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Cablegate: Kazakhstan: International Oil Companies Brief Ambassador

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OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHPOD RUEHPW RUEHROV RUEHSR RUEHVK
RUEHYG
DE RUEHTA #1977/01 2801133
ZNR UUUUU ZZH
O 061133Z OCT 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3522
INFO RUCNCIS/CIS COLLECTIVE 0670
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0073
RUEHKO/AMEMBASSY TOKYO 0783
RUEHBS/USEU BRUSSELS
RUEHVEN/USMISSION USOSCE 1957
RUCNDT/USMISSION USUN NEW YORK 1905
RUEHNO/USMISSION USNATO 2242
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0228
RUEKJCS/SECDEF WASHDC 0150
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 04 ASTANA 001977

SIPDIS
SENSITIVE

STATE FOR SCA/CEN, EEB/ESC, EUR/RUS

E.O. 12958: N/A
TAGS: PGOV EPET EINV ELAB TX GG RS KZ

SUBJECT: KAZAKHSTAN: INTERNATIONAL OIL COMPANIES BRIEF AMBASSADOR
ON CURRENT OPERATIONS AND FUTURE PLANS

1. (U) Sensitive but unclassified. Not for public Internet.

2. (U) SUMMARY: Several international oil companies active in
Kazakhstan briefed the Ambassador on their current operations and
future plans in separate meetings during September 30 to October 2.
They reported that negotiations on the Kashagan project are in their
final stages, new exploration opportunities abound in the north
Caspian region, and relations with the Kazakhstani government are
generally very good. The companies stressed the importance of
increasing overall crude oil transportation capacity, noted that
there will be increased risk associated with investments in Georgia,
and maintained that the Government of Kazakhstan is seriously
considering increasing oil exports via Iran. END SUMMARY.

TNK-BP PURSUING "MAJOR" ACQUISTION

3. (SBU) The Ambassador met on September 30 with TNK-BP Vice
President for International Affairs Shawn McCormick, along with the
company's Kazakhstan Country Director, Alexandr Grabovsky, and
Senior Manager for International Affairs Sergey Tanaschuk.
McCormick said that TNK-BP was "satisfied" with the recent
negotiated settlement regarding its Russian Federation operations
and confirmed that changes in company leadership and board
composition are forthcoming. McCormick also mentioned that TNK-BP
will float 20% of company stock on the Russian capital markets
within the next two years, which he expected to improve company
morale and retention.

4. (SBU) TNK-BP has been operational in Kazakhstan for less than
one year and the TNK-BP representatives lamented to the Ambassador
that their company arrived on the scene too late to join one of the
"big three" projects (i.e., Tengiz, Kashagan, and Karachaganak).
Nevertheless, McCormick was optimistic that TNK-BP will complete a
major onshore, upstream acquisition in northwestern Kazakhstan
within the "next couple of months." The location is strategic for
TNK-BP, since it is near their existing upstream assets in Orenburg,
Russia. McCormick noted that TNK-BP has been a major client for
U.S. oil service companies operating in Russia and expects to
increase the volume of business it conducts with U.S. suppliers as
it expand operations into Kazakhstan and elsewhere. According to
McCormick, during the past two years alone, TNK-BP purchased more
than $700 million in goods and services from U.S. suppliers to
support operations in Russia. McCormick also expressed frustration
that the Government of Turkmenistan has again delayed a decision on
awarding production rights to international companies and said the
company does not expect a decision before 2009. "We're in the
hopper, along with all the other companies. We're ready when they're
ready," said McCormick.

GEORGIA CONFLICT GALVANIZES EUROPEAN SUPPORT FOR NABUCCO

5. (SBU) The Ambassador met on September 30 with Wolfgang Sporrer,
OMV Gas and Power Country Manager for the Caspian Region, to discuss
the Nabucco gas pipeline to Europe. Sporrer maintained that in the
aftermath of the conflict in Georgia, political support for Nabucco
has greatly increased and European governments have become
"galvanized" in favor of the project. Of course, he said, there
have been negative consequences as well: the risk premium for
construction and infrastructure investments in Georgia has
increased, and the Government of Turkmenistan is more apprehensive
than previously. Sporrer reported that at the September 4-5 oil and
gas conference in Baku, Turkmen representatives had no individual
meetings with international oil companies (IOCs). In fact,
according to Sporrer, Turkmenistan's delegates to the Baku
conference allegedly had to sign a letter to President
Berdimukhamedov before departure, vowing not to meet with IOCs.
(NOTE: Another conference participant claimed to Energy Officer
that Marathon had a meeting in Baku with the Turkmenneft Chairman,
but this could not be independently confirmed. END NOTE). Despite
all of this, Sporrer said that OMV remains "very interested" in

