KAZAKHSTAN: PLANS FOR THE NATIONAL SULFUR STORAGE CENTER

UNCLAS SECTION 01 OF 03 ASTANA 001920 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA, OES/PCI STATE PLEASE PASS TO USTDA E.O. 12958: N/A TAGS: PGOV PREL ECON EINV EPET SENV KZ SUBJECT: KAZAKHSTAN: PLANS FOR THE NATIONAL SULFUR STORAGE CENTER REF: A. 08 ASTANA 1368 ¶B. ASTANA 0450 ASTANA 00001920 001.3 OF 003 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: As Kazakhstan continues to debate sulfur storage, the Caspiy Socially Responsible Corporation has contracted feasibility and technical studies for the government's planned National Sulfur Storage Center (NSSC) in Atyrau, which it will operate. The Center will be able to provide up to 50 years of long-term sulfur storage, and oil companies will have to put their sulfur in the facility and pay storage fees. The NSSC currently envisions a covered storage facility, and companies would be able to store sulfur temporarily and retrieve it later. Tengizchevroil (TCO) believes that the NSSC is rife with problems and has formed its own working group to study this issue, concluding that uncovered above-ground sulfur storage (TCO's current storage method) has no significant negative impact on the environment. TCO insists that the NSSC will need much more research because of the many legal, economic, and construction-related questions that still exist. TCO is willing to pay for such a study and has formed several working groups to cover the legal, financial, construction, and ecological aspects of this storage plan. Complicating this, TCO plans to liquidate all its current sulfur storage by 2017, and in subsequent years it will have no sulfur to put in the national storage center. With the Kashagan partners planning to re-inject 100% of sulfur gas back into the well to maintain pressure for oil production, this raises questions about potential users of the national storage center if there is no TCO sulfur left to store. END SUMMARY. CASPIY DESIGNATED TOOPERATE THE NEW NATIONAL SULFUR STORAGE CENTER ¶3. (U) According to Caspiy Socially Responsible Corporation Lead Manager Assylbek Jakiyev and Senior Manager Lilia Balgimbayev, President Nazarbayev tasked the government with the creation of a national sulfur storage center. Caspiy, a state-owned enterprise, has formed a working group consisting of itself, Tengizchevroil (TCO),AGIP (an Italian oil company responsible for the Kashagan offshore oil site),and the Kazakhstan Oil and Gas Institute (KOGI), to work out the concept of the NSSC. Caspiy has contracted with KOGI to carry out phase one of this project, which consists of the preparation of the Center's technical requirements and a feasibility study of several aspects of the Center, including its location and capacity. KOGI has not yet completed phase one. In the second phase, KOGI will prepare design documents outlining all the technical aspects of the NSSC. Public hearings to obtain citizen input will follow, and then the government will start construction. After completion of NSSC, Caspiy will operate it, and oil companies (e.g., TCO and AGIP) will put their sulfur in the NSSC and pay storage fees. ¶4. (U) Balgimbayev criticized the oil companies' current open storage methods (e.g. TCO),saying that they permit the wind to carry sulfuric dust to surrounding communities and allow residual gases to escape into the atmosphere. She said the NSSC will be profitable, environmentally safe, and economically feasible. The Center will be able to provide up to 50 years of long-term storage, have a monitoring system, minimize the spread of sulfur dust that now occurs, be located higher than TCO's current storage sites to ensure safety in the event of rising Caspian sea waters, and prevent the dissemination of sulfur gases now being emitted from the open sites. ¶5. (U) Balgimbayev said the Center's conceptual development is now 97% complete, and the feasibility study for the site's construction is now 72% finished. The preliminary environmental impact assessment study is 50% complete, and the environmental survey of the site and its suitability is now 90% done. ¶6. (U) According to Balgimbayev, the NSSC will be a covered storage facility consisting of covered sulfur storage in blocks with covers and/or reinforced concrete panels. The Center will use heated ASTANA 00001920 002.3 OF 003 pipelines to transfer liquid sulfur to the storage facility, she said, and will use rail transport to move brimstone sulfur. Companies would be able to store sulfur temporarily and then retrieve it later, thereby retaining ownership of the sulfur, or they could relinquish ownership to the government. THROWN OUT OF THE OFFICE: IS SOMETHING FISHY HERE? ¶7. (SBU) So far, so good. But then the head of the Atyrau Caspiy Office, Sagyndyk Lukpanov, entered and said that Caspiy cannot continue to discuss this matter "without the approval of the Akimat," given that the U.S. Embassy is "such a serious organization." And just like that, the meeting