HIGH-LEVEL KASHAGAN TALKS SCHEDULED IN ASTANA FOR

C O N F I D E N T I A L ASTANA 000056

SIPDIS

SIPDIS

SCA/CEN FOR M. O'MARA
DOE FOR EKIMOFF
COMMERCE FOR HUEPER

E.O. 12958: DECL: 01/12/2018
TAGS: EPET ENRG ECON PREL KZ
SUBJECT: HIGH-LEVEL KASHAGAN TALKS SCHEDULED IN ASTANA FOR
JANUARY 13


Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4(B) and (D)


1. (C) Summary: Further Kashagan negotiations are scheduled
for January 13 in Astana. CEOs from all consortium members
(except Total) expected to participate. Kashagan was a topic
of discussion during Senator Richard Lugar's January 10-11
visit to Astana, with Ministry of Energy and Natural
Resources Sauat Mynbayev expressing frustration with
ExxonMobil, KazMunayGas First Vice President Maksat Idenov
still optimistic on chances for a resolution, and Prime
Minister Masimov reserved. ExxonMobil's country
representative for Kazakhstan told the Ambassador on January
11 that ExxonMobil does not plan to change its position. End
Summary


2. (C) CEOs from Eni, ExxonMobil, ConocoPhillips, Impex, and
Shell are expected in Astana on January 13 for the latest
round of Kashagan negotiations. (Total will be represented by
chairman.) According to ExxonMobil Kazakhstan's Government
Relations and Public Affairs Director Patricia Graham, each
CEO will meet separately with Ministry of Energy and Natural
Resources Sauat Mynbayev before a group meeting with Prime
Minister Karim Masimov.


3. (C) Kashagan was a subject of conversation during Senator
Richard Lugar's January 9-11 trip to Kazakhstan (see septel
for a more detailed description of the Senator's meetings).
Prime Minister Masimov noted that ExxonMobil was the
remaining obstacle but otherwise did not comment on the
prospects of a negotiated settlement. Energy Minister
Mynbayev told the Senator that Kazakhstan "has exhausted all
of its flexibility on Kashagan." January 13-14 will be the
final negotiations, he said, and then Kazakhstan will decide
whether to continue to work with the consortium (Comment:
Mynbayev gave no hint of contemplated next steps if the next
round of negotiations fail. Local media on January 11 quoted
an unnamed source "close to the talks" who said that
Kazakhstan is considering termination of the Production
Sharing Agreement (PSA)). Mynbayev placed the blame on
ExxonMobil, saying that ExxonMobil and Kazakhstan have not
been able to agree upon the value of an increased stake for
KazMunayGas (KMG). Aside from the dispute with ExxonMobil,
all sides are in agreement on all issues, claimed Mynbayev.


4. (C) Maksat Idenov, KMG First Vice-President and Kashagan
lead negotiator, told Senator Lugar that he is still
optimistic on chances for a resolution. Idenov did not spare
the consortium of criticism, calling it dysfunctional and
describing frequent disagreements among the parties. He
explained to the Senator in some detail the reforms he
believes are needed within the consortium and which he
claimed are largely agreed upon. Like Mynbayev, Idenov was
critical of ExxonMobil's approach to calculating the
fair-market value of KMG's increased stake. Nevertheless, he
said that Kazakhstan wants to keep the consortium together
and could not see the prospect of "excluding" any current
consortium members. In response to a question from a
delegation member, Idenov stated that Kazakhstan has never
threatened to apply the sub-soil use law against the
consortium. He also noted that he has approved the next
operating budget for Kashagan.

5.(C) Graham told the Ambassador on January 11 that
ExxonMobil will not change its position. ExxonMobil is a
world-wide operation, she said, and cannot afford to create a
precedent in Kazakhstan that will affect it elsewhere. She
said that progress has been made on other issues, but not on
the question of establishing the fair market value of an
increased ownership share for KMG. Graham indicated that
ExxonMobil does not have any new ideas to offer and she
expects "tough negotiations."


6. (C) Comment: The sides in the Kashagan dispute have made
some progress, and Kazakhstan's decision to approve the next
operating budget is positive. Nevertheless, with Kazakhstan
and ExxonMobil at loggerheads, we do not expect this
weekend's negotiations to yield a final result, and we are
not yet ready to give credence to rumors of breaking the PSA
as anything more than another bargaining tactic. Ultimately,
as Idenov confirmed, none of the consortium members are
willing to sell any of their interests (except to grant KMG a
larger share),or to walk away from an asset that has
considerable impact on each company's proven reserves. The
GOK needs a capable operator, and breaking the current
contract would create a situation that would further delay
the project, raise costs, and create a grave risk to its

viability, particularly if ExxonMobil or any other member
took the matter to the courts or arbitration. End Comment


7. (U) Senator Lugar has not cleared this cable.

ORDWAY