KAZAKHSTAN: SPECIAL ENVOY MORNINGSTAR DISCUSSES

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 001449

SIPDIS

STATE FOR SCA/CEN, EEB/ESC
STATE PLEASE PASS TO USTDA AND USTR

E.O. 12958: DECL: 03/06/2059
TAGS: PGOV PREL PINR ECON EINV EPET AJ CH RS TX KZ
SUBJECT: KAZAKHSTAN: SPECIAL ENVOY MORNINGSTAR DISCUSSES
OIL TRANSPORTATION PROJECTS WITH MINISTER OF ENERGY MYNBAYEV

REF: A. ASTANA 1365

B. ASTANA 1438

C. ASTANA 1445

D. ASTANA 1400

Classified By: Ambassador Richard E. Hoagland, 1.4 (b),(d)


1. (C) SUMMARY: On August 26, Special Envoy for Eurasian
Energy Richard M. Morningstar met with Minister of Energy and
Mineral Resources (MEMR) Sauat Mynbayev to discuss two oil
export projects: the Caspian Pipeline Consortium (CPC)
pipeline expansion and the Kazakhstan Caspian Transportation
System (KCTS). Mynbayev said he expects both projects to
move forward, albeit slowly, as negotiations with
international oil companies (IOCs) over tariff structures,
equity participation, access rights, and financing terms
continue. Mynbayev mentioned that Russia does not openly
oppose either project. However, he conveyed Russian
criticism of CPC and said Russian proposals to export
Kazakhstani crude oil via an expanded Atyrau-Samara pipeline
were becoming increasingly attractive to the government of
Kazakhstan. He also asked SE Morningstar to raise with Azeri
President Ilham Aliyev the issue of IOC equity participation
in the trans-Caspian portion of KCTS, which Kazakhstan
supports, but Azerbaijan has thus far opposed. END SUMMARY.

CPC EXPANSION MOVING FORWARD...


2. (C) During the 45-minute meeting, Mynbayev confirmed that
the government is still &very interested8 in expansion of
the CPC pipeline. He said BP that has already sold its stake
in CPC to Lukoil and KazMunaiGas (KMG),thus clearing the way
for a vote to sanction expansion. (NOTE: KMG President
Kairgeldy Kabyldin made similar comments to SE Morningstar,
reftel B. However, KMG,s representative to the CPC Board of
Directors, Timur Rakhanov, told SE Morningstar on August 25
that BP and Lukoil have not yet signed all of the necessary
legal documents, and the CPC shareholders, agreement has not
yet been amended. BP has made no public statement about its
withdrawal from CPC. END NOTE).

...ALBEIT SLOWLY


3. (C) Mynbayev conceded that progress on CPC expansion has
been slow, and the consortium continues to discuss who will
manage the expansion project. He said Russia is advocating
for management by the CPC members themselves, based on the
proportion of share ownership, while Chevron insists on
hiring an outside firm. (NOTE: Having purchased Oman,s
seven percent of CPC earlier this year, Russia now owns 31
percent of CPC. END NOTE). Mynbayev was optimistic that
Russia and the IOCs would reach a compromise. &If Russia
had serious objections to CPC expansion,8 he said, &they
would never have come this far. As for Kazakhstan,8
Mynbayev continued, &we don,t care who manages CPC
expansion, as long as the work gets done. We don,t consider
this a deal-breaker.8

ATYRAU-SAMARA A VIABLE ALTERNATIVE?


4. (C) Mynbayev cited the Atyrau-Samara oil pipeline as an
additional export alternative, but stated &it has some
disadvantages. First, the pipeline goes through Russia,
which does not meet our goal of diversifying export routes.
Second,8 he continued, &the pipeline lacks a quality
bank,8 which would compensate Kazakhstani producers if their
higher-quality crude were blended with lower-quality crude
from Tatarstan and Bashkiria, thus adversely affecting the
market price. Nevertheless, Mynbayev said that Russia is
&very interested8 in expanding the capacity of
Atyrau-Samara in order to accommodate increased future oil
production from Tengiz, Kashagan, and Karachaganak. &We
often receive proposals from Russia8 about Atyrau-Samara,

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&and lately, they have become more and more attractive,8 he
said. Mynbayev was optimistic that the parties would
ultimately reach agreement to expand CPC and establish KCTS,
but he reluctantly added that if negotiations faltered, &We
would be forced to export our crude almost exclusively
through Russia.8

CHINA PIPELINE COMES ONLINE IN 2009


5. (C) Mynbayev also confirmed that the oil pipeline to
China will be operational by the end of this year, and the
final segment (Kenkiyak-Kumkol) has been completed. He said
the China pipeline will eventually carry up to 20 million
tons (400,000 barrels per day).

