues excellent
cooperation on cooperative threat reduction (CTR). Facing a
255-megawatt power deficit due to a poorly integrated power network,
Kazakhstan wants to develop a domestic nuclear energy industry to
help meet its power needs. Kazakhstan's nuclear power industry
comprises the Ministry of Energy and Mineral Resources (MEMR) which
sets energy policy, the state-owned nuclear power company
Kazatomprom, and the National Nuclear Center, which conducts
research and development. END SUMMARY.

PLANS TO DEVELOP NUCLEAR POWER IN KAZAKHSTAN


2. Kazakhstan is currently the world's third largest uranium
producer after Canada and Australia. In response to reduced market
demand due to the global economic crisis, on November 6, Kazatomprom
lowered uranium production plans from 9,000 tons to 8,700 tons in
2008, and from 12,000 tons to 11,000 tons in 2009. Kazakhstan
produced 6,637 tons of uranium in 2007. On December 15, Energy
Officer met with Yevgheniy Ryaskov, Acting Director of the
Department for Nuclear Industry and Atomic Energy at the Ministry of
Energy and Mineral Resources (MEMR). He said that Kazakhstan
currently exports all of the uranium it produces. However, from
1973 to 1998, the BN-350 plutonium breeder reactor owned by
Kazatomprom generated approximately 1% of all electrical power in
Kazakhstan. On April 22, 1999, the Government of Kazakhstan decided
to shut down and decommission the BN-350 reactor. By the end of
2008, Russia's Afrikantov Research and Development Bureau plans to
complete a feasibility study for the construction of a nuclear power
plant in the vicinity of the decommissioned BN-350 reactor in Aktau,
which would be equipped with Russian-made VBER-300 reactors that
have been used on board Russian nuclear submarines.

KAZATOMPROM TO INCREASE PRODUCTION AND EXPORT OF URANIUM


3. As described in reftel C, Kazatomprom has ambitious plans to
become a vertically integrated transnational corporation managing
the full nuclear fuel cycle, including uranium mining, gas
processing, isotopic enrichment, fuel pellet and fuel assembly
production, and construction of nuclear power plants. The Northern
mining group has uranium reserves of 750,000 tons; the Western
mining group has 180,000 tons of uranium reserves in its North and
South Karamurun mines; the Eastern mining group has 140,000 tons of
uranium reserves; and the Southern mining group owns 70,000 tons of
uranium reserves.


4. The Ulba Metallurgical Plant processes waste materials
containing uranium (scraps and ashes),including 27% U-235, supplied
to the United States as uranium dioxide powder, and 5% U-235 fuel
pellets, supplied to Russia. On December 12, Ulba announced that
Russia refused to place an order for fuel pellets from Kazakhstan as
expected. Kazatomprom president Mukhtar Dzhakishev was nonplussed,
saying, "If we lose the Russian market, Ulba will obtain more orders
from China and Japan."


5. Ulba is the world's largest processor of uranium products, the
second largest processor of beryllium products, and the third
largest processor of tantalum and niobium products. In July,
Kazatomprom abandoned earlier plans to participate in a tantalum
mining project in Brazil due to the high asking price. On December
11, Ulba launched a tantalum powder shop. The production of powder
for tantalum condensers is considered a breakthrough project for
KazAtomProm and will be carried out under a national program called
"30 Corporate Leaders," which makes Ulba eligible for federal
financial aid.

NATIONAL NUCLEAR CENTER CONDUCTS RESEARCH AND DEVELOPMENT

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6. Established in 1993, the National Nuclear Center has an
extensive research and production infrastructure, including three
pilot reactors, an isochronal cyclotron, a particle accelerator, and
a range of facilities for conducting experiments. The Center
employs highly-qualified specialists in a number of affiliated
institutes, such as the Nuclear Physics Institute in Almaty,
Kurchatov, and Aksai; the Atomic Energy Institute in Kurchatov; the
Geophysical Research Institute in Kurchatov, Borovoye, Almaty,
Kaskelen, Aktobe, and Makanchi; the Institute of Radiation Safety
and Environment; the Baikal production facility in Kurchatov; the
State Research and Production Center for Blasting Operations in
Almaty; among others. In 2011, the National Nuclear Center plans to
open a Center for Nuclear Medicine and Biophysics, which will be
equipped to diagnose and treat cardiovascular and oncological
diseases.