ended. Outside, we began to suspect that Lukpanov did not want us to pry too deeply into matters connected with the storage center. We started to speculate that Caspiy relied on the connections of its Aktau Central Office Head Bolat Palymbetov as former Deputy Akim of the Atyrau Region, Deputy Minister of Economy and Trade, and Deputy Minister of Economics and Budget Planning, to obtain this potentially lucrative contract, especially given its controversial status. (NOTE: Just one day after we were essentially thrown out of Caspiy's Atyrau office, Jakiyev contacted us to say that Caspiy's Head Office is eager to meet with us at our earliest convenience. It appears that Caspiy's main headquarters was not pleased with Lukpanov's decision to eject a U.S. diplomat. END NOTE.) ¶8. (SBU) To obtain another perspective on the NSSC, we subsequently contacted AGIP. The Atyrau office representative Walter Rizzi agreed that this was a sensitive topic and would only talk about it in person during our next trip to Atyrau. AGIP's recently restructured entity, the North Caspian Operating Company's (NCOC) Astana office, also politely declined to meet, because the person responsible for this issue was relatively new in the job. NO SURPRISE: TENGIZCHEVROIL DISLIKES THE NATIONAL STORAGE PLAN ¶9. (SBU) However, Tengizchevrooil (TCO) Astana Office Deputy General Manager Rzabek Artygaliev was eager to explain the potential problems of the proposed NSSC, which he alleged was the brainchild of former KuzMunaiGas President Burkitbayev. (NOTE: Serik Burkitbayev, also former advisor to President Nazarbayev and president of KOGI, was arrested in 2008 for embezzling $16 million and sentenced to six years in prison. He was also suspected of supplying Rakhat Aliyev, Nazarbayev's exiled former son-in-law, with an eavesdropping device used to spy on high-ranking Kazakhstani officials. END COMMENT.) TCO and several other Kazakhstani oil-related companies and institutes, along with Alberta Sulfur Research Ltd. and Moscow State University, formed their own council to study this question, and concluded that uncovered, above-ground sulfur storage (TCO's current storage method for eight million tons of granulated sulfur) has no significant negative impact on the environment. For this reason, TCO has not agreed to the national storage plan. He added that Caspiy, to which the government has awarded the contract to manage the storage facility, is a 100% government enterprise, and that KOGI is Caspiy's subcontractor carrying out the government's own studies on the center. ¶10. (U) Artygaliev said the government instructed TCO to participate in the NSSC, and TCO agreed. However, before TCO actually uses the facility, it must have a well-developed concept and evaluation of this plan because of numerous pending legal, economic, and construction-related questions, which will require considerable research. He said TCO is willing to pay for such a study and has formed several working groups to cover the legal, financial, construction, and ecological aspects of this storage plan. Some remaining thorny questions include the facility's method of sulfur storage (above ground, covered, or underground),legal status of this "national storage facility," and its impact on TCO's own foundation agreement with Kazakhstan. ¶11. (U) In addition, complicating these issues, Artygaliev said that TCO plans to liquidate all its current sulfur storage by 2017. ASTANA 00001920 003.3 OF 003 In subsequent years, it will have no sulfur to put in the national storage center. In fact, he asserted that TCO has already liquidated six of its nine pads of sulfur (approximately six million tons out of almost nine million tons of accumulated sulfur). He highlighted that this fact poses a serious question to the government about the potential users of the national storage center if no TCO sulfur remains to store. He acknowledged that Kashagan and AGIP may use it in the distant future, but he could not comment on their plans. ¶12. (SBU) COMMENT: Because Nazarbayev issued the decree, the government remains intent on NSSC construction in spite of TCO objections. Caspiy and local Akimats appear to view this project as a very large, future cash cow, especially once Kashagan production comes online. Acknowledging the importance of sulfur management, the United States, Canada, and UK, along with Shell and TCO, sponsored a conference in Astana on September 21. The event sought to identify ways to improve the legislative framework for the storage and treatment of sulfur, change the image of sulfur from a hazardous waste to a valuable product, and promote the use of sulfur in industrial applications, such as fertilizers, road construction, and uranium mining. Shell recently reported that the conference has informed ongoing discussions about the construction of early sulfur-handling facilities for Kashagan. This evolving situation merits observation due to its potential impact on U.S. interests. END COMMENT.