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Cablegate: Kazakhstan: First President of Kazakhoil Calls For

VZCZCXRO4189
OO RUEHIK
DE RUEHTA #0198/01 0470648
ZNR UUUUU ZZH
O 160648Z FEB 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7415
INFO RUCNCIS/CIS COLLECTIVE 2452
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1812
RUEHKO/AMEMBASSY TOKYO 2518
RUEHUL/AMEMBASSY SEOUL 1428
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 2009
RUEKJCS/SECDEF WASHDC 1857
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/AMCONSUL ALMATY 2280

UNCLAS SECTION 01 OF 02 ASTANA 000198

SENSITIVE
SIPDIS

STATE FOR SCA/CEN

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EPET SOCI KZ
SUBJECT: KAZAKHSTAN: FIRST PRESIDENT OF KAZAKHOIL CALLS FOR
GREATER CONTROL OVER NATURAL RESOURCES

ASTANA 00000198 001.3 OF 002


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

2. (SBU) SUMMARY: On February 10, Nurlan Balgimbayev -- former
Prime Minister and first president of KazakhOil -- shared his
strident opinions of the national oil company he helped to create,
the degree of local content in oil and gas exploration and
production, and the attitude and behavior of international oil
companies operating in Kazakhstan. END SUMMARY.

THE SLOW, RIGID BUREAUCRACY OF KMG

3. (SBU) Balgimbayev, who served as Prime Minister from 1997-99 and
president of KazakhOil, the predecessor to national oil company
KazMunaiGas (KMG), from 1999-2002, remains one of President
Nazarbayev's closest advisors on energy issues. Meeting with Energy
Officer alone in his private offices, Balgimbayev was surprisingly
blunt in his criticism of KMG, its affiliates, and even the Ministry
of Energy and Mineral Resources (MEMR). He called KMG "inflexible,
bureaucratic, cumbersome, slow, and generally incapable" in its
current form of managing Kazakhstan's natural resource wealth
effectively. Becoming more agitated as he spoke, Balgimbayev
pointed at the stationery and office equipment on his desk and said,
"I had to bring all this from home. Otherwise, if I had to go
through KMG, I wouldn't even have a pencil to write with!"

LACK OF FIELD EXPERIENCE HINDERS DECISION MAKING

4. (SBU) Balgimbayev said that to obtain approval for procurement
or personnel decisions, he has to go through 11 layers of KMG
management, which he said takes up to three months. According to
Balgimbayev, KMG has become a large, unwieldy bureaucracy that
cannot manage its many affiliates and daughter companies
effectively. In particular, he said that KMG owns many exploration
and production projects that lack the independence and authority to
operate efficiently. He also criticized the management of KMG, its
affiliates, and officials in the Ministry of Energy and Mineral
Resources (MEMR), who "have not worked their way up to the top.
Some of them have never worked a day in the field," he exclaimed.
Balgimbayev insisted that senior managers in KMG and MEMR must have
at least five years of relevant practical experience.

NOT A BANANA REPUBLIC

5. (SBU) Balgimbayev laid the blame for Kazakhstan's lack of
qualified senior managers squarely at the feet of the international
oil companies (IOC). "Chevron has been in Kazakhstan for almost 20
years," he said. "Surely in that amount of time, they could have
developed the skills and expertise of their local staff."
Balgimbayev was visibly upset that there are no Kazakhstani citizens
installed as managing directors of major oil and gas exploration and
production projects in Kazakhstan. Again, he blamed the IOCs.
"Your companies are so arrogant," he said. "They think they're
working in a Banana Republic. They think they're so big and
powerful, so much better than us. They have no confidence in
Kazakhstan. They think we're Africans."

NAZARBAYEV CRITICIZES KMG, IOCS

6. (U) NOTE: Balgimbayev's scathing remarks closely track with
President Nazarbayev's strong, public criticism of KMG and the IOCs
on January 22. Nazarbayev told a Cabinet meeting that he was
concerned that not enough qualified Kazakhstani petroleum engineers
and project managers are working on the largest oil exploration and
production projects in Kazakhstan. "No matter how hard we try,"
said Nazarbayev, "we cannot find more than two or three specialists
working at the top management levels. There is not a single Kazakh
(sic) citizen working as a top manager in either of the large
foreign oil companies operating in Kazakhstan!" Nazarbayev
continued. "Why is this happening?," he asked. "Why do the (IOCs)
not train and develop managers from among their local staff?" Then,
addressing the Cabinet, he ordered, "You have to deal with it." END
NOTE.

ASTANA 00000198 002.3 OF 002

"WITHOUT TENGIZ, THERE WOULD BE NO CHEVRON"

7. (SBU) When asked if the attitude and approach of Western oil
companies has changed during the past 20 years, Balgimbayev
responded bluntly. "Absolutely nothing has changed," he insisted.
"Except that now, the President supports me." Balgimbayev singled
out ExxonMobil and Chevron for particularly harsh criticism. He
recalled a meeting with ExxonMobil in 1992, when a low-level clerk
approached the Kazakhstani delegation and threw down a packet of
marketing materials -- in English, not Russian -- and said, "There.
You can read all about us in that brochure." He also alleged that
Chevron is deliberately slowing development of Karachaganak in order
to conserve resources for expansion of the Tengiz project. He also
said that Chevron and other IOCs bought Kazakhstan's most lucrative
oil fields for a song. "Chevron bought Tengiz for nothing -
nothing! And now it's worth a fortune. Tengiz saved Chevron. They
had no reserves at the time. Without Tengiz," he insisted, "there
would be no Chevron."

TAX STABILITY AND THE SANCTITY OF CONTRACTS

8. (SBU) Referring to the tax stability clauses in the oil
exploration and production contracts for Tengiz, Kashagan, and
Karachaganak, Balgimbayev said that change is inevitable, and that
it is time to redress the balance. "This is a new time, and a new
day," he exclaimed. "Companies that want to do business in
Kazakhstan will have to obey our laws and play by our rules."
Balgimbayev said that he hoped and expected that the government and
the IOCs would be able to reach a negotiated settlement, but he
warned that if push came to shove, "we always have one more bullet
than they do, because this is our country."

9. (SBU) Balgimbayev insisted that Kazakhstan has a fundamental
right to own at least a majority stake in the exploration and
production of oil on its territory, and added that KMG was preparing
to acquire a stake in Karachaganak. "I don't just mean 10 or 15%,"
he said. "I mean all of it."

10. (SBU) COMMENT: Despite (or perhaps because of) his lack of a
formal, top-level position within KMG, Balgimbayev remains a
highly-influential advisor to President Nazarbayev on energy issues.
The timing and tenor of Nazarbayev's criticisms of KMG and the tax
stability clauses of existing PSAs demonstrate that Balgimbayev
still has the President's ear. With oil prices remaining steady
above $70/barrel, perhaps Nazarbayev has calculated that the time
has come for even the most favored IOCs to play by Kazakhstan's
rules, regardless of previously negotiated agreements. It is
unclear whether the government will take the dramatic and
consequential step of dissolving the existing PSAs, but there is no
doubt that Nazarbayev and his most trusted advisors are convinced
that it is time for Kazakhstan to reassert its sovereign rights over
its natural resources. END COMMENT.

SPRATLEN

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