KAZAKHSTAN'S MOTIVATIONS FOR PURSUING NUCLEAR POWER


7. On August 20, 2002, Kazakhstan adopted the Development Concept
for the Uranium Industry and Atomic Energy from 2002 to 2030, which
described the status of the atomic energy and uranium mining
industry, described development trends, indicated future strategic
priorities for the industry, and defined the official state policy
for civil nuclear power. According to the Concept, it is in
Kazakhstan's strategic national interest to increase uranium
production, construct new uranium mines, increase the percentage of
energy demand met by nuclear power, and eliminate the import of
electricity.


8. The Concept identifies the following motivations for developing
a civil nuclear power program:

-- Perennial power shortages in the south, expected to reach 1.9 to
2.0 billion kilowatt hours a year by 2030, even if Kazakhstan builds
a new 2,000-megawatt power plant;

-- Kazakhstan's large deposits of uranium, which can be mined using
a more environmentally-friendly in-situ leaching method;

-- Dependence on inefficient and environmentally-harmful coal-fired
power plants that supply 84% of Kazakhstan's electrical power; and

-- An existing world-class nuclear training system.


9. In a December 15 meeting with Energy Officer, MEMR's Ryaskov
stressed that Kazakhstan favors the development of nuclear energy
over oil, gas, and coal as a future source of energy because its
in-situ leaching uranium mining is much more environmentally
friendly than the extraction of fossil fuels. Moreover, the cost of
electricity generated by nuclear power plants is lower than that of
coal- or gas-fired plants, while the lifespan of a nuclear plant is
60 years, compared to 25 for a coal-fired plant. Finally, Ryaskov
noted that Kazakhstan would generate more revenue if it exported the
majority of its oil, gas, and coal reserves and leveraged its
uranium resources to supply domestic power.

GOVERNMENT ROLE IN THE CIVIL NUCLEAR SECTOR


10. On October 13, MEMR transferred its 100 percent ownership in
Kazatomprom to the Samruk-Kazyna Sovereign Wealth Fund.
Samruk-Kazyna will finance development and production projects if
Kazatomprom itself does not have sufficient revenue. As
Kazatomprom's Dzhakishev said on November 6, "If, for example, we
are unable to raise capital for a new ore mill, we may turn to
Samruk-Kazyna and borrow $1.5 billion from the state fund to build
the mill."


11. Kazatomprom's strong financial position, steady uranium
production, and long-term contracts make Kazatomprom a low-risk and
solvent borrower. In July, Kazatomprom announced plans to raise a
two-year, $300-million syndicated loan with the assistance of
Citigroup. On November 27, Japan's Nippon Export and Investment
Insurance increased its coverage for Kazakhstan-Japan joint uranium
production projects from $47.94 million to $114.37 million.

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KEY NUCLEAR DECISION MAKERS


12. Policy for Kazakhstan's nuclear power industry is set by a
number of influential decision makers, including Minister of Energy
and Mineral Resources Sauat Mynbayev, Kazatomprom president Mukhtar
Dzhakishev, Kairat Kadyrzhanov, director of the National Nuclear
Center, and Kairat Kelimbetov, chairman of the Samruk-Kazyna
Sovereign Wealth Fund.


13. In addition, two offices in MEMR are directly involved in
decisions regarding the nuclear power industry. The Department for
Nuclear Industry and Atomic Energy, currently supervised by Deputy
Director Ryaskov, defines Kazakhstan's development strategy for the
industry, while the Committee for Atomic Energy, chaired by Timur
Zhantikin, issues licenses and carries out supervisory and
monitoring functions.


14. The recent appointment of President Nazarbayev's close
associates to senior management positions in Samruk-Kazyna and
Kazatomprom indicate the strategic importance the political
leadership attaches to the development of Kazakhstan's civil nuclear
sector. On October 13, the Government of Kazakhstan named
Nazarbayev's son-in-law Timur Kulibayev Deputy Chairman of
Samruk-Kazyna and recommended he also chair Kazatomprom's Board of
Directors. In addition, Nartay Dutbayev, a former advisor to the
president and chairman of the National Security Committee (KNB),was
appointed a vice president of Kazatomprom.

GOVERNMENT TO CREATE NUCLEAR REGULATING AUTHORITY


15. On September 16, Prime Minister Karim Massimov announced a plan
to establish the State Nuclear Industry Supervision Agency under the
Ministry of Energy and Mineral Resources. The new agency would have
the authority to draft laws and regulations for the nuclear
industry. At the time, Energy Minister Mynbayev said that "the
International Atomic Energy Agency has made it a formal requirement
for all countries with a civil nuclear power sector to set up an
independent nuclear energy committee or agency." The National
Nuclear Center offered to host the new regulatory agency, but it is
likely that MEMR's Committee for Atomic Energy will be merged with
the new agency instead.

