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Cablegate: Kazakhstan: The U.S. Ioc Big Three and Kmg

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DE RUEHTA #0041/01 0151145
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O 151145Z JAN 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7185
INFO RUCNCIS/CIS COLLECTIVE 2333
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1695
RUEHKO/AMEMBASSY TOKYO 2401
RUEHUL/AMEMBASSY SEOUL 1311
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 1891
RUEKJCS/SECDEF WASHDC 1741
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/AMCONSUL ALMATY 2162

UNCLAS SECTION 01 OF 04 ASTANA 000041

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: PGOV PREL PINR ECON EINV EPET SOCI RS KZ
SUBJECT: KAZAKHSTAN: THE U.S. IOC BIG THREE AND KMG

REF: (A) 09 ASTANA 0430
(B) 09 ASTANA 1858
(C) 09 ASTANA 2129
(D) 09 ASTANA 2100

ASTANA 00000041 001.3 OF 004


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

2. (SBU) SUMMARY: Senior executives from the three largest U.S.
investors in Kazakhstan -- ExxonMobil, ConocoPhillips, and Chevron
-- spoke recently about their companies' plans, priorities, and
problems with the biggest oil exploration, production, and
transportation projects in Kazakhstan. They also provided insight
into the leadership and management of national oil company
KazMunaiGas (KMG). END SUMMARY.

KASHAGAN COMPLICATIONS

3. (SBU) On January 13, Patty Graham, Director of Government
Relations for ExxonMobil Kazakhstan, told Energy Officer that she is
concerned about the slow pace of progress on the 40-year, $136
billion Kashagan project. The North Caspian Operating Company
(NCOC) that oversees the Kashagan consortium is "a vast improvement"
over Agip's management of the project, but the partners are
nevertheless "really struggling" to make decisions, she said.
(NOTE: The date for commercial production at Kashagan has shifted
repeatedly, from 2005 to 2008 to a current target of the 4th quarter
of 2012. END NOTE.) Graham underlined that the consortium must
make a number of major, pre-investment decisions in the near future,
and expressed concern that the government's reluctance to commit the
necessary funds would adversely impact the project schedule. She
said the approvals process has been very slow, and that invoices and
requests for reimbursement are very carefully scrutinized. (NOTE:
On January 15, KMG President Kairgeldy Kabyldin suggested in a press
conference that the 2010 budget for the Kashagan project should be
reduced by nearly $3 billion, from $10 billion to $7 billion. END
NOTE). Graham added that construction work at Kashagan nearly came
to a halt at the end of 2009 when the project's environmental permit
expired. The government finally approved a new annual permit on
December 29, averting a crisis that would have cost the consortium
millions of dollars, she stated.

KMG CONFLICTED

4. (SBU) Graham highlighted national oil company KazMunaiGas' (KMG)
complicated, and often conflicted, dual role on the project, as an
equity partner with 16.81% ownership in Kashagan, and as the
government's recognized authority that must approve investment and
other decisions. According to Graham, KMG's senior managers are
trying to run the company on commercial terms according to best
business practices, but ultimately, political directives win the
day. Graham mentioned that the private-sector partners of the
Kashagan consortium often meet without their KMG counterparts,
because their internal deliberations are leaked to the government.
This situation, she asserted, has not helped to build trust and
confidence among the consortium.

THE DECISION-MAKERS AT KAZMUNAIGAS

5. (SBU) Graham called KMG President Kairgeldy Kabyldin a
"straight-talking bureaucrat," passionate about pipelines, who takes
direction from President Nazarbayev's son-in-law Timur Kulibayev,
the Deputy Chairman of National Welfare Fund Samruk-Kazyna, which
owns KMG. She revealed that KMG First Vice President Maksat Idenov
has had his portfolio sharply restricted, but did not speculate on
the reasons. Idenov, who formerly managed KMG's stake in Tengiz and
led negotiations on the Kazakhstan Caspian Transportation System
(KCTS) for the government, now only oversees Kashagan and Dunga, a
small, onshore oilfield in Mangistau oblast operated by Denmark's
Maersk Oil Kazakhstan. "Maksat is a man of principle and a good
businessman," she said, "but (KMG Managing Director for Exploration
and Production Askar) Balzhanov has taken over everything." Graham
also called NCOC Deputy Director Zhakyp Marabayev "a reliable

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partner" who is "doing a great job. He is the only reason we were
able to get our environmental permit when everyone was on vacation
at the end of the year" (reftel A).

