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Cablegate: Kazakhstan: Highlights From the 2008 Kazakhstan

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DE RUEHTA #2101/01 2970834
ZNR UUUUU ZZH
O 230834Z OCT 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3635
INFO RUCNCIS/CIS COLLECTIVE 0717
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0117
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RUEHIT/AMCONSUL ISTANBUL 0048
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RUEHNO/USMISSION USNATO 2286
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RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
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RHEHNSC/NSC WASHDC 0273
RUEKJCS/SECDEF WASHDC 0195
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UNCLAS SECTION 01 OF 03 ASTANA 002101

SIPDIS

STATE FOR SCA/CEN, EUR/CARC, EUR/RUS, EEB
STATE PLEASE PASS USTDA FOR DAN STEIN

E.O. 12958: N/A
TAGS: PGOV PREL EPET EINV RS GG KZ
SUBJECT: KAZAKHSTAN: HIGHLIGHTS FROM THE 2008 KAZAKHSTAN
INTERNATIONAL OIL AND GAS EXHIBITION AND CONFERENCE (KIOGE)

1. SUMMARY: The 16th annual Kazakhstan International Oil and Gas
Exhibition and Conference (KIOGE) was held during October 7-10 in
Almaty. The exhibition featured more than 550 companies from 30
countries and was visited by more than 15,000 oil and gas industry
professionals. The conference included presentations by more than
50 high-level representatives from government, business, and
academe, including State Department Coordinator for Eurasian Energy
Diplomacy Ambassador Steve Mann. This cable summarizes the comments
of several speakers, including Lyazat Kiinov, Kazakhstan's Vice
Minister of Energy and Mineral Resources; Kairgeldy Kabyldin,
President of KazMunayGas (KMG); Vadim Gustov, Chairman of the CIS
Affairs Committee of Russia's Federation Council; and Alexander
Mikheyev, Gazprom's First Deputy Chief for Marketing and Processing
Gas and Liquid Hydrocarbons. END SUMMARY.

KIINOV'S KEYNOTE

2. Lyazat Kiinov, Kazakhstan's Vice Minister of Energy and Mineral
Resources, delivered a keynote address to the conference on "The
Vital Role of Kazakhstan in the Global Petroleum Market." He
announced that Kazakhstan expects to export 62.8 million tons of
crude in 2008, while processing 13.8 million tons for domestic use.
According to Kiinov, Kazakhstan's three oil refineries have a total
processing capacity of 14.5 million tons of oil a year. By 2010,
Kazakhstan expects to produce 80 million tons of crude and by 2015,
100 million tons.

OIL TRANSPORTATION OPTIONS

3. Kiinov reiterated Kazakhstan's multi-vector transportation
policy and listed the transportation capacity of several important
oil pipelines: Atyrau-Samara (with a capacity of 15.9 million
tons), Uzen-Samara (15 million tons), Ayrau-Novorossiisk (26 million
tons), the Caspian Pipeline Consortium (CPC) pipeline (31 million
tons, and up to 67 million tons with expansion), and
Atasu-Alashankou (20 million tons, with construction of the final
Kenkiyak-Kumkol segment currently underway). He called
Atasu-Alashankou -- which is a Kazakhstan-China pipeline -- "a
backup in case we transport less oil via Russia, but the Russian
route is preferred." Kiinov was skeptical of Baku-Batumi's transit
capacity, saying that even with expansion, that option would move
only 10 million tons of oil per year. He referred to the Kazakhstan
Caspian Transportation System (KCTS), noting that KMG is negotiating
with Tengizchevroil and the Kashagan consortium to construct an
Eskene (onshore) to Kuryk (sea port) oil pipeline to transport
Tengiz and Kashagan crude. Kiinov also noted that Kazakhstan
supplies oil to Iran via swaps and he announced that Kazakhstan is
studying the possibility of increased oil shipments to the Persian
Gulf via Iran. Kiinov dismissed the idea of a trans-Caspian oil
pipeline, noting the financial, technical, environmental, and legal
challenges of such a project. "We would have to have the agreement
of all Caspian littoral states," he said.