LEGAL FRAMEWORK FOR NUCLEAR POWER OPERATIONS


16. Kazakhstan's legal framework for nuclear power operations
includes the Law on the Use of Atomic Energy; the Law on Export
Controls for Arms, Military Technology, and Double-Use Products; the
Decree on the Export and Import of Uranium and Uranium Products,
Nuclear Fuel for Nuclear Power Plants, Special Equipment and
Technologies and Dual-Purpose Materials; the Development Concept for
the Uranium Industry and Atomic Energy Sector from 2002 to 2030,
among others.


17. The Law on the Use of Atomic Energy empowers the Committee to
develop rules and instructions to implement existing laws, issue
nuclear-related licenses, monitor atomic energy use, conduct
inspections, monitor radiation in Kazakhstan, inventory nuclear
materials, and cooperate with relevant authorities from other
countries and international organizations to ensure the safe use of
atomic energy and the non-proliferation of nuclear arms and secure
control of nuclear materials.


18. To ensure the efficient development of its nuclear power
sector, in 2007, the National Nuclear Center developed a special
national program currently under review by the Government of
Kazakhstan. The program focuses on legal and regulatory issues,
environmental and radiation safety, fundamental and applied
research, non-proliferation support, uranium and nuclear material
production, electricity generation by nuclear power plants, and
staff training. According to Director General Kairat Kadyrzhanov,
the most important element of this program is to enhance the legal
framework, as Kazakhstan does not yet have any laws regulating the
construction, organization, and operation of nuclear power plants.


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19. When asked whether Kazakhstan is party to an international
liability regime, MEMR's Ryaskov responded that Kazakhstan has been
a member of the International Atomic Energy Agency (IAEA) since
February 14, 1994. According to Ryaskov, Kazakhstan signed an
Agreement on the Application of Safeguards, under which all nuclear
installations in Kazakhstan operate under IAEA supervision. Ryaskov
added that all nuclear activities are carried out in compliance with
IAEA rules and standards. On February 19, 2007, Kazakhstan also
ratified the Additional Protocol to the Safeguards Agreement, which
expands the IAEA's ability to verify the country's nuclear
activities.

KAZAKHSTAN'S NUCLEAR WORKFORCE


20. The personnel for the atomic industry are trained at the
special nuclear power and chemical metallurgy departments of four
public schools in the south and east of Kazakhstan such as the
Al-Farabi Kazakh State University (Almaty),Kazakh State Technical
University (Almaty),East-Kazakhstan State University
(Ust-Kamenogorsk),and the Shakarim Semipalatinsk State University
(Semei). Kazakhstan also has quite a few technical universities,
which train future engineers, technicians, and constructors.


21. According to Ryaskov, Kazakhstan's use of in-situ leaching
methods means that its uranium production is not labor intensive.
For example, he said that just 104 workers are used to develop the
Karatau uranium field, whereas thousands would have been needed if
they used an open mining approach. Highly qualified nuclear
scientists and workers are employed at the BN-350 plutonium breeder
reactor site, the National Nuclear Center in Kurchatov, and other
nuclear energy facilities. Many of Kazakhstan's nuclear specialists
received training at the Tomsk Technical Institute in Russia.


22. Ryaskov insists that Kazakhstan has enough highly-trained
specialists to meet current obligations, "but to achieve our future
goals, the trained workforce is not sufficient." MEMR plans to meet
future staffing needs by developing a special training program. In
addition, the National Nuclear University of Kazatomprom,
established in 2004, organizes advanced training and continuous
professional education of technical staff. Kazatomprom subsidiary
Geotechnology trains Kazatomprom employees on its in-situ leaching
method as well as maintenance and radiological protection.

CURRENT COOPERATION WITH U.S. COMPANIES


23. Kazatomprom has existing partnerships with the following U.S.
companies: Brush Wellman Inc., Exelon Corp., Freedom Alloys Inc.,
General Electric, and New York Nuclear Corporation. In addition,
Kazatomprom subsidiary Ulba Metallurgical Plant supplies uranium
dioxide powder to the United States. On October 18, 2007,
Kazatomprom purchased 10% of Westinghouse Electric Company from
Toshiba for $540 million. In November 2007, Kazatomprom president
Dzhakishev attended the Westinghouse shareholders meeting and
announced that the company would supply fuel for Westinghouse
nuclear reactors.


