CHEVRON READY TO GIVE UP ON CPC EXPANSION, SAYS

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000470

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 02/11/2018
TAGS: EPET ENRG ECON PREL PINR RS
SUBJECT: CHEVRON READY TO GIVE UP ON CPC EXPANSION, SAYS
COMPANY'S EURASIA PRESIDENT

Classified By: Ambassador William J. Burns for reasons 1.4 (b/d)

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SUMMARY
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1. (C) Chevron Europe, Eurasia, and Middle East president Guy
Hollingsworth told the Ambassador on February 11th that the
company has largely "written off" CPC expansion. Chevron
will pursue a trans-Caspian oil shipping route instead. He
said the company is generally satisfied with its joint
venture with Gazprom's oil subsidiary, Gazpromneft, but that
the business climate is not stable enough for Chevron to
invest heavily here. Hollingsworth said Chevron was
concerned about Kazakhstan,s tactics against oil companies
there, but that ExxonMobil's recent court victory over
Venezuela's nationalization of assets could be a major
positive for the industry as it fights to rollback energy
nationalism. Finally, he said Chevron believes Turkmenistan
has "oversold" its gas, but that the potential for new gas
would be very good given the right incentives. End summary.

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NOT WAITING ANY LONGER FOR CPC EXPANSION
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2. (C) Chevron's new president for Europe, Eurasia, and
Middle East exploration and production, Guy Hollingsworth,
told the Ambassador in a February 11th meeting that the
company "can't wait anymore" for CPC expansion and that it
will seek alternative export routes for its expanding Kazakh
crude production. He said the Russian partners in CPC "keep
ratcheting up demands until there is nothing left." Chevron
has instead decided to prioritize a trans-Caspian oil
shipping route, probably to the Black Sea. If Russia had
honored original commitments on CPC expansion, Hollingsworth
explained, not only would everyone including the Russians be
making a lot of money, but Chevron would have sought to build
a twin pipeline.


3. (C) Hollingsworth and Chevron Russia president Ian
MacDonald said that CPC, as it stands currently, is "running
fine," with the Russians cooperative on most management
issues. They noted, however, that Russian oil has not been
flowing into the CPC pipeline lately. They suggested that
this was because new Transneft (Russia's oil pipeline
monopoly) president Tokarev "wants in" on a profitable oil
trading deal arranged by previous Transneft head and current
chair of Russia's Sochi Olympics effort Semyon Vainshtok and
Minister of Industry and Energy Khristenko.

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CHEVRON "NOT GOING TO SPEND BIG MONEY" IN RUSSIA
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4. (C) Hollingsworth and MacDonald said the company's joint
venture with Gazprom's oil arm, Gazpromneft, was going "quite
well." They noted, however, that Russia's "brutal fiscal
regime" makes the economics of the project questionable,
especially given the complex geology of the reservoirs.
Chevron is hoping for tax relief for production from the JV
and to ultimately book some 2 billion barrels of oil from the
partnership. Separately, Chevron intends to pitch Gazprom on
developing some gas fields in the Ob Gulf (northern West
Siberia) that could be brought onstream quickly. According
to Hollingsworth however, it is not clear whether Gazprom, in
contrast to its daughter Gazpromneft, is capable of
organizing such a deal.


5. (C) Hollingsworth said Chevron would maintain its interest
in Russia, but would not be investing major capital here.
Exceptionally long lead times, an unstable political climate
as it relates to the oil and gas sector, a lack of contract
sanctity, and partners that "can't be trusted," lead Chevron
to put its money elsewhere for now. Hollingsworth and
MacDonald admitted that plenty of other oil and gas companies
are willing to work here despite these conditions.

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KAZAKHSTAN
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6. (C) Hollingsworth said he is concerned that foreign oil
and gas companies in Kazakhstan are "under attack" by the
GOK. He laid partial blame for the deteriorating investment
climate in Kazakhstan on Italy's ENI, which he said "botched
up" the Kashagan field, resulting in the GOK having to wait
years for any payoff. Chevron's Tengiz project by contrast
had netted the GOK $20 billion thus far. Hollingsworth said
Chevron is proceeding with a Tengiz expansion plan from
roughly 300,000 b/d to 550,000 b/d, but under the current
political circumstances it will hold off on the next phase of
expansion that would ramp production up to about 1 million
b/d.


7. (C) Hollingsworth added that ExxonMobil's recent court
victory over Venezuela's nationalization of its assets was
just the sort of "counterpunch" to resource nationalism that
is needed to protect contract sanctity in places like
Kazakhstan.

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TURKMENISTAN
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8. (C) Hollingsworth and MacDonald said Chevron believes
there is significant gas potential in Turkmenistan and that
the company has opened an office in Ashgabat. They
cautioned, however, that major gas fields, if they exist,
will be difficult to develop. They said Turkmenistan has
"oversold" its current gas production and needs help quickly
if it is to meet its commitments.


9. (C) They had general praise for President
Berdymuhammedov's approach to date on courting foreign firms.
That said, Turkmenistan has only offered fairly
non-prospective offshore blocks to Chevron so far. They said
Berdymuhammedov is "waking up" to gas production problems,
but that he does "not know what to ask for" in terms of
foreign help to resolve these challenges.
BURNS