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