KAZAKHSTAN: MARINE TRANSPORTATION EXPERT ADVISES

UNCLAS SECTION 01 OF 03 ASTANA 000578 SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/CARC, EEB/ESCSTATE PLEASE PASS TO USTDA FOR DAN STEIN E.O. 12958: N/A TAGS: PGOV ECON EPET EINV IR KZ SUBJECT: KAZAKHSTAN: MARINE TRANSPORTATION EXPERT ADVISES GOVERNMENT ON TRANS-CASPIAN PROJECT REF: (A) ASTANA 0530 (B) ASTANA 0283 (C) ASTANA 0131 ASTANA 00000578 001.2 OF 003 ¶1. (SBU) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On April 1, Captain Kjell Landin, Marine Manager for Chevron Transport Corporation, briefed Energy Officer on the complexities of the proposed Kazakhstan Caspian Transportation System (KCTS). He said that, from a technical and engineering point of view, the project is certainly feasible. However, Landin highlighted a number of political issues that could complicate implementation. Foremost among them in his opinion is the fact that the government of Kazakhstan does not have a single, authoritative champion who can appreciate the project's complexity and enforce discipline on a diverse group of stakeholders. He said that KazMunaiGas (KMG),which has overall responsibility for managing KCTS, must act quickly to invest in education and human capacity, improve its understanding of port administration, and demonstrate overall leadership of the project. He also said that Kazakhstan is exploring the option of building a second port at Kuryk that would not be covered by its MOU with Azerbaijan, from which crude from Kashagan and other fields could be shipped to Iran. Landin was in Astana at the invitation of KazMunaiGas, for whom he is acting as an unofficial, unpaid advisor on maritime transportation. END SUMMARY. AN ENGINEERING PROBLEM WITH A POLITICAL SOLUTION ¶3. (SBU) When asked to describe the complexity of the KCTS project, Landin acknowledged the various technical challenges (reftel B),but said, "These are just engineering problems. We hire the engineers, we tell them what we want, and they build it. We put a man on the moon. We can certainly make this project work." But, he said, the real difficulty is overcoming domestic political obstacles and ensuring alignment among the various Kazakhstani stakeholders, including KMG, the Ministry of Energy and Mineral Resources, the Customs Committee, the Ministry of Transportation, and national maritime shipping company KazMorTransFlot. ¶4. (SBU) For example, according to Landin, KCTS will require significant changes to the ways and means of port administration in Kazakhstan, including port charges, documentation, staffing, and management. Calling Kazakhstan's port charges "enormous," Landin said the high fees will make it much more difficult for KMG to convince the State Oil Company of the Republic of Azerbaijan (SOCAR) to eliminate its port fees in Baku for Kazakhstani oil arriving via tanker from Aktau or Kuryk. KMG MUST IMPROVE UNDERSTANDING OF PORT ADMINISTRATION ¶5. (SBU) Landin observed that some stakeholders will not favor increased transparency and efficiency in port administration and said that it will take a determined political effort to implement these changes. As a first step, Landin suggested that KMG must quickly improve its understanding of the details and nuances of port administration. "(KMG head Kairgeldy) Kabyldin supports the trans-Caspian project," he said, "but he has no visibility into the line-item charges by the port authority, or what fees KazMorTransFlot is collecting, and how these costs may jeopardize the success of the project." GOVERNMENT "FRAGMENTED" ¶6. (SBU) Landin complained that there is "no firm, consistent policy" on these issues and said the government is "fragmented" by a multiplicity of institutions and interests. For KCTS to work, he said, "Kazakhstan needs a single, high-level official or coordinating body to pull the government stakeholders together, tell them this is about increasing transparency and lowering costs, and enforce discipline across the government to carry it out." Landin said it would take the authority of the Prime Minister to achieve such unity of purpose. ASTANA 00000578 002.2 OF 003 "THERE ARE NO CAPTAINS IN KAZAKHSTAN" ¶7. (SBU) Landin also argued that the lack of trained captains and crews could prove devastating to the project. Speaking passionately, he said he urged both the companies and the government to invest now in developing the human capacity and technical expertise required to operate large oil tankers in the Caspian Sea. "During the negotiations in February, I told them, 'You guys are not committed to this project at all. You're missing the point. You're arguing about ownership and assuming you've got trained crews. Where are the 400 people you need to operate a tanker? Where are all the Kazakh captains you're talking about? There isn't a single one today.'" Landin added that it will take four years, and approximately $100 million, to build a large oil tanker for the Caspian, but eight to ten years to train a captain. OVERCOMING RUSSIAN OBJECTIONS TO KCTS ¶8. (SBU) Surprisingly, Landin did not seem overly concerned by the impressive logistical challenges facing the KCTS project. For example, he suggested that Russian objections to the construction or transportation of large tankers could be overcome by involving a Russian shipyard in the construction, shipment, and assembly in the Caspian of the four 60,000 deadweight ton tankers required by KCTS. Landin said he believed the Russians would support the KCTS project if it is in their commercial interests to do so and if they are convinced that the project will go forward without them in any case. He dismissed, however, the suggestion that the shipyard in Astrakhan could build or service the new vessels: "Those guys are a bunch of crooks," he said. "Even the Russians don't trust them." SMALL TANKER TENDER TO BE RE-BID ¶9. (SBU) Landin confided to Energy Officer that the government will rebid its recent tender for three smaller, 12,000 deadweight ton tankers, because it did not follow the new procurement procedures established by Samruk-Kazyna National Welfare Fund (reftel A). He also suggested that the smaller tankers would be useful in the beginning of KCTS until the larger vessels can be phased in. PUTTING PRESSURE ON RUSSIA AND AZERBAIJAN ¶10. (SBU) When asked whether KCTS or expansion of the Caspian Pipeline Consortium (CPC) pipeline would come first, Landin said the two projects are interconnected. "Of course, the CPC expansion project will be completed first," he said, "but it can only move forward if you also make incremental progress on KCTS." He said that taking tangible steps to implement KCTS will convince the Russians to support CPC expansion in order to capture more crude shipments via Russian territory. Alternatively, Landin said that progress on CPC expansion will convince the Azeris to support KCTS to ensure that some Kazakhstani crude transits Azerbaijan. "By 2016, Kazakhstan will have 90 million tons of oil sitting on its shores," he said. "It is up to Azerbaijan to decide how much of that comes to Baku." KAZAKHSTAN EXPLORING OPTION TO SHIP TO IRAN ¶11. (SBU) Landin confirmed that the November 14, 2008, memorandum of understanding between KMG and SOCAR allows their KMG Trans-Caspiy joint venture -- which is charged with implementing KCTS -- to ship crude in "other directions," including Iran, but only with the mutual agreement of both parties. Therefore, Landin said, Kazakhstan is exploring the option of building a second port at Kuryk that would not be covered by the MOU with Azerbaijan, from which crude from Kashagan and other fields could be shipped to Iran. SOMETHING FOR EVERYONE ASTANA 00000578 003.2 OF 003 ¶12. (SBU) Despite the obvious technical and political challenges, Landin is optimistic that the KCTS project will ultimately succeed, because it has something of interest and value to everyone. "If we can build a cost-efficient, reliable transportation system across the Caspian," he said, "that will be good for everybody." Landin was in Astana for two days at the invitation of KMG to provide advice, counsel, and recommendations to KMG Trans-Caspiy. He will next travel to Baku on April 6-7 to participate in meetings with SOCAR and KMG. HOAGLAND