NAZARBAYEV CRITICIZES KMG'S HIRING AND PROMOTION PRACTICES

6. (SBU) Graham described the talent pool at KMG as shallow and
highlighted ExxonMobil's difficulty in identifying qualified
applicants for long-term training in the United States. She also
asserted that appointments and promotions of KMG managers often
depend on family ties rather than technical knowledge or job skills.
In unusual public criticism, President Nazarbayev himself appeared
to confirm this claim. According to an article published in
"Kazakhstanskaya Pravda" (a semi-official government newspaper) on
December 25, 2009, Nazarbayev criticized the top managers of KMG and
its subsidiary, KMG Exploration and Production (KMG EP). "It has
been proven that the existing management system is inefficient,"
Nazarbayev said in a statement from the President's press office.
"KazMunaiGas has a four-level management system, and KazMunaiGas
Exploration and Production a five-level system. In both companies,
the number of support departments and services is higher than that
of the production units," the statement underlined.

7. (U) Subsequently, an inspection of KMG by the Presidential
Administration found that "the companies do not comply with the
qualification requirements for hiring and promoting employees." The
article claimed that more than 40% of senior managers at KMG and KMG
EP do not satisfy the experience and educational requirements
defined in their job descriptions. The inspection found that some
department directors supervise only three or four people while
others supervise as many as 30 employees. It also reported that
salaries paid to senior managers are "unreasonably high." According
to the article, President Nazarbayev instructed the inspectors to
determine whether KMG and KMG EP employ relatives of high-ranking
officials. According to the report, 7.5% of KMG staff and 2.7% of
KMG EP staff are relatives of other government officials, including
17 employees who are related to heads of other government agencies,
eight to parliament members, nine to directors of the inspected
companies, and seven to former heads of various governmental
agencies. Nazarbayev ordered the leaders of KMG and KMG EP to take
immediate steps to improve transparency and efficiency at the
companies. He additionally tasked Aslan Musin, head of the
Presidential Administration, to ensure that those who committed
violations would be held accountable.

KCTS WILL STILL NEED THE IOCS

8. (SBU) In brief comments on the Kazakhstan Caspian Transportation
System (KCTS), Graham reported that KMG's Kabyldin has made it clear
that the government will continue to insist on 100% equity in the
pipeline and marine infrastructure. However, even if the
international oil companies (IOCs) do not own the assets, she
underlined their continued expectation of guarantees on the
reliability/safety of the infrastructure, access to the pipeline and
tankers, and the stability of tariff rates before they commit their
crude to the system. Graham said that even with financing provided
by the export-credit agency of France, KMG would still not be able
to meet the financial terms of the project. She speculated that
additional subsidies from the government of France might be
forthcoming (reftel B).

9. (SBU) According to the UK Energy Officer in Astana, who met with
Kabyldin on January 12, credit lines are already in place with the
French and Japanese export-credit agencies, and KMG expects to
conclude negotiations with the French consortium by August 2010.
Kabyldin said the completion of negotiations would guarantee credit
from French and Japanese commercial banks to build KCTS. When asked
whether KMG would build KCTS without volume commitments from the
IOCs, Kabyldin reportedly replied that the renegotiated October 2008
Kashagan contract requires the IOCs to use Kazakhstani
transportation infrastructure if it meets international standards.
Kabyldin assured the UK Energy Officer that KMG would guarantee the

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IOCs a fixed tariff and long-term access to KCTS in exchange for
their volume commitments.

