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09ASTANA1622 2009-09-25 08:50:00 CONFIDENTIAL Embassy Astana
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1. (SBU) SUMMARY: On September 24, senior executives from
ConocoPhillips (COP) briefed the Ambassador on their
continued pursuit of a natural gas deal in Turkmenistan, the
status of the N Block exploration in Kazakhstan's sector of
the Caspian, and concerns about exposure and delays with the
Kashagan project. They also provided a candid assessment of
the changing role and influence of KazMunaiGas (KMG) First
Vice President Maksat Idenov in negotiating and closing deals
for the government of Kazakhstan. END SUMMARY.


2. (C) Don Wallette, COP Vice President for Russia and the
Caspian Region, told the Ambassador that COP is still very
interested in pursuing an exploration and production deal for
Blocks 19 and 20 in Turkmenistan. CEO Jim Mulva was
scheduled to meet Turkmenistan President Berdimuhamedov
during a dinner event in New York on September 24. However,
on short notice, Mulva was &summoned,8 along with senior
executives from Shell, Total, ENI, and other international
oil companies, to attend a meeting on Russia,s Yamal
peninsula with Russian President Putin. COP,s Chief
Operating Officer will join the dinner with Berdimuhamedov in
lieu of Mulva.


3. (C) Wallette said that on September 23, COP Vice
President Larry Archibald met Yagshygeldi Kakayev, Head of
the State Agency for Management and Use of Hydrocarbon
Resources, to brief him on COP,s proposal to develop Blocks
19 and 20. Kakayev, according to Wallette, was surprisingly
blunt and direct, for the first time in two years. Without a
doubt, Wallette said, Conoco has &a Lukoil problem.8 He
said that Kakayev told Archibald that the government of
Turkmenistan likes ConocoPhillips, &but not your partner.8
Among the reasons for Turkmenistan,s dislike of Lukoil,
Wallette suggested that Lukoil may have unintentionally
drilled in waters in disputed territory, due to the lack of
full delimitation of the Caspian Sea. He also said that
Lukoil retained legal advisors that had previously
represented the Argentinian company Bridas in a dispute with
the Turkmenistani government that went to international

4. (C) As a result, Wallette said that Mulva will meet Vagit
Alekperov, the CEO of Lukoil, in Russia next week to inform
him that COP will not go forward with Lukoil as a partner in
Turkmenistan, and that Lukoil will need to stand down.
Wallette also mentioned that Conoco may take advantage of the
Turkmenistan Investment Forum on October 15 to present a new
bid for Blocks 19 and 20, which would not include Lukoil, but
would include their partner from Abu Dhabi, Mubadala
Corporation, with whom they partnered on the successful N
Block bid in Kazakhstan. According to Wallette, British
Petroleum (BP) is COP,s strongest competition for Blocks 19
and 20. He said the government of Turkmenistan is impressed
with BP,s experience in Azerbaijan, &although they say they
also like ConocoPhillips.8 U.S. company Marathan Oil may
also be a competitor for the project, Wallette judged.


5. (C) Kazakhstan's N Block is still in the early stages of
exploration. COP said the next big milestone, after further
seismic work, is to drill an appraisal well by the third
quarter of 2010. The company is somewhat concerned by the

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lack of drilling capacity currently in the Caspian Sea.
Wallette said that there is only one rig able and available
to do the work, and they are now negotiating to lock it up.
Other complications include staffing and salary issues.
Wallette said that Kazakhstan has &a different compensation
philosophy8 than Conoco. KMG,s candidate for the General
Director position, for example, was making $8,000 per month,
and is now asking $24,000 per month before he will accept the
new position. Wallette commented that this is way beyond the
standard Houston scale.


6. (C) Wallette and Regional Director Nick Olds both said
that KMG First Vice President Idenov is no longer their
primary interlocutor on the N Block project. Instead, that
responsibility has been given to Askar Balzhanov, former CEO
of KMG Exploration and Production, whom Olds described as a
hard-driving businessman, strong advocate for local content,
big believer in the fundamental principles of doing business,
and a nationalist. Olds also said that Balzhanov is likely
under the influence of Timur Kulibayev, President
Nazarbayev,s son-in-law and Deputy Chairman of
Samruk-Kazyna, whose political star continues to rise as he
becomes more directly involved in managing the economy
(reftel C). Wallette told the Ambassador that he and the
other Kashagan consortium partners meet monthly in Paris to
discuss the project, and they all agreed that on September 1,
&Maksat,s world changed dramatically.8 According to
Wallette, on that day, Idenov was relieved of his
responsibility for negotiating the Kazakhstan Caspian
Transportation System (KCTS), supervising the N Block
project, and overseeing the government,s stake in
Tengizchevroil (TCO).


7. (C) When asked why the change was made, Wallette said he
had noticed for some time the &tremendous animosity8
between Idenov and Kulibayev. Wallette said Idenov's "eyes
get big" when he talks about Kulibayev, and he once
complained that he has to do the "dirty work" of negotiating
complex, international transactions, whereas Kulibayev is
protected and sheltered by President Nazarbayev. Wallette
said Idenov then waved his left arm as if pushing someone
behind him, and acted out Nazarbayev telling Kulibayev,
&That,s ok, son, you go on back there and just lay low.8
Then he motioned with his right hand. &Now come here,
Maksat, and sort this mess out.8 Olds said that Idenov was
recently asked to resign his position, but turned to the
Prime Minister for support and was able to remain with KMG
)- at least for the time being. Idenov has reportedly
expressed a strong interest in returning to a position with
an international oil company. (NOTE: Idenov was a regional
vice president with Shell in the Middle East from 2004-2007.


8. (C) COP also expressed concerns with delays and
contractual exposure on Kashagan. Wallette said that more
than 700 contracts totaling $11 billion have piled up,
waiting for Idenov,s approval. He said that Idenov has not
signed any documents since October 2008, when the Kashagan
contract was renegotiated. &He is scared to death that the
tax police will come after him,8 Wallette said. &He won,t
sign anything. At a certain point, the exposure will be too
high and Kashagan will begin to shut down operations. I
don't know exactly what our pain threshold is," he said. "It
could be $10 billion, $20 billion, $50 billion. But
eventually, something, somewhere, will have to give."

9. (C) COMMENT: Conoco's colorful and candid comments offer

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further evidence of the rising political influence of
Kulibayev. In addition to his private business empire, which
includes Halyk Bank and engineering/construction firm
KazStroiService, Kulibayev is Deputy Chairman of National
Welfare Fund Samruk-Kazyna, which owns KMG, Kazatomprom, and
more than 90 percent of Kazakhstan's manufacturing sector.
He therefore has the ability to direct much of Kazakhstan's
economic policies and investment decisions. As his economic
role has expanded, so has his political power and public
persona, seen on display this week as host of the Eurasian
Energy Forum, a week-long conference and exhibition attended
by the Prime Minister, other senior government officials, and
more than 500 energy executives. Conoco's description of a
frightful, paralyzed Idenov is consistent with scenarios
being played out elsewhere, as government officials watch the
drama of the corruption charges and jail sentences handed
down to former high flyers such as Mukhtar Dzhakishev, former
head of Kazatomprom. We have heard from multiple sources
that senior government and business leaders across the
country, and across all sectors, are paralyzed by fear, and
extremely reluctant to take risks of any kind, lest they get
caught in the anti-corruption net. END COMMENT.