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Cablegate: Kazakhstan: Energy Deputy Secretary Poneman Briefed On

VZCZCXRO1594
OO RUEHIK
DE RUEHTA #1858/01 2890519
ZNR UUUUU ZZH
O 160519Z OCT 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6622
INFO RUCNCIS/CIS COLLECTIVE 2042
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1413
RUEHKO/AMEMBASSY TOKYO 2112
RUEHUL/AMEMBASSY SEOUL 1059
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1602
RUEKJCS/SECDEF WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1936

UNCLAS SECTION 01 OF 03 ASTANA 001858

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA, EUR/WE
STATE PLEASE PASS TO USTDA

E.O. 12958: N/A
TAGS: PGOV PREL ECON EPET EINV FR KZ
SUBJECT: KAZAKHSTAN: ENERGY DEPUTY SECRETARY PONEMAN BRIEFED ON
PIPELINE CONTRACT

REF: (A) ASTANA 1438
(B) ASTANA 1449

ASTANA 00001858 001.3 OF 003


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

2. (SBU) SUMMARY: On October 6, during the visit of French
President Nicolas Sarkozy to Astana, the government of Kazakhstan
signed a memorandum of understanding with a consortium of French
companies to study construction of a 730-kilometer, on-shore
pipeline to carry crude oil from Eskene, near Atyrau, to the port of
Kuryk, south of Aktau. International oil companies (IOCs) had been
engaged in negotiations with the government for months prior to the
announcement, and have expressed concern that the deal will delay
the $2 billion project. Senior government officials told Deputy
Secretary of Energy Daniel Poneman that the government will retain
100% ownership of the pipeline and guarantee tax stability, access
rights, and market-based tariffs. Also during Sarkozy's visit,
Total SA, Europe's third-largest oil company, and GDF Suez SA agreed
to buy 25% of the offshore Khvalynskoye natural gas field from
national oil company KazMunaiGas (KMG). END SUMMARY.

THE ESKENE-KURYK PIPELINE

3. (SBU) On October 6, a consortium of predominantly French
companies -- including Vinci SA, Entrepose Contracting SA, Spie
Capag, Mannesmann France, Europipe GmbH, GTS Group, and
ArcelorMittal -- signed an agreement with the government to study
construction of an on-shore pipeline that would transport oil from
Eskene, near the supergiant fields of Kashagan and Tengiz, to the
Kazakhstani port of Kuryk, for onward shipment via tanker to Baku.
The pipeline is a key component of the Kazakhstan Caspian
Transportation System (KCTS) that will deliver Kazakhstani crude oil
to Baku across the Caspian via tanker. The contract is expected to
be worth as much as $2 billion.

KAZAKHSTAN WANTS TO BE A COMMON CARRIER

4. (SBU) On October 7, KMG President Kairgeldy Kabyldin told Deputy
Secretary of Energy Daniel Poneman that the French consortium
received financial backing from the export credit agencies (ECA) of
France and Japan for the construction of the Eskene-Kuryk pipeline.
He also confirmed that the companies will not acquire equity in the
pipeline. "It will be 100% owned by Kazakhstan. Besides," he
added, "the international oil companies are not in the pipeline
business." Kabyldin said the government's negative experience as a
partner in the Caspian Pipeline Consortium (CPC) convinced him that
this was not the best model to follow for the Eskene-Kuryk pipeline
project. In particular, Kabyldin criticized the inefficiencies,
delays, and cost overruns associated with the construction,
management, and expansion of the CPC pipeline (ref A).

5. (SBU) Kabyldin said that before signing the agreement with the
French consortium, KMG offered ExxonMobil and Chevron --
representing Kashagan and Tengiz respectively -- guaranteed access,
preferential tariffs, and tax stability in exchange for a
ship-or-pay commitment. Unfortunately, he said, they were not able
to come to an agreement. Despite the MOU with the French
consortium, Kabyldin said that KMG remains ready to continue
negotiations with the IOCs on the KCTS project. However, he
stressed that the government will insist on maintaining complete
ownership of the transportation infrastructure. "If we own the
system," he said, "we can guarantee equal access and fair treatment
to all. We can act as a common carrier," and provide a service to
all shippers, without discrimination or favoritism.

MINISTER OF ENERGY EXPLAINS AGREEMENT WITH FRENCH

6. (SBU) During a private dinner at his residence in Astana on
October 7, Minister of Energy and Mineral Resources Sauat Mynbayev
told Deputy Secretary of Energy Poneman that Kazakhstan was

ASTANA 00001858 002.3 OF 003


originally prepared to offer the IOCs a 49% equity stake in the
pipeline (ref B). Mynbayev said that the government would have
retained a majority stake of 51% and the right to purchase the
remaining shares at any time. He also asserted that the government
asked the IOCs to provide a loan to finance the share purchase, but
they refused. When Poneman noted that President Aliyev had told him
in Baku on October 5 that Azerbaijan would not object to the IOCs
having equity participation in the KCTS, Mynbaev replied that the
Government of Azerbaijan had insisted that the Kazakhstan and
Azerbaijan governments would split their equity shares 50/50, and
Astana was free to share the GOK's 50% share with the IOCs if it
wished.