COMMERCIAL QUESTIONS REMAIN


6. (C) Turning to KCTS, Mynbayev began by saying that KMG
President Kabyldin is now the government,s lead negotiator,
having taken over that role from MEMR. (NOTE: During a
private dinner at the Ambassador,s residence on August 26,
KMG First Vice President Maksat Idenov said that he, too, has
been sidelined on the KCTS negotiations. &I used to be very
much involved,8 he said, &but I am not any longer. Mr.
Kabyldin is now leading the negotiations. Of course,8 he
added, &I can always pass a message to him if necessary.8
END NOTE). Mynbayev told SE Morningstar that CPC expansion
would provide a &clearer picture8 of Kazakhstan,s oil
transportation needs by helping to determine the exact amount
of crude available for export via the KCTS tanker shuttle
system. Confirming Kabyldin,s comments to SE Morningstar on
August 25, Mynbayev said the government has resolved issues
concerning tariff stability, throughput volumes, and access
rights with the Kashagan consortium (the so-called G-6),
which he claimed needs KCTS more urgently than Tengizchevroil
(TCO). Mynbayev said the government was indeed interested in
project financing for KCTS, which would enable the government
to buy back the IOC,s minority share, but the IOCs have
firmly rejected that possibility. &And I suppose,8 he
conceded, &that one can understand their point of view.8
Mynbayev was hopeful that the government and IOCs can resolve
the remaining questions on KCTS, which he said were &simply
commercial in nature.8

GOVERNMENT TO OWN 51 PERCENT OF KCTS


7. (C) Mynbayev explicitly confirmed that the government has
reached agreement with the IOCs -) including Chevron,
representing TCO )- that the government would own 51 percent
of the onshore portion of KCTS (i.e., the Eskene-Kuryk
pipeline) while the IOCs would own 49 percent. He added that
the consortium (which includes KMG, as an equity partner in
Kashagan) would pay for 100 percent of the initial costs to
construct the pipeline. He emphasized, &there is no way
that we would ever agree to own less than 51 percent of KCTS.
Never.8

RUSSIAN CRITICISM OF CPC CONSORTIUM


8. (C) In an aside, Mynbayev shared Russian criticism of the
CPC consortium. He reassured SE Morningstar that the
Eskene-Kuryk pipeline would not charge exorbitant fees, but
he insisted that it would be profitable, &unlike the CPC
pipeline.8 Mynbayev said he frequently hears complaints
from Russian colleagues, who wonder why they should pay to
expand a pipeline that transits their territory, causes
environmental damage, and from which they do not earn a
profit.

AZERBAIJAN OPPOSED TO IOC PARTICIPATION IN KCTS


9. (C) As the meeting came to a close, SE Morningstar
mentioned that he would meet President Aliyev in Baku the

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next day. Mynbayev sat up straight, looked SE Morningstar in
the eye, and switching from Russian into fluent English,
&Please raise with President Aliyev the possibility of IOC
participation in the trans-Caspian portion of KCTS. ThaQ
would be helpful.8 Mynbayev explained that Kazakhstan and
Azerbaijan have an intergovernmental agreement to establish a
50-50 joint venture to build the oil terminals and offshore
infrastructure of KCTS. He said Kazakhstan would be willing
to grant the IOCs an equity stake in that joint venture, but
only if Azerbaijan also sold them an equal percentage of its
share. &Either we go together on this,8 he said, &or not
at all.8 SE Morningstar said he would be pleased to raise
the issue with President Aliyev.


10. (C) COMMENT: The meeting with Mynbayev was significant
because it confirmed the government,s willingness to grant
the IOCs up to 49 percent equity in KCTS, rather than
insisting on retaining 100 percent ownership. While we have
no reason to doubt that Mynbayev is able to speak with
authority on behalf of the government, we note that KMG
President Kabyldin, who takes his orders from Samruk-Kazyna
Deputy Chairman Timur Kulibayev, has now replaced Mynbayev as
the government,s lead negotiator on KCTS. Kabyldin,
notably, made no comment about the equity structure of KCTS,
which might signal that the negotiations are far from over.
END COMMENT.


11. (SBU) Special Envoy Morningstar has not cleared this
cable, but he has approved its release.
HOAGLAND