KAZAKHSTAN: FIRST PRESIDENT OF KAZAKHOIL CALLS FOR

UNCLAS SECTION 01 OF 02 ASTANA 000198 SENSITIVE SIPDIS STATE FOR SCA/CEN E.O. 12958: N/A TAGS: PGOV PREL ECON EINV EPET SOCI KZ SUBJECT: KAZAKHSTAN: FIRST PRESIDENT OF KAZAKHOIL CALLS FOR GREATER CONTROL OVER NATURAL RESOURCES ASTANA 00000198 001.3 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On February 10, Nurlan Balgimbayev -- former Prime Minister and first president of KazakhOil -- shared his strident opinions of the national oil company he helped to create, the degree of local content in oil and gas exploration and production, and the attitude and behavior of international oil companies operating in Kazakhstan. END SUMMARY. THE SLOW, RIGID BUREAUCRACY OF KMG ¶3. (SBU) Balgimbayev, who served as Prime Minister from 1997-99 and president of KazakhOil, the predecessor to national oil company KazMunaiGas (KMG),from 1999-2002, remains one of President Nazarbayev's closest advisors on energy issues. Meeting with Energy Officer alone in his private offices, Balgimbayev was surprisingly blunt in his criticism of KMG, its affiliates, and even the Ministry of Energy and Mineral Resources (MEMR). He called KMG "inflexible, bureaucratic, cumbersome, slow, and generally incapable" in its current form of managing Kazakhstan's natural resource wealth effectively. Becoming more agitated as he spoke, Balgimbayev pointed at the stationery and office equipment on his desk and said, "I had to bring all this from home. Otherwise, if I had to go through KMG, I wouldn't even have a pencil to write with!" LACK OF FIELD EXPERIENCE HINDERS DECISION MAKING ¶4. (SBU) Balgimbayev said that to obtain approval for procurement or personnel decisions, he has to go through 11 layers of KMG management, which he said takes up to three months. According to Balgimbayev, KMG has become a large, unwieldy bureaucracy that cannot manage its many affiliates and daughter companies effectively. In particular, he said that KMG owns many exploration and production projects that lack the independence and authority to operate efficiently. He also criticized the management of KMG, its affiliates, and officials in the Ministry of Energy and Mineral Resources (MEMR),who "have not worked their way up to the top. Some of them have never worked a day in the field," he exclaimed. Balgimbayev insisted that senior managers in KMG and MEMR must have at least five years of relevant practical experience. NOT A BANANA REPUBLIC ¶5. (SBU) Balgimbayev laid the blame for Kazakhstan's lack of qualified senior managers squarely at the feet of the international oil companies (IOC). "Chevron has been in Kazakhstan for almost 20 years," he said. "Surely in that amount of time, they could have developed the skills and expertise of their local staff." Balgimbayev was visibly upset that there are no Kazakhstani citizens installed as managing directors of major oil and gas exploration and production projects in Kazakhstan. Again, he blamed the IOCs. "Your companies are so arrogant," he said. "They think they're working in a Banana Republic. They think they're so big and powerful, so much better than us. They have no confidence in Kazakhstan. They think we're Africans." NAZARBAYEV CRITICIZES KMG, IOCS ¶6. (U) NOTE: Balgimbayev's scathing remarks closely track with President Nazarbayev's strong, public criticism of KMG and the IOCs on January 22. Nazarbayev told a Cabinet meeting that he was concerned that not enough qualified Kazakhstani petroleum engineers and project managers are working on the largest oil exploration and production projects in Kazakhstan. "No matter how hard we try," said Nazarbayev, "we cannot find more than two or three specialists working at the top management levels. There is not a single Kazakh (sic) citizen working as a top manager in either of the large foreign oil companies operating in Kazakhstan!" Nazarbayev continued. "Why is this happening?," he asked. "Why do the (IOCs) not train and develop managers from among their local staff?" Then, addressing the Cabinet, he ordered, "You have to deal with it." END NOTE. ASTANA 00000198 002.3 OF 002 "WITHOUT TENGIZ, THERE WOULD BE NO CHEVRON" ¶7. (SBU) When asked if the attitude and approach of Western oil companies has changed during the past 20 years, Balgimbayev responded bluntly. "Absolutely nothing has changed," he insisted. "Except that now, the President supports me." Balgimbayev singled out ExxonMobil and Chevron for particularly harsh criticism. He recalled a meeting with ExxonMobil in 1992, when a low-level clerk approached the Kazakhstani delegation and threw down a packet of marketing materials -- in English, not Russian -- and said, "There. You can read all about us in that brochure." He also alleged that Chevron is deliberately slowing development of Karachaganak in order to conserve resources for expansion of the Tengiz project. He also said that Chevron and other IOCs bought Kazakhstan's most lucrative oil fields for a song. "Chevron bought Tengiz for nothing - nothing! And now it's worth a fortune. Tengiz saved Chevron. They had no reserves at the time. Without Tengiz," he insisted, "there would be no Chevron." TAX STABILITY AND THE SANCTITY OF CONTRACTS ¶8. (SBU) Referring to the tax stability clauses in the oil exploration and production contracts for Tengiz, Kashagan, and Karachaganak, Balgimbayev said that change is inevitable, and that it is time to redress the balance. "This is a new time, and a new day," he exclaimed. "Companies that want to do business in Kazakhstan will have to obey our laws and play by our rules." Balgimbayev said that he hoped and expected that the government and the IOCs would be able to reach a negotiated settlement, but he warned that if push came to shove, "we always have one more bullet than they do, because this is our country." ¶9. (SBU) Balgimbayev insisted that Kazakhstan has a fundamental right to own at least a majority stake in the exploration and production of oil on its territory, and added that KMG was preparing to acquire a stake in Karachaganak. "I don't just mean 10 or 15%," he said. "I mean all of it." ¶10. (SBU) COMMENT: Despite (or perhaps because of) his lack of a formal, top-level position within KMG, Balgimbayev remains a highly-influential advisor to President Nazarbayev on energy issues. The timing and tenor of Nazarbayev's criticisms of KMG and the tax stability clauses of existing PSAs demonstrate that Balgimbayev still has the President's ear. With oil prices remaining steady above $70/barrel, perhaps Nazarbayev has calculated that the time has come for even the most favored IOCs to play by Kazakhstan's rules, regardless of previously negotiated agreements. It is unclear whether the government will take the dramatic and consequential step of dissolving the existing PSAs, but there is no doubt that Nazarbayev and his most trusted advisors are convinced that it is time for Kazakhstan to reassert its sovereign rights over its natural resources. END COMMENT. SPRATLEN