24. Kazatomprom uranium production is somewhat constrained by a
deficit of sulfuric acid for on-site uranium processing, which the
company plans to address by using up to 400,000 tons of sulfur
stored by the Tengiz oil production consortium Tengizchevroil (TCO),
in which Chevron has a 50% share and ExxonMobil a 25% stake.
Kazatomprom buys sulfur from TCO and processes it at the Stepnogorsk
Chemical Plant.

FUTURE OPPORTUNITIES FOR U.S. INDUSTRY


25. MEMR's Ryaskov was surprised that U.S. companies -- unlike
companies from Japan, France, and Canada -- have not entered
Kazakhstan's uranium mining market. He hypothesized that U.S.
companies are not interested in Kazakhstan's uranium fields since
the United States has large uranium deposits of its own. According
to Ryaskov, Kazakhstan does not anticipate conducting any
nuclear-related tenders in the near future. Nevertheless, post
believes that Kazakhstan's nuclear institutions would welcome U.S.
technology and expertise in existing projects.

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26. Kazakhstan is interested in acquiring or building small and
medium-size nuclear reactors such as Russia's VBER-300. Ryaskov
said that Kazatomprom considered acquiring AR-600 reactors from
Westinghouse, but Westinghouse subsequently shifted to production of
AR-1000 reactors, which do not fit Kazatomprom's needs. Ryaskov
believes that U.S. companies cannot realistically compete to build
nuclear power plants in Kazakhstan, since Kazakhstan plans to build
small- and medium-sized nuclear reactors, while U.S. companies can
offer only high-capacity reactors.

FOREIGN COMPETITORS


27. Reftel C describes in detail joint ventures between KazAtomProm
and companies from Canada, France, Japan, China, Russia, and
Ukraine. In addition,

-- In May, during the visit to Kazakhstan of South Korea's Prime
Minister Han Seung Soo, Kazatomprom and Korea Hydro and Nuclear
Power signed a long-term contract under which Kazatomprom will
deliver 3,410 tons of uranium a year until 2017, which would
represent 11% of South Korea's annual uranium consumption.

-- On October 24, Energy Officer met with D.C. Manjunath, Political
and Commercial Counselor at the Embassy of India to discuss press
reports of India's interest in uranium from Kazakhstan. Manjunath
was unable to provide specific details on the timing, amount, or
players in a possible transaction, but he did confirm India's
increased interest in a deal with Kazakhstan and said that the
signing of the U.S.-India Civil Nuclear Accord vastly expands
India's options and possibilities. He noted that India's Department
of Atomic Energy would be the lead agent on any uranium purchase.
He also acknowledged that both governments plan to arrange state
visits in 2009.

-- On November 27, the Government of Ukraine approved an agreement
to join the International Uranium Enrichment Center. The stake to
be acquired by Ukraine will come from Russia's 90% share. On
November 26, the Afrikantov Research and Development Bureau pledged
to complete by the end of 2008 a feasibility study for a nuclear
power plant in Aktau to be equipped with Russian-made VBER-300
reactors, which have a good record of operation onboard of Russian
navy ships.

-- On December 15, National Nuclear Center Director Kadyrzhanov
announced that in 2009-2010, the Center would conduct a feasibility
study together with Japanese scientists to build a 50-megawatt
experimental nuclear reactor in Kurchatov and bring it to design
capacity in 2011-2018.

POLITICAL CONSIDERATIONS FOR NUCLEAR POWER COOPERATION


28. Kazakhstan is cautious in its choice of potential partners.
For example, according to Ryaskov, since India did not have a waiver
until recently from the Nuclear Suppliers Group, Kazakhstan did not
consider India a potential customer, regardless of India's high
demand for uranium. After India obtained the relevant waiver,
Kazakhstan acknowledged its willingness to supply uranium to India
for all types of civilian nuclear reactors.


29. Kazakhstan plans to pursue nuclear power development in order
to meet domestic power shortages, minimize environmental impact, and
take advantage of its extensive uranium reserves, processing
facilities, and nuclear expertise. Kazakhstan does not anticipate
any tenders for available uranium fields, but would welcome
nuclear-related joint ventures with U.S. companies in exchange for
their technology and expertise. To meet its ambitious plans of
becoming the world's largest uranium producer and operating a full
fuel cycle, Kazakhstan will strengthen state supervision of
nuclear-related operations.

HOAGLAND