KAZAKHSTAN: SPECIAL ENVOY MORNINGSTAR DISCUSSES

C O N F I D E N T I A L SECTION 01 OF 05 ASTANA 001438 SIPDIS STATE FOR SCA/CEN, EUR/RUS, EUR/CARC, EAP/CM, EEB/ESC STATE PLEASE PASS TO USTDA AND USTR E.O. 12958: DECL: 03/06/2059 TAGS: PGOV PREL PINR ECON EINV EPET IR RS CH GG TX, KZ SUBJECT: KAZAKHSTAN: SPECIAL ENVOY MORNINGSTAR DISCUSSES ENERGY, GEOPOLITICS WITH TIMUR KULIBAYEV REF: A. 08 ASTANA 2081 ¶B. 08 ASTANA 2291 Classified By: Ambassador Richard E. Hoagland, 1.4 (b),(d) ¶1. (C) SUMMARY: In a wide-ranging, frank, and lively conversation on August 25, Special Envoy for Eurasian Energy Richard M. Morningstar discussed regional energy security with a panel of senior government officials, including the Deputy Chairman of the National Welfare Fund Samruk-Kazyna, Timur Kulibayev, and the President of national oil company KazMunaiGas (KMG),Kairgeldy Kabyldin. Kabyldin was optimistic about ongoing negotiations to expand the Caspian Pipeline Consortium (CPC) pipeline and establish the Kazakhstan Caspian Transportation System (KCTS) although he acknowledged that the CPC partners have not been able to agree on who will manage the expansion project. Kulibayev offered insights about Kazakhstan,s broader relationship with countries in the region, in particular Russia, China, Turkmenistan, and Georgia. Kulibayev said Kazakhstan would have a "neutral" attitude if U.S. companies partnered with Chinese firms, and declared, "In the energy sector at least, China is becoming more important to us than Russia." He said Kazakhstan has proposed building trans-Caspian pipelines for oil and gas, but he admitted this would be "impossible" without the support of at least four of the five Caspian littoral states (excluding Iran). Although Kulibayev claimed that Russia "never pushes us" to make certain decisions, he conceded that Russia would likely oppose a trans-Caspian pipeline. END SUMMARY. KULIBAYEV IN CONTROL ¶2. (C) Kulibayev, President Nazarbayev,s tanned and perfectly manicured billionaire son-in-law, warmly greeted each of his guests with the grace of a statesman. He announced that this was his first meeting following his return from vacation, and said he was very pleased to welcome SE Morningstar, whom he first met in 1999, during the groundbreaking ceremony for the CPC pipeline in Novorossiysk. "It was a very cold and windy day," he recalled, "and they left us up there on that stage, shivering for hours!" Kulibayev was clearly in command, often calling on Kabyldin to provide technical details on oil export projects. He spoke Russian at the beginning of the meeting, but switched to fine English as he became more comfortable and the conversation gained momentum, moving from technical issues to geopolitics. ONE REMAINING QUESTION ON CPC EXPANSION ¶3. (C) At Kulibayev,s request, KMG,s Kabyldin provided an update on the status of negotiations to expand CPC and establish KCTS. He said the government is "fully behind" both projects and declared the remaining unresolved issues technical, not political, in nature. Kabyldin said BP has exited the CPC consortium by selling its shares in Kazakhstan Pipeline Ventures to KMG in March, and in LukArco to Lukoil in July, thus clearing the way for the CPC Board of Directors to sanction expansion at its next meeting in Almaty in September. (NOTE: Timur Rakhanov, KMG,s representative on the CPC Board of Directors, subsequently told SE Morningstar that although BP,s deal with Lukoil has been finalized, the documents have not yet been signed. He expects this transaction to be concluded by the end of the year, which would set the stage for a vote on expansion in mid-2010. END NOTE). Kabyldin informed SE Morningstar that the "only remaining question" on CPC expansion was how the project would be managed. He said Russia would prefer that the consortium members manage the project themselves while the international oil companies (IOCs) wanted to hire an outside management firm. ASTANA 00001438 002 OF 005 THE COMPLICATED CASE OF KCTS ¶4. (C) On KCTS, Kabyldin said that negotiations were ongoing with the Kashagan consortium (the so-called G-6) and Chevron, representing Tengizchevroil (TCO). The equity structure, financial plan, and tariff schedule for KCTS were all addressed in the Second Supplemental Agreement to the Kashagan Production Sharing Agreement, signed in October ¶2008. Kabyldin said that in exchange for long-term commitments of crude throughput, the government provided a long-term guarantee of stable tariffs. "Unfortunately," he said, "Chevron is not a party to that agreement and they have insisted on different terms and conditions." Kabyldin said Chevron wants to use KCTS to accommodate additional volumes from its Future Growth Project, which has not yet been sanctioned by the government,s "competent authority," the Ministry of Energy and Mineral Resources (MEMR). According to Kabyldin, MEMR is still completing its review of the Future Growth Project, but he expects approval during the first half of 2010. Kabyldin attempted to reassure SE Morningstar that the government was acting in good faith: "KMG is also a partner in the Kashagan consortium," he observed, "and we have the same interests as the IOCs in KCTS." RUSSIAN COMPLAINTS ABOUT CPC ¶5. (C) Kulibayev said