WITH IGA ON TRANS-CASPIAN OIL TRANSPORT RATIFIED,

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000729 SIPDIS SIPDIS STATE FOR SCA/CEN DOE FOR EKIMOFF COMMERCE FOR HUEPER E.O. 12958: DECL: 04/15/2018 TAGS: PGOV PREL EPET KZ SUBJECT: WITH IGA ON TRANS-CASPIAN OIL TRANSPORT RATIFIED, KAZAKHSTAN IMPATIENT WITH AZERBAIJAN, ALOOF OF IOCS REF: A. ASTANA 480 B. ASTANA 354 Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4 (B) AND (D) ¶1. (C) Summary: On March 26, Kazakhstan's Parliament ratified an intergovernmental agreement with Azerbaijan on trans-Caspian oil transportation. According to the Kazakhstanis, Azerbaijan appears "not in a hurry" in trans-Caspian talks and, sensing Kazakhstan's vulnerabilities, is driving a hard bargain. Kazakhstan may try to strengthen its position by shipping some oil from the Kazakhstan Caspian Transportation System (KCTS) to Russia and Iran, although shipments to Iran would be small. The Kazakhstanis continue to insist that they will build and finance the Eskene - Kurik pipeline on their own, to the concern of their international partners. End Summary ¶2. (C) On March 26, Kazakhstan's Parliament ratified an intergovernmental agreement (IGA) with Azerbaijan on trans-Caspian oil transportation. Arman Darbayev, KazMunayGas Executive Director for Oil Transportation and Service Projects, told Poloff on March 27 that when he notified his Azeri counterparts of ratification, they seemed "disinterested." Their reaction is not a surprise, said Darbayev, because the Azeris appear "not in a hurry" to develop trans-Caspian options. "We are doing all the pushing." Darbayev noted that Kazakhstan cannot even get the Azeris to travel to Astana; the last three meetings on transportation have all been held in Baku. ¶3. (C) The Azeris are also taking a tough negotiating stance, according to Darbayev. They are well-aware that Kazakhstan's need for additional export routes provides them a strong bargaining position. Darbayev identified two immediate problems for the trans-Caspian project. First, Kazakhstan and Azerbaijan are in a dispute over sole risk expansion. Kazakhstan wishes to establish provisions for sole risk expansion, but the Azerbaijanis will do so only with strict conditions. The Azeris have also said that only project financing is acceptable, which the Kazakhstanis believe could cause delays of two to four years. ¶4. (C) Darbayev confirmed that Kazakhstan will build the KCTS' Eskene - Kurik pipeline by itself. He described the project as technically simple and relatively inexpensive ($1.2 - 1.3 billion) (Note: The Kazakhstanis have indicated that they may dip into their oil fund to pay for the project. Minister of Energy Sauat Mynbayev told the Ambassador in February that the Kazakhstanis realize that they will need to offer stable tariffs and other guarantees with the pipeline. Reftel A). Darbayev also noted that KMG will soon register a new daughter company focused solely on assessing and developing trans-Caspian transportation options. The outfit will have ten employees. Kazakhstan had initially considered creating a joint venture with Azerbaijan, but has abandoned the idea because of concerns that Azerbaijan would not provide sufficient manpower. ¶5. (C) Poloff asked Darbayev about his previous statement that the Eskene - Kurik pipeline might be a means to ship oil to points other than Azerbaijan. Darbayev responded that Kazakhstan needs to show the Azerbaijanis that it has other options and will consider additional shipments to Iran and Russia. He noted, however, that shipments to Iran would be small and that Kazakhstan has no interest in pipeline projects in Iran. ¶6. (C) Darbayev also briefly discussed Kazakhstan's plans beyond Baku. The extent to which BTC's capacity will be expanded is uncertain, said Darbayev. As a result, more shippers (Darbayev specifically identified Shell, Exxon, and Chevron) are clamoring for another route to Georgia, a "Baku - Supsa II." While Darbayev believes that this plan has advantages, it also could create more conflict between Azerbaijan and Kazakhstan because of their competing terminals in Georgia (Kazakhstan's at Batumi, Azerbaijan's at Kulevi). Referring to President Yushchenko's recent trip to Kazakhstan, Darbayev said that Kazakhstan considers the Odessa - Brody pipeline unprofitable and is waiting to be shown a feasibility study proving otherwise. Many of Kazakhstan's problems could be solved, he admitted, with a trans-Caspian pipeline. Political issues still exist, but "as soon as we have a chance we will build it," said Darbayev. ASTANA 00000729 002 OF 002 ¶7. (C) KMG Vice President for Oil and Gas Transportation Kabildin reaffirmed that Azerbaijan is "not rushing" on KCTS in a conversation with the Ambassador on April 3. Kabildin added that it is unfortunate that Baku-Supsa has been idle for a year and he hopes that it will be revived to accomodate Kazakhstani volumes in excess of BTC capacity. Kabildin also discussed a number of other transportation issues with the Ambassador. Kabildin expressed some optimism on CPC expansion, claiming that the Russians have moved beyond any political considerations and are prepared to look at expansion in commercial terms. He noted that Transneft will have substantial excess capacity in the westward direction because of falling Russian oil production and the expansion of pipelines. This, he believes, will strengthen the position of Kazakhstani shippers and could even support the reversal of Odessa-Brody. Kabildin does not think Russia has the oil for Bourgas - Alexandropoulos and doubts the pipeline will be built. He stated that Atyrau - Samara could be expanded in one year, and would be once Transneft needs Kazakhstani oil. ¶8. (C) After the ratification, Poloff discussed the status of KCTS with several representatives from western oil companies . Patty Graham, ExxonMobil's Kazakhstan Government and Public Affairs Representative, said that ExxonMobil has of late been consistently told that Kazakhstan will build and finance the Eskene - Kurik pipeline, and that "the door is totally shut" on negotiations. The decision on financing is particularly crucial, she said, because it eliminates possible leverage for the IOCs. "All we can do", she said, "is engage on tariff and capacity agreements." Pete Clark, Manager of Chevron's Strategic Planning Eurasia Business Unit, told Poloff that Azerbaijan is "playing hard to get" on KCTS. Chevron, he said, would still like to participate as an equity partner in Eskene - Kurik. If the Kazakhstanis came looking for a loan from TenghizChevroil for the pipeline, "it would be hard to turn down." The real tricky part for Chevron will come when Kazakhstan asks it to commit volumes for KCTS. Chevron then might have to make a choice at the expense of the CPC, said Clark. ¶9. (C) Comment: Kazakhstani criticism of Azerbaijan's inertia is a bit rich, given that it took more than one year for Kazakhstan to ratify the IGA. Nevertheless, the Kazakhstanis are now acting with an increased sense of urgency as they try to diversify their oil export options to meet increased production. With CPC expansion still uncertain and other options less appealing, they are ready to show some flexibility in the face of tough demands from Azerbaijan. Given their apparent unshakable determination to build and finance the Eskene - Kurik pipeline by themselves, the Kazakhstanis also must reassure their Kashagan and Tenghiz partners that they will establish fair access conditions. End Comment ORDWAY