AZERBAIJAN: CONOCO-PHILLIPS SAY NOW IS KEY TIME

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000314 SIPDIS .O. 12958: DECL: 04/16/2019 TAGS: PGOV PREL AJ TU KZ SUBJECT: AZERBAIJAN: CONOCO-PHILLIPS SAY NOW IS KEY TIME FOR KCTS Classified By: Ambassador Anne E. Derse, Reasons 1.4 (b,d) ¶1. (C) SUMMARY: According to a Conoco-Phillips executive, the project for moving Kazakhstan crude oil from the Kashagan mega-field to market is at a stage similar to where BTC was in 1997-1998, where major decisions are being made that will shape the project's future and its commercial viability. As such, the involved international energy companies (IOCs) will need the kind of USG support, collaboration and facilitation between IOCs and the respective government that characterized the BTC project. Currently, the Kashagan IOCs are working with SOCAR and KazMunaiGaz to determine their role in the part of the project involving shipping volumes across the Caspian, with the IOCs focused on ensuring that all safety procedures and standards meet international metric. Onward transport of Kashagan crude once it arrives in Azerbaijan could be multi-vectored, using both BTC to Ceyhan, a BTC spur to the Black Sea, and a new pipeline to Georgia. The CP Executive said CP and other Kashagan IOCs were looking forward to meeting with SE Morningstar, perhaps during the June 2-5 Caspian Oil and Gas Show in Baku. END SUMMARY. ¶2. (C) On April 16 The Ambassador met with John Dabbar, Conoco-Phillips (CP) Department Head for Oil and Gas Transportation, Russia and The Caspian, to discuss the Kazakhstan Caspian Transportation System (KCTS) and related issues. ¶3. (C) Prefacing his remarks by pointing out that Kazakhstan's massive Kashagan oil field was due to begin production in late 2013, he explained that even with CPC expansion KCTS would be needed, as most of any expanded CPC capacity would go for oil coming from Kazakhstan's Tengiz field. KCTS was designed to move most of this Kashagan crude to market. It encompassed an oil pipeline from Essene to Kuryk and marine transportation across the Caspian to a receiving terminal on the Azerbaijani side. The Trans-Caspian Project (TCP) between SOCAR and KazMunaiGas (KMG) was the part of KCTS that encompassed the movement from oil-loading terminals in Kazakhstan across the water in ships to an oil-unloading terminal in Azerbaijan. ¶4. (C) Dabbar explained that the Kashagan IOCs were still working with SOCAR and KMG to determine their role in TCP. Options varied from the IOCs having a minority equity share with negative control, to having some type of substantive operating role in TCP. While SOCAR has said that any IOC equity share would have to come from the KMG side, KMG's position is that if the IOCs are to be granted equity in whatever joint venture owns the TCP, SOCAR and KMG should each give up an equal equity portion to the IOCs. SOCAR's position has also been that the IOCs don't need any TCP ownership share, since SOCAR is "willing to give whatever guarantees are needed" in terms of transparency, safety and security. CP and the other IOCS (to include Exxon and Chevron) were commercially aligned with KMG in their collective emphasis on whatever TCP system that eventually is created focusing on establishing and operating a marine transport system that meets international standards for safety and security. ¶5. (C) Once Kashagan crude arrives on the Azerbaijani shore, Dabbar explained that there would be three possible vectors for its onward movement. Reliance on just an expanded BTC pipeline was unwise, as there were concerns about Turkish reliability. However BTC would be expanded by adding additional pumping stations to accommodate some Kashagan volumes. Additionally, a spur could be built off the BTC to go through Georgia to the Black Sea. Finally, a new oil pipeline could be built to carry volumes to Georgia. Azerbaijan's relations with the GOT will have an impact on the respective volumes carried by each of these vectors. ¶6. (C) If all went well, Dabbar said that if Azerbaijan and Kazakhstan were able to devise a commercially viable TCP, oil volumes transiting from Azerbaijan would increase to approximately two million barrels a day, with approximately 1.2 of the 1.5 million barrels a day from Kashagan using this 'shuttle tanker' route. In general, Dabbar said "where we are now with KCTS is where we were in 1997-98 with BTC," i.e. with key decisions now being made which would determine the future shape of the project. As such, he said the involved international energy companies (IOCs) will need the kind of BAKU 00000314 002 OF 002 USG support, collaboration and facilitation between IOCs and the respective government that characterized the BTC project - "we want to recreate the BTC dynamic." ¶7. (C) Dabbar did caution that an excess of 'rent-seeking activity' on Azerbaijan's part could adversely impact TCP's commercial viability, but "we're not there yet." As such, for the moment he saw no need for USG intervention with the GOAJ on this specific issue - "there's no need to go to the mat on this yet." However, there were Kashagan partners, primarily Total, who were seeking to use Iran as a major conduit for Kashagan volumes, and were TCP to become sub-optimal due to excessive rent-seeking, Kashagan volumes could well flow to Iran. TURKMENISTAN ¶8. (C) Dabbar explained that through CP's partial ownership of Lukoil, it is involved in developing offshore gas projects in Turkmenistan, in conjunction with the UAE's "Mubadala Development" company (whose oil and gas division is headed by Sir David Woodward, the former head of BP Azerbaijan). They are pursuing offshore blocks 14-21, although Dabbar said he doesn't expect any deals to be signed this year. Were a deal to be signed, Lukoil would have the option of exporting product in whatever direction it saw fit. ¶9. (C). Dabbar said he had heard of the recent appointment of Ambassador Morningstar as Special Envoy for Eurasian Energy Issues, and said that CP and other Kashagan IOCs were looking forward to meeting with SE Morningstar, perhaps during the June 2-5 Caspian Oil and Gas Show in Baku. ¶10. (C) COMMENT: Understandably, Azerbaijan's role in moving Caspian gas (both as a producer and transit country) has been a major focus of our Eurasian Energy policy. For Azerbaijan too, the issue of gas to Europe has been become one of strategic importance, and thus to a large extent it has 'firewalled' the project from the type of rent-seeking activity that could impinge the Southern Corridor's commercial viability. It seems that transit of Kashagan volumes through Azerbaijan has not yet achieved this strategic significance for Azerbaijan, and as such commercial entities in Azerbaijan are seeking what CP characterizes as more than "investor-type returns" in creating TCP. So far the IOCs haven't asked for USG assistance in this regard, and Dabbar at least seemed to think that the IOCs involved with Kashagan could handle this specific issue on their own. However, from this and other discussions it seems that the US IOCs involved with Kashagan are beginning to focus more on how to best leverage USG participation in order to ensure TCP's safety, security and commercial viability . END COMMENT. DERSE