KAZAKHSTAN: U.S. OIL EXECUTIVES DISCUSS CORRUPTION,

UNCLAS SECTION 01 OF 02 ASTANA 000119 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA STATE PLEASE PASS TO USTDA E.O. 12958: N/A TAGS: PGOV PREL ECON EINV EPET SOCI KZ SUBJECT: KAZAKHSTAN: U.S. OIL EXECUTIVES DISCUSS CORRUPTION, COMPETITION, AND THE INVESTMENT CLIMATE REF: A. 09 ASTANA 2027 ¶B. ASTANA 0061 ASTANA 00000119 001.3 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On January 26, the outgoing and incoming CEOs of U.S. oil services company J. Ray McDermott conveyed to the Ambassador their optimism about the investment climate in Kazakhstan, and asserted that strong, fundamental corporate values and a refusal to engage in corrupt practices give U.S. companies a competitive advantage in the region. END SUMMARY. ¶J. RAY IN BAUTINO BAY ¶3. (U) J. Ray McDermott is a leading worldwide marine solutions company with fabrication facilities in the Americas, Middle East, Caspian, and Asia-Pacific. McDermott specializes in the design, fabrication, transportation, and installation of offshore platforms, as well as the installation of offshore pipelines. The company also operates a global fleet of vessels for the marine-construction industry, including combination derrick and lay barges. Under the September 2008 lease agreement between McDermott and TenizService, the latter will reclaim 20 hectares of land from the Caspian Sea to build a steel fabrication yard in Bautino, north of Aktau, including landfill and sheet piling. McDermott will provide engineering and construction of fabrication facilities, install utilities, procure yard equipment, and recruit and train Kazakhstani personnel to manage and operate the yard. The annual production capacity is expected to be 12,000 metric tons, and the base is expected to be operational in the fourth quarter of 2010. McDermott's Bautino fabrication yard would be just the second facility of this magnitude on Kazakhstan's Caspian shore with the capacity to build offshore oil platforms, drilling modules, and floating terminals that meet the demanding standards of the North Caspian's complex exploration and production projects. PROJECT IS BACK ON TRACK ¶4. (SBU) According to McDermott's outgoing CEO Robert Deason, the Bautino project is back on track after early delays and is progressing well. He said the company restructured the contract after its joint-venture partner TenizService, in which national oil company KazMunaiGas (KMG) owns 49%, failed to meet its investment obligations. Deason conceded that the new contract has yet to stand the test of time, but nevertheless, expressed his personal optimism about the company's prospects in Kazakhstan. He expects the Bautino base to provide essential support services to all of the major offshore oil exploration projects in the Caspian, including Kashagan, N Block, and Pearls. For example, Deason said that Shell (lead operator of the Pearls project) and ConocoPhillips (N Block) expressed interest in McDermott's services. "ALL ROADS LEAD TO TK" ¶5. (SBU) McDermott's Vice President for Europe and Central Asia, Dan Houser, said the biggest challenge McDermott faces is simply identifying the ownership structure of its partners and competitors. "It's tough to say who owns what," Houser remarked. Transparency in ownership structures is lacking, many subsidiaries and arms-length offshore partners exist, and "all roads lead to TK (Timur Kulibayev, President Nazarbayev's billionaire son-in-law)." Houser asserted that McDermott's regional competitors all have powerful political sponsors and effective lobbies. For example, Italy's Saipem and The Lancaster Group, which is chaired by Nurlan Kapparov, former Vice Minister of Energy and Mineral Resources and former chairman of Kazakh Oil, KMG's predecessor, formed the joint-venture Ersai. The Singapore-based Keppel, according to Houser, has a joint venture connected to Kulibayev. ¶6. (U) NOTE: A January 27 Interfax report alleged that former BTA Bank chairman Mukhtar Ablyazov, who fled the country following ASTANA 00000119 002.3 OF 002 accusations of embezzlement and financial fraud, claims that shares of AktobeMunaiGas were sold to the China National Petroleum Corporation illegally, and at half their market value. According to Interfax, Ablyazov sent a letter to several law-enforcement agencies naming a senior government official (reportedly Kulibayev) allegedly responsible for the illegal transaction. Interfax highlighted Ablyazov's allegations that the state's 25% stake in AktobeMunaiGas was sold "at a price far below market value." END NOTE. CULTURE OF "COMPLIANCE" ¶7. (SBU) Deason expressed concern about a culture of "compliance" (corruption) in Kazakhstan. He said that when McDermott first entered the country, they were approached by brokers claiming they could help the company obtain contracts, "but that was the last thing we wanted to hear. We just want to compete and win, fair and square," he underlined. Deason declared that McDermott did not have a single corruption case worldwide during his tenure. McDermott Vice President Dan Houser recalled a visit to the company by Kazakhstan's Financial Police, who initially charged the company with operating unlicensed planning software. He stated the company quickly produced the license, resolving the issue. Deason concluded, "If you follow the rules, cross your Ts, and stay in bounds, you can get things done in Kazakhstan." U.S. COMPETITIVE ADVANTAGE ¶8. (SBU) When Italy's ENI was the lead operator on the Kashagan project, Deason asserted, "It was hard for American contractors to get a fair shake." He claimed that ENI would direct its fabrication services to Saipem, in which ENI owns a 40% stake. He now expects McDermott to win more business in the Caspian region despite increasing competition, notably from Korean companies. When asked to describe McDermott's competitive advantage, Deason underlined that it is no longer the company's capital, technology, or global reach, but rather its values. "People trust Americans," he said. "We're not as desperate to please, not as willing to compromise. We're reliable, fair partners. We keep our word, and deliver on our commitment," unlike competitors from other countries that attempt to renegotiate a deal once they realize they have made a promise they cannot keep. ¶9. (SBU) COMMENT: As KMG Vice President Maksat Idenov (ref B) has made abundantly clear, the reputation of U.S. companies for honest, transparent business practices can give them a competitive advantage in Kazakhstan. Although investing in Kazakhstan can present challenges, we are pleased to note that U.S. companies, like McDermott, continue to play fair and win big. END COMMENT. SPRATLEN