PROMISING PROVEN GAS RESERVES

4. Kiinov reported that Kazakhstan's proven reserves of natural gas
total 3.3 trillion cubic meters, the majority of which is located at
Tengiz, Kashagan, Karachaganak, and Zhanazhol. In 2007, according
to Kiinov, Kazakhstan produced 29.6 billion cubic meters (bcm) of
gas and expects to produce 42.6 bcm by 2010 and 61 bcm by 2015.
Kiinov noted that Kazakhstan's northern regions are dependent upon
gas from Russia, while its southern regions import gas from
Uzbekistan. He said that imports from Uzbekistan will be
significantly reduced with the construction of a
Beyneu-Bozoy-Akbulak gas pipeline. Kiinov noted that on May 13,
2007, the Government of Kazakhstan signed an agreement with Russia
and Turkmenistan to build the Prikaspiskyy gas pipeline, which could
transport 20 bcm north to Russia (including 10 bcm of Kazakhstani
gas) by 2010. He also said that construction of the

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Kazakhstan-China gas pipeline has started and is expected to be
completed by 2012, at which point Kazakhstan will export up to 2 bcm
of gas to China. Kiinov noted that Kazakhstan's gas policy is
driven by both political and economic factors. "We used to sell gas
to Russia cheaply," he said. "Now, we get a market price."

CROSS-CASPIAN POSSIBILITIES

5. In response to a question from an American lawyer about
trans-Caspian pipelines, Kiinov said, "We are keeping our options
open and listening to everyone. Yes, you are teaching us, but
remember that you are not the only ones teaching us. Everyone is
teaching us. Some day we might end up knowing more than you do."
On the subject of cross-Caspian oil tankers, Kiinov said that
Kazakhstan does not want ships from countries other than Kazakhstan
or Azerbaijan to sail on the Caspian Sea. "No other shippers will
be allowed to enter the Caspian Sea," he said. Kiinov announced
that 60,000-ton tankers would be used and said that Kazakhstan is
considering the possibility of building tankers in Russia and Iran
and has plans for a ship yard facility in Aktau. Kiinov warmly
welcomed British and Norwegian companies to help Kazakhstan build
new tankers and promised that Kazakhstan would be open and
transparent in its deals with foreign companies. He cautioned,
however, that "the open market is a two-way road. If Kazakhstan is
open to foreign business, other markets must be open to Kazakhstan.
Our companies would like to enter Europe, but for now, Kazakhstan
has investments only in Romania."

KAZAKHSTAN COMPANIES TO REMAIN IN GEORGIA

6. When asked about reports that Kazakhstan may sell its
investments in Georgia, Kiinov answered directly,
"Kazakhstan is not going to pull out of Georgia. We are not
leaving. Someone apparently wants Kazakhstan and Georgia to fight,
but we have no conflict in Georgia."

KMG'S LONG-TERM STRATEGY

7. Kairgeldy Kabyldin, President of KazMunayGaz (KMG), said that
KMG's long-term strategy includes the consolidation and optimization
of KMG assets, investment projects, and further growth. Kabyldin
reminded participants that KMG retains a preemptive right to acquire
oil and gas assets. He said that KMG has established itself as an
industry leader by building a berth for offloading construction
materials, a base for the supply of offshore operations in the
Caspian, a landfill for toxic industrial waste, a filling station
for sea vessels, and an oil spill response center. Kabyldin
announced that KMG, ConocoPhillips, and Mubadala from Abu Dhabi
signed a memorandum of understanding on October 3 for the
exploration of the N Block. Kabyldin also noted that, in order to
expand its business geographically, KMG acquired the Batumi oil
terminal and 70% of Rompetrol in Romania, and established a joint
venture with Gazprom at the Orenburg Gas Processing Plant.

