KAZAKHSTAN AND AZERBAIJAN SIGN ENERGY AGREEMENTS

UNCLAS SECTION 01 OF 02 ASTANA 001774

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: PGOV PREL ECON EPET EINV AZ KZ
SUBJECT: KAZAKHSTAN AND AZERBAIJAN SIGN ENERGY AGREEMENTS

REF: (A) ASTANA 1539
(B) ASTANA 1400

ASTANA 00001774 001.3 OF 002



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: On October 2, during President Nazarbayev's
visit to Baku, the national oil companies of Kazakhstan and
Azerbaijan signed three documents on energy cooperation. The
agreements do not preclude the participation of international oil
companies (IOCs),but they signal that SOCAR and KMG are prepared to
move forward with oil transportation projects, even without IOC
shipping commitments. END SUMMARY.

KMG AND SOCAR SIGN OIL TRANSPORTATION AGREEMENTS


3. (SBU) On October 2, the State Oil Company of Azerbaijan (SOCAR)
and Kazakhstan's national oil company KazMunaiGas (KMG) agreed to
use Azerbaijani infrastructure to transport Kazakhstani oil, to
conduct a joint feasibility study of the marine portion of the
Kazakhstan Caspian Transportation System (KCTS),and to explore
alternative options to move Kazakhstani oil from Baku to Black Sea
ports, including the Georgian ports of Kulevy and Batumi. The
agreements come less than three weeks after President Nazarbayev
hosted a summit in Aktau for the presidents of Russia, Azerbaijan,
and Turkmenistan (reftel A).


4. (SBU) KCTS will require a new, 500-kilometer pipeline from
Eskene to Kuryk, new oil-loading terminals on the Kazakhstani coast
of the Caspian Sea, large tankers and support vessels, new
oil-unloading terminals on the Azerbaijani coast of the Caspian Sea,
and new pipelines to the Baku-Tbilisi-Ceyhan system. Initially, the
system is expected to transport 500,000 barrels of oil a day (23
million tons a year) with expansion to 750,000-1,200,000 barrels a
day (35-56 million tons a year). Negotiations between KMG and the
IOCs have stalled over ownership and operational issues related to
the Eskene-Kuryk pipeline (reftel B).

A NEW BLACK SEA PIPELINE?


5. (SBU) The memorandum of intent to cooperate on Baku-Black Sea
oil transportation mentions the possibility of constructing, on a
parity basis, a new pipeline from the Caspian coast near Baku to the
Black Sea coast, in order to transport Kazakhstani oil through
Azerbaijan. Kazakhstani officials have long advocated for access to
the Baku-Supsa pipeline, without success.


6. (U) On October 2, Azerbaijani President Ilham Aliyev told
reporters that Azerbaijan and Kazakhstan "maintain an active
dialogue on a wide range of issues. Our two countries are
implementing a number of projects together," he said, "and we have
high hopes for their success." President Nazarbayev said that
"there are no unresolved problems, differences or friction in
relations between Kazakhstan and Azerbaijan."

IOCS SHOULD NOT BE CONCERNED . . .


7. (SBU) Dan Mihalik, an American citizen with more than 12 years
of experience in Kazakhstan's oil and gas industry, is currently an
advisor to Italy's Agip and a member of the Board of Directors of
KazTransOil. On October 4, Mihalik told Energy Officer that, as a
Board Member of KTO, he was very happy that SOCAR and KMG agreed to
conduct the KCTS feasibility study independently. "This is fully
consistent with the strategy that Kazakhstan has been pursuing for
the last 12 years, and from their perspective, it is absolutely the
right thing to do." Mihalik said the joint agreement is good for
the diversification of Kazakhstan's oil transportation routes, and
does not doubt KMG and SOCAR's technical expertise to carry out the
work. When asked about the implications of the agreement for IOC
participation in the KCTS project, Mihalik was unconcerned, "This
should not be a major issue for them. They don't want to be in the
marine transportation business. They don't want to own the

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terminals and the tankers." Mihalik said that the next major step
will be to secure shipping commitments from the IOCs, but he
asserted that recent agreements between SOCAR and KMG would
adversely affect the IOC's negotiating position.

BUT SOME ARE SKEPTICAL


8. (SBU) On October 5, Jay Johnson, Managing Director for Chevron's
Eurasia Business Unit, told Energy Officer that KMG's agreement to
conduct a joint feasibility study with SOCAR is part of KMG
President Kairgeldy Kabyldin's "drive to develop an entirely
government-owned transportation corridor" across the Caspian. He
said Kabyldin is not under any time pressure to build KCTS, whereas
the IOCs are eager to plan an evacuation route for anticipated
Kashagan volumes. Johnson said KMG and SOCAR have neither the
capital nor the expertise to build the system without IOC
participation. He said the amended Kashagan contract includes
ship-or-pay commitments, but since Chevron is not part of the
Kashagan consortium, he did not know whether or not these
commitments could be invoked to construct KCTS, or whether the funds
would be sufficient to cover the cost of building the system.
Johnson said he would not be surprised if the agreements between KMG
and SOCAR were part of a ploy to cut out U.S. producers and ship
Kashagan oil to Iran. He said that Iran offers the most attractive
alternative from a strictly commercial point of view, and only Iran
has the large tankers and ship-building capacity to transport the
large volumes of crude necessary to make KCTS commercially viable.


9. (SBU) COMMENT: Since his speech on Caspian issues at the
Russian port of Astrakhan on August 17, Russian President Dmitri
Medvedev has lobbied for increased energy cooperation with the
leaders of other Caspian states in Orenburg (September 10),Aktau
(September 12),and Turkmenbashi (September 13). Yet, despite
Medvedev's clear attempt to set the agenda for other Caspian states,
Nazarbayev and Aliyev demonstrated on October 2 that the presidents
of the region can and will act independently, even on projects that
Russia likely opposes. Although representatives of the national oil
companies of Azerbaijan and Kazakhstan signed the agreements,
Nazarbayev and Aliyev's personal involvement advanced the process.
We expect the IOCs to advise and consult SOCAR and KMG on the
feasibility study. They must also provide ship-or-pay volume
commitments, or direct financing, before the system can be built.
We therefore view the October 2 agreements as a good sign for KCTS.
Presidential support is advantageous for the project and for the
IOCs, because ultimately only the presidents of Kazakhstan and
Azerbaijan can make the final decisions needed to complete the
project.

HOAGLAND