Kazakhstan,s own antimonopoly regulations would ensure that KCTS tariffs are reasonable. "We can,t generate exces profits from tariffs and fees," he said, "and, in any case, the transportation costs of KCTS would definitely be lower than CPC." Kulibayev then criticized the CPC consortium, calling it poorly managed. He said the IOCs are making a profit on oil production and also set the tariffs for the transit of their oil. For that reason, he said, Russian officials have been "very critical" of CPC. "For ten years," he said, "they have not received one penny of profit, not one penny in dividends. They often complain to us that they have not benefitted at all from this pipeline." BLACK SEA STATES ¶6. (C) Kulibayev was confident that the government would find common ground with the IOCs and Azerbaijan on KCTS. "The real issue," he said, "is, where do we go after we get to Baku? We will gain access to the Baku-Tbilisi-Ceyhan (BTC) pipeline, but we need a pipeline to Batumi, and we are willing to build one." Kulibayev explained that KMG would like to ship oil to Batumi where it owns the oil loading terminal, and then ship it via tanker to the Black Sea port of Constantia, Romania, where KMG owns refineries managed by its subsidiary Rompetrol. From Romania, KMG could sell crude on the world market, or refined oil products to European customers. Commenting briefly on Ukraine, Kulibayev said KMG is reducing the volumes it ships to Odessa. "It is simply not possible to do business in Ukraine," he complained. "There are no rules, and they just steal your oil, replacing it with mazut. We do not expect any changes in Ukraine after the presidential elections," he added. "The oligarchs control that country. The government is not powerful enough to control them." DISAPPOINTED BY GEORGIA ¶7. (C) Turning to Kazakhstan,s relations with Georgia, Kulibayev said Kazakhstan has been "disappointed and frustrated" with the Georgian government. He said Kazakhstan has strongly supported Georgia politically and economically, but "it has become very hard to invest there. They don,t honor their commitments and their obligations. They don't ASTANA 00001438 003 OF 005 allow Tbilgas to operate there. They are driving us out of the country. We don,t feel comfortable there now, not at all. Georgian companies owned by the government are driving us to give up our assets." (NOTE: Since March, KMG has come under increasing pressure from the Georgian government and Georgian NGOs to divest its ownership of KazTransGas-Tbilisi. END NOTE). Kulibayev noted that more than one million Georgians live in Russia and wondered why a country in such a position would go out of its way to "aggravate Russia." He said Kazakhstan,s support for, and investment in, Georgia has "spoiled our relations in the region." Kulibayev said that Kazakhstan had plans to export natural gas to Georgia, but "now, it is not possible for us to supply our gas to Georgia." CASPIAN SEA SUMMIT ¶8. (C) When asked for his views on the issues confronting the Caspian littoral states, Kulibayev said that the heads of state would soon meet to discuss Caspian issues, primarily the Caspian littoral gas pipeline (the so-called "Prikaspiskii" pipeline). (NOTE: Shell,s country manager Campbell Keir told the Ambassador on August 24 that a number of IOC executives have been summoned to Aktau on September 14 to brief President Nazarbayev on energy issues, especially oil and gas transportation. END NOTE). TRANS-CASPIAN PIPELINE PROPOSAL ¶9. (C) Kulibayev insisted that Kazakhstan would not be a major supplier of natural gas to Europe, but it would play a role as a transit country, moving gas from Turkmenistan to China, Russia, and even Azerbaijan. Surprisingly, Kulibayev said that Kazakhstan has proposed (to the governments of Turkmenistan and Azerbaijan) building a trans-Caspian gas pipeline from Kazakhstan to Azerbaijan. He then pulled out a map and pointed to an area of the Kazakhstani shoreline just north of the border with Turkmenistan, where a Soviet-era pipeline already exists, and drew his finger in a straight line across the Caspian to Baku. Kulibayev said, "We have existing onshore facilities and infrastructure. This would not be difficult to do." According to Kulibayev, the real question is whether or not Turkmenistan has sufficient reserves of natural gas to supply such a pipeline. He agreed with SE Morningstar that Turkmenistan,s supply security would increase if they would allow IOCs to work onshore. "Everyone expected the new president (Berdymukhamedov) to be more active and a "modern man," but no one is in Turkmenistan except the Chinese." He said it has been difficult to get a clear, consistent reading of Turkmenistan. "Their policy is uncertain and undefined," he said. "It,s a policy of Permanent Ambiguity," playing on Ashgabat,s Permanent Neutrality policy. RUSSIAN SUPPORT ESSENTIAL TO TRANS-CASPIAN PIPELINE ¶10. (C) When pressed, Kulibayev admitted that a trans-Caspian pipeline would require Russian support, which he acknowledged would not be likely. At first, Kulibayev told SE Morningstar that "all five" Caspian littoral states would have to agree on a trans-Caspian pipeline. Later, he backtracked somewhat and said that "at least four" of the Caspian states would have