ASTANA 00001977 002 OF 004


doing business with Turkmenistan. "This is no time to cut and run,"
he argued, "but we may need to go slower."

6. (SBU) Sporrer was in Kazakhstan at the invitation of the
state-owned oil company, KazMunaiGas (KMG). He said the
Kazakhstanis complained to him that "no one ever talks to us about
Nabucco." Sporrer raised the issue of Kazakhstan supplying gas to
Europe in 2014-15, after the start-up of production at Kashagan,
when "they will not re-inject as much gas and will have more
available for export." Sporrer said he told Askar Batalov,
Executive Secretary of the Ministry of Energy and Mineral Resources,
that it is in Kazakhstan's interests to participate in Nabucco -- at
the very least, in order to ensure that Russia pays competitive
market prices for gas from Kazakhstan. However, according to
Sporrer, his meetings were inconclusive, and it is too early to tell
whether the Kazakhstani government is favorably disposed to
participating in Nabucco. (NOTE: During an Economist Business
Roundtable held in Astana on September 30, Batalov said that the
Government of Kazakhstan remains committed to the agreement it
signed with the European Union to transport Turkmen gas to Europe,
is exploring large gas fields near the Aral Sea, will build
additional gas processing plants to meet domestic gas demand, and is
seriously considering building a new gas pipeline via the Aral Sea
with the capacity to transport up to 1.5 billion cubic meters
annually. END NOTE.)

KASHAGAN NEGOTIATIONS IN FINAL STAGES

7. (SBU) On October 1, the Ambassador met with Shell Kazakhstan
Country Chair Campbell Keir and Corporate Affairs Manager Daniel
Worrall. Keir noted that Shell and other Kashagan consortium
members were involved in negotiations that day with KMG on taxation,
transportation, and equity allocation issues. The Government of
Kazakhstan had set a deadline of October 25 to conclude negotiations
on Kashagan, but Shell hopes to conclude talks by October 15.
Production operations at Kashagan are expected to be extremely
expensive -- "more than the first lunar landing and five times the
cost of the Beijing Olympics," according to Keir, with the initial
"Experimental Phase" managed by Eni expected to cost more than $30
billion. Keir said that they used to refer to the initial phase as
"EP 450" because production was supposed to reach 450,000 barrels
per day, but out of an abundance of caution, consortium members now
simply refer to the "Experimental Phase." Keir said first oil is
expected in the fourth quarter of 2013.

KMG FINANCES A MYSTERY

8. (SBU) When asked how KMG plans to pay for its increased share in
Kashagan, Keir called KMG's finances "a mystery." He claimed that
KMG could not tell Sir Richard Evans, Chairman of the state-owned
Samruk holding company which owns 100% of KMG, the company's current
cash position. Instead, KMG told Evans that it would "get back to
him in about three months with an answer." (NOTE: KMG released a
press statement on October 2 announcing that the company had paid
off a bridge loan of $1.05 billion ahead of schedule. The funds
were raised to finance KMG's purchase of an additional 8.48% stake
in the Kashagan consortium. A syndicate of eight banks extended the
15-month loan in September 2007. BNP Paribas, Societe Generale, and
Citibank N.A. Bahrain acted as lead managers. END NOTE.)

