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Cablegate: Cpc Expansion at Hand?

VZCZCXRO4743
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHMO #3591/01 3471109
ZNR UUUUU ZZH
P 121109Z DEC 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1106
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 MOSCOW 003591

SIPDIS
SENSITIVE

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF

E.O. 12958: N/A
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CPC EXPANSION AT HAND?

REF: A. MOSCOW 3394
B. ASTANA 2144
C. 07 MOSCOW 4691

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. NOT
FOR INTERNET DISTRIBUTION.

-------
SUMMARY
-------

1. (SBU) Andrew McGrahan, Chevron Russia's Vice President in
charge of CPC, told us December 10 that an MOU on CPC
expansion will be signed on December 17. McGrahan said BP,
which is attempting to divest itself of shares in CPC, may
not sign the MOU but is likely to allow the expansion plans
to proceed regardless. End Summary

----------------------
BP MAY NOT SIGN MOU...
----------------------

2. (SBU) McGrahan said BP, which has been the latest holdout
on expansion (refs A and B), will be present at the ceremony
but has not yet decided whether to sign the MOU. Since BP
doesn't ship oil through CPC, its interests are not
necessarily aligned with those of other shareholders, and it
is currently negotiating its exit from the project. BP
representatives recently told us (ref A) that an agreement on
the sale of part of BP's share in CPC to KazMunaiGaz (KMG) is
almost complete. McGrahan told us on December 12 that BP had
informed shareholders earlier that day that BP CEO Tony
Hayward and Lukoil President Vagit Alekperov had reached
agreement on the sale of the rest of BP's interest in CPC to
Lukoil.

3. (SBU) The MOU calls for extending the new tariff and
interest rate changes put in place last year in a previous
MOU and which are set to expire in January (ref C). The
previous MOU increased shipping tariffs from $32 to $38 per
ton and reduced the interest rate on the CPC debt dating from
the pipeline's initial construction (and owed to
shareholders) from 12.66% to 6%. This would ensure CPC's
financial viability for another year. The MOU also allots
$50 million for expansion engineering studies and stipulates
that CPC begin reserving cash to fund expansion.

-----------------------------------
...BUT EXPANSION MAY PROCEED ANYWAY
-----------------------------------

4. (SBU) McGrahan was optimistic that even if BP does not
sign the MOU, CPC expansion would nonetheless proceed per the
agreement. According to McGrahan, in the event BP does not
sign the agreement, the CPC board would meet on December 18
and likely vote to implement the provisions of the agreement
through 2009, while allowing BP more time to finalize its
exit. He told us that the reported December 12 agreement
between Hayward and Alekperov makes it very likely that BP
will at least agree to this plan.

5. (SBU) McGrahan said BP agrees with all of the MOU
provisions except the one requiring a build-up in cash
reserves. According to McGrahan, all other shareholders,
however, see it as an all-or-nothing deal and are "applying
all the pressure we can" to BP to agree. He said without
cash reserves, expansion can't move forward in the current
financial environment as third-party financing would be very
expensive, if available at all.

6. (SBU) McGrahan is hopeful that BP will see the move
forward on expansion as in its best interest. He noted that
CPC would face "financial disaster" without extending the
current tariff and interest rate terms. This would in turn
substantially lower the value of the shares BP is trying to
sell. McGrahan argued that the other partners should be able
to convince BP that it would thus benefit from allowing the
expansion to go forward.

-------
COMMENT
-------

MOSCOW 00003591 002 OF 002

7. (SBU) CPC expansion has been pending for many years and
has seen several false starts. The GOR, ExxonMobil, and now
BP have all held up expansion at one time or another. The
main culprit has been the GOR, which has seen CPC expansion
as mainly benefiting Kazakhstan and the producing companies.
However, with the GOR now supportive of expansion (likely as
part of a broader interest in improving relations with
Kazakhstan), and with BP apparently committed to divesting
from CPC (ref A), we share McGrahan's optimism that CPC
expansion may finally be on the horizon -- despite BP's
remaining objections to parts of the MOU. End comment.
RUBIN

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