EITI VALIDATION

10. (SBU) As a member of Kazakhstan's National Stakeholders Council
under the Extractive Industries Transparency Initiative (EITI),
Graham provided an update on Kazakhstan's EITI validation efforts
(reftel C). She said that the external validators rated
Kazakhstan's progress as satisfactory for 15 of the 18 indicators
and requested additional information about the remaining three
indicators. While Graham was pleased about the validators' general
satisfaction with Kazakhstan's progress, she expressed frustration
about the government's apparent unwillingness to dedicate the time
and resources necessary to complete the process. "They simply won't
engage," she stated, noting the refusal of KMG's Kabyldin to meet
with the validators during their December 2009 visit to Astana.
Graham also mentioned the recommendations by a coalition of civil
society organizations involved in the EITI process to downgrade
Kazakhstan on all 18 indicators and negotiate a new memorandum of
understanding. She acknowledged NGOs' concern that they will lose
negotiating leverage with the government once Kazakhstan achieves
validation, but argued that it is unreasonable to expect all 122
parties to renegotiate the MOU at this stage. With the rapidly
approaching deadline of March 9, Graham underscored the need for
quick government action to respond to the validators' request for
information. "Kazakhstan has a chance to make positive headlines
just as it assumes leadership of the OSCE," she said. "This is a
good news story waiting to be written. It would be a shame if they
missed this opportunity."

CONOCO CONFIRMS KASHAGAN DIFFICULTIES

11. (SBU) On December 11, 2009, ConocoPhillips regional president
Colette Reynolds described to Energy Officer the Kashagan
consortium's difficulty in convincing the government's recognized
authority, KMG, to invest in Phase II expansion activities.
"There's still a lot of baggage" from the delays and cost overruns
that led to the restructuring of the original agreement, she said.


WILL THE FRENCH BUILD THE ESKENE-KURYK PIPELINE?

12. (SBU) Reynolds also asserted that the Kashagan consortium is
exploring new oil-export options, including a rail transportation
project that would carry sulfur and early oil from Kashagan (up to
300,000 barrels per day). According to Reynolds, the door remains
open for U.S. companies to play a significant role in KCTS,
including equity ownership of the Eskene-Kuryk pipeline. She noted
that Minister of Energy Mynbayev was "extremely emphatic" that no
deal had been struck with a consortium of French companies to build
the pipeline. "It's just an option on an early engineering study to
facilitate the government's access to finance," she said.

13. (SBU) On December 14, 2009, Jay Johnson, Managing Director for
Chevron's Eurasia Business Unit, told Energy Officer that KCTS
negotiations have stalled. He claimed the project has received no
volume commitments from any of the major Western oil producers in
Kazakhstan and expressed skepticism that the French consortium could
raise sufficient funding to construct the Eskene-Kuryk pipeline
without such volume commitments.

CPC EXPANSION APPROVED

14. (SBU) Johnson emphasized Chevron's priority is expansion of the
Caspian Pipeline Consortium (CPC) pipeline. He mentioned a planned
CPC Board meeting in Moscow on December 15-16 to sanction expansion
and confirmed BP's withdrawal from the Consortium, thus removing the
last obstacle to a positive decision on expansion. However, he
cautioned that "each company in the Consortium is pushing its own
interests." (NOTE: Graham verified on January 13 that the CPC
Board sanctioned expansion of the CPC pipeline and approved pre-FEED

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activities. She was not aware of any demands from the government of
Russia that the CPC companies build a new 100 metric ton oil
terminal in Novorossisk, north of current terminal. END NOTE.)

CHEVRON SKEPTICAL ABOUT SAMSUN-CEYHAN

15. (SBU) Calling the Samsun-Ceyhan pipeline a "political project,"
Johnson said Chevron would prefer to evacuate its crude from the
Black Sea via Suez supertankers through the Bosphorus, or via a
future Bourgas-Alexandropolous pipeline. He noted that the latter
would likely be more competitive, because it transits Bulgaria and
Greece, whereas Samsun-Ceyhan would be located entirely on Turkish
territory, thus giving the Turks greater leverage over shippers
(reftel D).

16. (SBU) COMMENT: It was a pleasant surprise to see President
Nazarbayev holding senior government officials publicly accountable
for results and operational efficiency. It was also rare -- but
welcome -- for the Presidential Administration to conduct an
unannounced inspection of a state-owned company and investigate
allegations of nepotism, waste, and redundancy. We suspect that
Presidential Advisor Nurlan Balgimbayev, a founder of the national
oil and gas company and a close personal friend of Nazarbayev's had
a hand in the decision. We can only hope that Nazarbayev's emphasis
on efficiency will translate into an accelerated pace on projects
such as Kashagan and KCTS, in which the government, and U.S.
companies, have a significant interest. END COMMENT.

HOAGLAND

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