FRANCE: TOTAL SA LEADS THE NORTH CASPIAN OPERATING COMPANY

C O N F I D E N T I A L SECTION 01 OF 02 PARIS 001565

SIPDIS

E.O. 19528: DECL: 11/23/19
TAGS: EPET EINV ENRG BEXP ETRDPREL FR KZ
SUBJECT: FRANCE: TOTAL SA LEADS THE NORTH CASPIAN OPERATING COMPANY

Ref. A) Astana 2072 B) 08 Astana 2176.

Classified by Econ Minister Counselor Seth Winnick for reasons 1.4
(B) and (D).


1. (C) Summary. The North Caspian Operating Company (NCOC) will
oversee planning and development of Kazakhstan's rich North Caspian
petroleum resources, but the seven NCOC partner companies are on
their own to get the crude to the market. NCOC faces numerous
challenges: a harsh climate, sensitive geological issues, and a
local administration and legal framework unprepared to cope with the
deal. Because of the cost and complexity of its main project,
development of the giant Kashagan field in Western Kazakhstan, NCOC
has adopted unprecedented corporate arrangements in part held
together by common political interests. France's national champion,
Total, enjoys the political backing of President Sarkozy who
considers Kazakhstan to be France's major strategic partner in
Central Asia. End summary.

NCOC: a complex company, a complex project
--------------


2. (C) The North Caspian Operating Company (NCOC) is unprecedented in
the oil industry, measured by its corporate arrangements and the
complexity of its projects, Total executive Pierre Offant told us.
The first Managing Director of NCOC, Offant, is based in Astana and
makes regular trips to NCOC's Paris office. Since January 2009, NCOC
has been the sole operator of assets within the North-Caspian Sea
Production Sharing Agreement area, replacing Agip KCO (Ref A). The
area includes the giant Kashagan field discovered in 2000.
Considered to be the biggest hydrocarbon discovery since the late
1960s, and the first large-scale offshore petroleum development in
Kazakhstan, the Kashagan field is so big, and its deposits so
complex, Offant emphasized, that no one international oil major could
develop it alone.


3. (U) Five of NCOC's seven partner companies have an equal 16.8
percent interest in the company: ENI, ExxonMobil, KMG (Kazakh
national oil company),Shell, and Total. The other two partners are
ConocoPhilips (8.4 percent) and the Japanese firm Inpex (7.56
percent). All partner companies contribute to NCOC staff but follow
the Total management culture. The Managing Director of NCOC will
rotate among the partner companies every two to three years (Ref B).
NCOC's Deputy Manager comes from the state-owned KMG.

Getting the Oil Out
--------------


4. (C) NCOC's authority extends to -- but not beyond -- the
processing plant or oil delivery point in Atyrau, the oil capital of
Kazakhstan 1,100 miles west of Astana. Total and other NCOC partners
are on their own when it comes to getting Kashagan crude to the
market, Offant said. Each company handles its own commercial and
property rights, as well as downstream activities. Offant stressed
his job is to manage the NCOC work projects and budget and interface
with the Kazakh government on behalf of the partner companies. He
said his personal opinion is that oil could be transported through
the Kazakhstan Caspian Transport System, which will take crude west
across the Caspian through Azerbaijan. Alternative transport routes
go across the Caspian to Iran, through the BTC (Baku-Tbilisi-Ceyhan),
or the CPC (Caspian Pipeline Consortium) pipelines. Rail lines could
also transport Kashagan crude by land, Offant suggested. (Note:
Existing rail lines go to the countries of the former Soviet Union.
End note.)

Current challenges
--------------


5. (C) It has been a unique challenge to manage a handful of Western
oil majors with equal stakes in the Kashagan deal, Offant stressed.
The companies differ on technical and financial issues although they
had a common political interest, he noted. Logistics are another
worry; organizing meetings in the world's ninth largest country (in
area) is difficult given limited internal flights. The complexity of
NCOC's corporate arrangements is also something the state of
Kazakhstan is not fully prepared for, Offant added. The
international oil companies are familiar with administrative hurdles
in new markets, but the lack of common business methods and
uncertainty in the application of the Kazakh legal framework has been
difficult, he conceded.

Biographical Note
--------------


6. Pierre Offant is trained in engineering and economics. He joined
Total in 1977 and has held different positions in the company's
Exploration and Production Division. Offant is former Managing

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Director for the company's affiliates in Australia, the Democratic
Republic of the Congo, and Norway. At Total's headquarters near
Paris, he previously headed the Gas and Power Business Development
office.

Comment
--------------


7. (SBU) France's national champion hopes to strengthen its presence
in a key Central Asian energy market by taking the helm of the NCOC.
Rich in oil and uranium, Kazakhstan attracted Total and Areva years
ago but President Sarkozy has given new impetus to the economic
relationship. Total's CEO went with Sarkozy to Kazakhstan last month
where the president said the GOF will "invest politically,
diplomatically and economically." The two countries signed 24
agreements in a range of sectors: military communications equipment,
media, culture, tramways, and uranium processing. Forty French
companies are now represented in Kazakhstan and bilateral trade
reached USD 6 billion last year, according to Kazakh Ambassador to
France, Nuran Danenov.


8. (SBU) France has decided to concentrate national efforts on
building "privileged relations" with a select number of countries:
Germany, Brazil, Egypt, India, South Africa, Mexico, and Kazakhstan.
In Central Asia, Kazakhstan is the GOF's "major strategic partner"
and leader in maintaining regional security. Each year the two
countries will meet (alternating Astana and Paris) to address their
2008 bilateral "strategic partnership agreement" (yet to be
ratified). Sarkozy plans to go to Kazakhstan next year for either
the strategic partnership or the Organization for Security and
Cooperation in Europe summit (OSCE). In 2007, Sarkozy and Bernard
Kouchner supported Kazakhstan's bid for the 2010 OSCE chairmanship
and this underscores why the French are pushing hard for the OSCE
summit.


9. (SBU) Embassy Paris coordinated with Embassy Astana for this
report.

RIVKIN