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) -------------- SUMMARY -------------- ¶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. -------------- NOT WAITING ANY LONGER FOR CPC EXPANSION -------------- ¶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. -------------- --- CHEVRON "NOT GOING TO SPEND BIG MONEY" IN RUSSIA -------------- --- ¶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. -------------- KAZAKHSTAN -------------- MOSCOW 00000470 002 OF 002 ¶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. -------------- TURKMENISTAN -------------- ¶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