CPC EXPANSION AT HAND?

UNCLAS SECTION 01 OF 02 MOSCOW 003591 SIPDIS SENSITIVE DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HEGBURG, EKIMOFF E.O. 12958: N/A TAGS: EPET ENRG ECON PREL RS SUBJECT: CPC EXPANSION AT HAND? REF: A. MOSCOW 3394 ¶B. ASTANA 2144 ¶C. 07 MOSCOW 4691 SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. NOT FOR INTERNET DISTRIBUTION. -------------- SUMMARY -------------- ¶1. (SBU) Andrew McGrahan, Chevron Russia's Vice President in charge of CPC, told us December 10 that an MOU on CPC expansion will be signed on December 17. McGrahan said BP, which is attempting to divest itself of shares in CPC, may not sign the MOU but is likely to allow the expansion plans to proceed regardless. End Summary -------------- BP MAY NOT SIGN MOU... -------------- ¶2. (SBU) McGrahan said BP, which has been the latest holdout on expansion (refs A and B),will be present at the ceremony but has not yet decided whether to sign the MOU. Since BP doesn't ship oil through CPC, its interests are not necessarily aligned with those of other shareholders, and it is currently negotiating its exit from the project. BP representatives recently told us (ref A) that an agreement on the sale of part of BP's share in CPC to KazMunaiGaz (KMG) is almost complete. McGrahan told us on December 12 that BP had informed shareholders earlier that day that BP CEO Tony Hayward and Lukoil President Vagit Alekperov had reached agreement on the sale of the rest of BP's interest in CPC to Lukoil. ¶3. (SBU) The MOU calls for extending the new tariff and interest rate changes put in place last year in a previous MOU and which are set to expire in January (ref C). The previous MOU increased shipping tariffs from $32 to $38 per ton and reduced the interest rate on the CPC debt dating from the pipeline's initial construction (and owed to shareholders) from 12.66% to 6%. This would ensure CPC's financial viability for another year. The MOU also allots $50 million for expansion engineering studies and stipulates that CPC begin reserving cash to fund expansion. -------------- ...BUT EXPANSION MAY PROCEED ANYWAY -------------- ¶4. (SBU) McGrahan was optimistic that even if BP does not sign the MOU, CPC expansion would nonetheless proceed per the agreement. According to McGrahan, in the event BP does not sign the agreement, the CPC board would meet on December 18 and likely vote to implement the provisions of the agreement through 2009, while allowing BP more time to finalize its exit. He told us that the reported December 12 agreement between Hayward and Alekperov makes it very likely that BP will at least agree to this plan. ¶5. (SBU) McGrahan said BP agrees with all of the MOU provisions except the one requiring a build-up in cash reserves. According to McGrahan, all other shareholders, however, see it as an all-or-nothing deal and are "applying all the pressure we can" to BP to agree. He said without cash reserves, expansion can't move forward in the current financial environment as third-party financing would be very expensive, if available at all. ¶6. (SBU) McGrahan is hopeful that BP will see the move forward on expansion as in its best interest. He noted that CPC would face "financial disaster" without extending the current tariff and interest rate terms. This would in turn substantially lower the value of the shares BP is trying to sell. McGrahan argued that the other partners should be able to convince BP that it would thus benefit from allowing the expansion to go forward. -------------- COMMENT -------------- MOSCOW 00003591 002 OF 002 ¶7. (SBU) CPC expansion has been pending for many years and has seen several false starts. The GOR, ExxonMobil, and now BP have all held up expansion at one time or another. The main culprit has been the GOR, which has seen CPC expansion as mainly benefiting Kazakhstan and the producing companies. However, with the GOR now supportive of expansion (likely as part of a broader interest in improving relations with Kazakhstan),and with BP apparently committed to divesting from CPC (ref A),we share McGrahan's optimism that CPC expansion may finally be on the horizon -- despite BP's remaining objections to parts of the MOU. End comment. RUBIN