7. (SBU) According to Mynbayev, the government began in July to
explore alternative financing arrangements to build the pipeline.
The agreement signed with the French consortium on October 6 allows
the government to borrow from France's export credit agency (ECA) to
finance construction of the Eskene-Kuryk pipeline. If it takes the
loan, the government will sign an exclusive construction contract
with the French consortium to build the pipeline, and, according to
Mynbayev, award France a "pre-emptive right" to negotiate an
exploration and production contract for an unspecified block.
However, Mynbayev said that if Kazakhstan is able to borrow from the
Kashagan partners, or another source, then the government is not
obligated to use the French companies, or negotiate an exclusive
exploration and production contract with France. Mynbayev confirmed
to Deputy Secretary of Energy Poneman that Kazakhstan will own 100%
of the pipeline, but provide long-term, stable tariffs and
guaranteed access.

IOC CONCERNS ABOUT DELAYS

8. (SBU) On October 12, Patty Graham, Director of Government
Relations for ExxonMobil Kazakhstan, told Energy Officer that the
agreement with the French consortium may delay construction of KCTS
and will be an unwelcome distraction for the Kashagan consortium,
which must make critical decisions by the end of the year on Phase
II production. "KMG now has a new opening to discuss third-party
financing," she said. "Normally, that takes one or two additional
years, because investment banks need more reassurance and
guarantees." Graham said the French export credit agency will need
at least six months to assess the risks and returns of the project
before it commits financing for the pipeline. As a result, she
said, KMG will wait at least that long before it responds to an IOC
offer to build the pipeline in exchange for a minority equity stake.
"We don't even know if we're in the ballpark," said Graham. The
agreement with the French consortium "creates significant delays,"
she said, "even before we've settled on a business model. What if
KMG decides at the end of the road that the terms are too onerous?
The whole thing could unravel." Graham added that the French
agreement was not completely unexpected, since Total has always had
its eyes set on the transportation component of the Kashagan field.

9. (SBU) Graham said that the consistency of messages from Mynbayev
and Kabyldin on IOC participation in the Eskene-Kuryk pipeline was a
clear indication that the decision came from the top (indicating
specifically, Timur Kulibayev, Deputy Chairman of Samruk-Kazyna).
She also suggested that the terms that will be offered by the ECAs
will be more stringent than those that would have been offered by
the IOCs, and she believes that the Kazakhstanis will ultimately not
be able to meet the terms of the ECA loan.

SHIPPERS V. OWNERS

10. (SBU) Graham said ExxonMobil and the other Kashagan partners
are willing to participate in KCTS, even if they do not own equity
in the project. "Our concern is not that we might not be given
ownership in the system," she said, "but rather that after months of
negotiations, we still have not been able to agree on a business
model." Graham said that if the Kashagan partners were to be

ASTANA 00001858 003.3 OF 003


shippers only -- not owners -- they would need "a whole slew of
guarantees on tariff stability and capacity access."

KCTS COULD SHIP OIL TO IRAN

11. (SBU) On October 7, Jay Johnson, Managing Director of Chevron's
Eurasia Business Unit, told Energy Officer that the French
consortium will pay 85% of pipeline costs, but will not acquire an
equity stake in the infrastructure. He said the government insisted
on retaining 100% ownership of the pipeline, which it will transfer
to KMG. Johnson also expressed concern that without the involvement
of U.S. companies, the pipeline could be used to send oil to Iran.
Although Graham agreed that the "Iran option" is an open
possibility, she noted that the government's primary focus will be
to build a transportation system to which all shippers will have
access.

DEAR FRIENDS

12. (U) According to wire reports, during the visit of French
President Sarkozy on October 6, Total agreed to purchase a 17%
stake, and GDF Suez an 8% share, of the Khvalynskoye gas field,
jointly owned by KMG and Russia's Lukoil, which owns 50% of the
field. "The gas will be sent to Russia," Total Chief Executive
Officer Christophe de Margerie said, adding that the French
companies will contribute about $1 billion of the $3.5 billion to $4
billion in estimated development costs. Output may start in 2016
and reach 8-9 billion cubic meters a year, he said. Sarkozy and
President Nursultan Nazarbayev oversaw the signing ceremony and
referred to each other as "dear friends" at a business forum held
after the talks. Sarkozy praised Kazakhstan's role in securing
stability in the volatile region and said Astana could help resolve
the Afghan crisis. When asked about criticism Kazakhstan has faced
over its human rights record ahead of chairing the Organization for
Security and Cooperation in Europe (OSCE), Sarkozy said he was
convinced Astana was moving towards OSCE standards. "We have made
our political choice, my dear friend, and I hope you will see that
when France makes a political choice it sticks to it to the end," he
told Nazarbayev.

13. (SBU) COMMENT: The agreement with the French consortium is not
a done deal. In fact, it is not a deal at all. It is simply a
memorandum of understanding that allows the government, in theory,
to borrow money from an ECA at favorable rates in exchange for
hiring French companies to build the pipeline. As both KMG
President Kabyldin and Minister of Energy Mynbayev made clear to
Deputy Secretary of Energy Poneman, the government is eager to
resume negotiations with the IOCs whose volume commitments are
essential if KCTS is to become operational. Third-party financing
from France's export credit agency may delay the government's
negotiations with the IOCs, which in turn could adversely affect the
pace of negotiations on CPC expansion. The government's
determination to own what it considers strategic infrastructure is
understandable, and its commitment to provide stable, predictable
access to KCTS should be taken seriously. Despite a number of
high-profile disputes -- most recently, BG Group's request for
reimbursement of $1 billion in crude export duties -- the government
has generally honored its commitments and kept its promises,
particularly when the stakes are this high. END COMMENT.

14. (U) Deputy Secretary Poneman has cleared this cable.

HOAGLAND

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