RUSSIA'S GUSTOV CRITICIZES CROSS-CASPIAN INITIATIVES

8. Following Ambassador Steven Mann's presentation, Vadim Gustov,
Chairman of the CIS Affairs Committee of Russia's the Federation
Council (and former Deputy Prime Minister under Prime Minister
Primakov), discussed the outlook of Russian-Kazakhstani cooperation
in the oil and gas sector. Gustov noted that in 1997-98, Russia
experienced tough times. "We were on our knees," he said, "and
Kazakhstan was still a developing country. But we never abandoned
our friends. We have been here in good times and in bad." Gustov
was dismissive of Ambassador Mann's support for a possible
trans-Caspian pipeline, saying, "Some people may not like the fact
that Russia has invested in infrastructure in Kazakhstan, but it is
a fact. It is a fact." Gustov claimed that for the next 20-30
years, Russia, Kazakhstan, Uzbekistan, and Turkmenistan will ensure

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the energy security of Europe. He then observed that politics and
energy are interrelated, saying, "Whoever owns the energy, defines
the political structure." Gustov noted that Russian companies are
important investors in several major energy projects, including the
Atyrau-Samara pipeline (which he said was "very important" to
expand), the CPC pipeline, the Karachaganak project, the Ekibastuz
coal-fired power plant, an ore processing joint venture, and the
Orenburg Gas Processing Plant. Gustov said that Russia and
Kazakhstan will work closely to deliver energy resources to China to
meet its growing demand and he called for a new "energy alliance"
between Russia and Kazakhstan for the joint development of energy
and mineral resources. Finally, Gustov said that any decisions
regarding transportation of oil and gas across the Caspian Sea would
require the consent of all five littoral states, "particularly given
the potential environmental impact on the Caspian's sensitive
ecology."

KASHAGAN OPERATOR REPORTS PROGRESS

9. Umberto Carrara, Managing Director of Agip KCO, which operates
the Kashagan field, said that up to 80% of Kashagan's sour gas will
be re-injected to maintain well pressure; 80% of AgipKCO's labor
force is local; construction of the Bautino Support Base, Koshanai
sewage facility, and Bolashak processing plant is more than 70%
complete; and 100% of the sulfur derived from Kashagan will be
stored in airtight containers and sold as a component in
fertilizer.

BRITISH GAS GROUP TO STUDY DOMESTIC GAS MARKET

10. Clare Young, Commercial Manager for Downstream Business
Development with British Gas Kazakhstan (BG Group), announced that
KMG asked the BG Group to prepare a natural gas market study and
long-term strategy for domestic gasification. According to Young,
the Government of Kazakhstan is keenly interested in promoting
domestic gas consumption for a variety of environmental, economic,
and social reasons.

GAZPROM'S INVESTMENT STRATEGY IN EURASIA

11. Alexander Mikheyev, Gazprom's First Deputy Chief for Marketing
and Processing Gas and Liquid Hydrocarbons, discussed the strategic
partnership between Russia and Kazakhstan in the natural gas sector.
According to Mikheyev, Gazprom's strategy in Eurasia is to invest
in gas infrastructure projects "regardless of location, in order to
optimize the gas system." Mikheyev said that Russia and Kazakhstan
signed an inter-governmental agreement on gas cooperation on
November 28, 2001. He also said that Kazakhstani gas is supplied
via KazRosGas, noted that Russian gas exports to Kazakhstan and
transportation volumes from Central Asia to Russia are growing, and
disclosed that the Orenburg Gas Processing Plant processes up to 1
bcm of gas annually. According to Mikheyev, Gazprom is currently
involved in the following projects in the region: (1) construction
of the Prikaspiskyy gas pipeline with Kazakhstan, Russia, and
Turkmenistan; (2) development of a gas transportation system in
Central Asia with Kazakhstan, Russia, Turkmenistan, and Uzbekistan;
(3) a new joint venture with KMG based at the Orenburg Gas
Processing Plant; (4) exploration of the Tsentralnaya offshore field
in the Caspian Sea; and (5) the use of an underground gas storage
facility at Bozoy.

HOAGLAND

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