to agree (i.e. all except Iran). He said the first step in building a trans-Caspian pipeline would be to improve relations between Azerbaijan and Turkmenistan, which he said would require goodwill and compromise on both sides. Then, he said, the CIS countries would have to improve relations with Iran. As a result, Kulibayev said, "I don,t believe a trans-Caspian pipeline will happen in the nearest future." (NOTE: KMG,s Rakhanov later told SE Morningstar that Russia has used media outlets and private channels to discourage the countries in the ASTANA 00001438 004 OF 005 region from moving forward with a trans-Caspian pipeline. When asked what could happen if the countries moved ahead with the project despite Russian objections, Rakhanov said, "They keep reminding people what happened to Georgia last year. They can be very creative and they could create some conflicts." Rakhanov suggested it might be possible to overcome Russian opposition by giving them a commercial interest in the project. END NOTE). "CHINA IS BECOMING MORE IMPORTANT THAN RUSSIA" ¶11. (C) Kulibayev said the countries of Central Asia are under increasing pressure from China, which is now a central player in the region. He claimed that only the Chinese are investing in the region and noted that state-owned Chinese companies are willing to pay a premium above the market price for Central Asian hydrocarbon resources. "Normal companies," he said, "cannot compete with that." Kulibayev asserted that Kazakhstan has no objection to Chinese investment, because the government typically works with China on a 50-50 basis to modernize infrastructure in Kazakhstan. When asked if Kazakhstan would react positively or negatively to U.S. companies that choose to partner with Chinese companies, Kulibayev said the government,s position would be "neutral." He added, "Of course, we would prefer that American companies come on their own, but we would have no objections if they partner with China." Kulibayev called China a "big, economically aggressive" neighbor, but also an important market for Kazakhstan,s energy and mineral resources. "In the energy sector," said Kulibayev, "China is becoming more important for us than Russia." RUSSIAN INFLUENCE ¶12. (C) Russia, however, is "definitely not happy" about China,s more active involvement in the region, according to Kulibayev, despite the fact that China recently provided a $10 billion loan to Russia, and the China National Petroleum Corporation (CNPC) invested in Russian companies Transneft and Rosneft. On energy policy, Kulibayev said that, "of course, Putin is the final decision maker." However, he noted that Deputy Prime Minister Igor Sechin makes most day-to-day decisions and is an independent and influential figure. Kulibayev was particularly impressed by Russia,s recent agreements with Turkey on energy issues. He asserted the agreements will help Russia reduce its dependence on Ukraine for the transit of gas to Europe, and gives Russia a "new alternative around Nabucco." Regarding relations with the United States, Kulibayev said, "Russia had lost confidence" in its bilateral relationship with the United States under the previous administration, and said it would now take "real steps and real action to rebuild relations." When asked how Russia influences Kazakhstan,s decisions, particularly on energy, Kulibayev insisted that Russia has no direct influence over government policy. "They never push us," he said, "Never. Putin trusts our president, as does Medvedev. We do business with Russia on a commercial basis, and there has never been any pressure from Russia" to take a certain course of action. RESTRAINT ON IRAN ¶13. (C) Kulibayev acknowledged that Kazakhstan trades agricultural goods (mostly wheat) and steel with Iran, but "our position is with the (international) mainstream," he said. According to Kulibayev, Kazakhstan has ceased oil swaps with Iran, for example, and has no plans to invest or participate in an oil pipeline through Iran, "despite the fact that our companies tell us this is the most feasible, commercially attractive route." He said Kazakhstan has taken this position in deference to U.S. policy, although "we, like the other Caspian Sea states, are not uncomfortable dealing ASTANA 00001438 005 OF 005 with Iran." ¶14. (C) COMMENT: With the onset of the economic crisis, Kulibayev began to assume a more public and more authoritative role in government after spending two quiet years out of the limelight as chairman of the KazEnergy business association. Now, as Deputy Chairman of Samruk-Kazyna, the state-owned holding company that owns or controls virtually all of Kazakhstan,s real economy, he has direct influence over the oil and gas, atomic energy, metals and mining, and banking sectors. As he demonstrated to SE Morningstar, Kulibayev combines sharp business acumen with a keen understanding of the geopolitical consequences of billion-dollar deals. His family ties and personal wealth give Kulibayev access to senior political and business leaders in the region, and we consider his information and insights to be valuable, reliable, and reflective of Kazakhstan,s pragmatic, realistic role in the region. END COMMENT. ¶15. (SBU) Special Envoy Morningstar has cleared this cable. HOAGLAND