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

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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