KAZAKHSTAN CONSIDERING SOUTHERN ROUTE VIA IRAN

9. (SBU) Keir also informed the Ambassador that Shell's joint
venture with KMG in Mangistau oblast drilled an appraisal well and
"encountered some hydrocarbons." Shell will do further drilling and
conduct seismic tests in 2008-09 to determine the extent of the
reservoir. According to Keir, the real problem with exploration in
the Caspian is the lack of drilling rigs and other necessary
infrastructure. "There simply are not enough rigs available,"
argued Keir. He said that Shell strongly supports the Kazakhstani

ASTANA 00001977 003 OF 004


government's "multi-vector" transportation policy and informed the
Ambassador that the Kazakhstanis are also seriously considering "the
southern route," via Iran. Worrall maintained that Iran has been
active lately in the Caspian. Under a contract from the Iranian
government, China Oilfield Services Ltd. completed construction of
the Alborz offshore drilling rig and, according to Worrall, Iran
intends to deploy the rig and three tankers to drill two appraisal
wells in "disputed territory" in the deep water of the southern
Caspian.

10. (SBU) When asked about the Georgia conflict, Keir called it a
"wake-up call" and said "people in government will be more
cautious," but he downplayed its impact, calling it a political
issue that is unlikely to detract from doing business. Worrall
pointed out that Sandra Roelofs, the wife of Georgian President
Saakashvili, had arrived in Kazakhstan on September 28 for several
high-profile meetings, which Worrall speculated would send a message
of support and sympathy for Georgia. (NOTE: In fact, Roelofs
visited Kazakhstan in her capacity as a humanitarian ambassador for
the global "Stop TB" partnership. END NOTE.) Keir also announced
that Shell will close its office in Almaty within two weeks and move
its country headquarters to Astana.

EXXONMOBIL INTERESTED IN BUYING BP'S STAKE IN KASHAGAN

11. (SBU) The Ambassador met on October 2 with Patty Graham,
Government Relations and Public Affairs Director for ExxonMobil
Kazakhstan. She confirmed reports that Kashagan negotiations are in
their final stages, with transportation and taxation issues yet to
be resolved. Graham also confirmed that BP is the only CPC partner
that has yet to sign a memorandum on CPC expansion. She said that
BP is interested in selling both its 6% stake in CPC and its 5%
stake (held jointly with Lukoil) in Tengizchevroil (TCO). According
to Graham, ExxonMobil would be interested in purchasing the TCO
share, but BP is already in talks to sell it to KMG. Graham claimed
that KMG is "extremely over-extended" financially as it pursues a
number of multi-billion dollar projects simultaneously, including
the acquisition of 51% of MangistauMunaiGas, the increase in its
Kashagan stake, the expansion of CPC, a $3 billion investment in
Romanian oil company Rompetrol, and ongoing projects to construct
oil and gas pipelines to China. Graham said KMG had already
withdrawn $4 billion from its $17 billion "rainy day" fund and may
have to withdraw an additional $4 billion.

TRANSPORTATION CAPACITY SEVERELY CONSTRAINED

12. (SBU) Graham stressed the importance of moving forward on the
the Kazakhstan Caspian Transportation System (KCTS), explaining that
up to 50% of Kashagan oil could ultimately be delivered via that
route. She said that oil transportation capacity is already
constrained -- CPC is at its full capacity of 690,000 b/d -- and new
capacity will be essential when Kashagan begins production in 2013.
For ExxonMobil, shipment from Baku onward to European markets is the
$64,000 question, particularly in the wake of events in Georgia.

13. (SBU) The Georgia conflict, Graham explained, has led
ExxonMobil to take a "wait and see" attitude regarding future rail
or pipeline projects through Georgia. At a minimum, she said the
company will expand its feasibility studies in light of what Graham
called "additional risk." Graham claimed that the conflict has
also had an impact on Kazakhstan's business plans in Georgia.
"They're worried," she said. "I do believe that they have concerns,
because they are heavily invested in Georgia, but their number one
priority is maintaining good relations with Russia." Partly as a
consequence of the conflict in Georgia and partly as a result of
transportation capacity constraints, Graham maintained that KMG is
seriously exploring the possibility of shipping Kashagan oil south
via Iran. "The French and Italians are supportive of the idea," she
said. (NOTE: Italy's Eni will manage the Experimental Phase of
Kashagan production and France's Total will provide the managing

ASTANA 00001977 004 OF 004


director for the new joint operating company that will manage the
Kashagan production sharing agreement going forward. END NOTE.)
Graham also said that ExxonMobil expects significant oil production
from fields other than Tengiz, Kashagan, and Karachaganak, saying
"there's a lot out there" in the Caspian basin.

HOAGLAND

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