06ASTANA204, KAZAKHSTAN: EXXONMOBIL UPDATES AMBASSADOR ON CPC

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Reference ID Created Released Classification Origin
06ASTANA204 2006-10-19 06:43 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO7341
PP RUEHDBU
DE RUEHTA #0204/01 2920643
ZNY CCCCC ZZH
P 190643Z OCT 06 ZDK(TAO)
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7332
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000204 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 10/18/2015 
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: EXXONMOBIL UPDATES AMBASSADOR ON CPC 
PIPELINE, KCTS PROJECT 
 
REF: A. ALMATY 1086 
 
     B. MOSCOW 11079 
     C. ALMATY 2273 
 
ASTANA 00000204  001.3 OF 002 
 
 
Classified By: DCM Kevin Milas; Reasons 1.5(b) and (d). 
 
1. (C) Summary:  In an October 18 meeting with Ambassador 
Ordway, ExxonMobil Country Manager David Willis described 
steps taken by his company to assert itself in the process of 
developing a Kazakhstan Caspian Transportation System (KCTS) 
to carry Kashagan (and now possibly Tengiz) crude to market. 
Willis also described how ExxonMobil had secured Chevron a 
place in the KCTS Host Government Agreement (HGA) 
negotiations -- a move which appears to signal both 
producers' interest in using the KCTS "Eskene to Kuryk" 
pipeline to ship Tengiz crude, at least during the time 
period between the pipeline's construction and CPC expansion. 
 On the subject of CPC expansion, Willis acknowledged that a 
generally-acceptable possible compromise on the CPC 
governance issue had recently emerged, but told the 
Ambassador that ExxonMobil needed assurances that it had the 
backing of Russia's decision-makers before the company 
subjected the package deal to final scrutiny.  Willis 
repeated his March comment (Ref A) that ExxonMobil had no 
interest in participating in a Burgos-Alexandropolis (B-A) 
Bosphorus bypass, stating that the company preferred to run 
the risk of an interruption in Bosphorus tanker traffic 
rather than incur the estimated $1 per barrel cost of a B-A 
bypass. End Summary. 
 
 
KCTS HGA Negotiations Underway 
------------------------------ 
 
2. (C) Willis informed the Ambassador on October 18 that the 
KCTS HGA discussions had recently been launched in London. 
While TOTAL had led the IGA negotiations to date, Willis 
explained, with ExxonMobil playing a more passive role, 
ExxonMobil had decided to play a more active role henceforth, 
and had insisted on being a signatory to an eventual 
agreement. While the KCTS system had been originally designed 
for Kashagan production, Willis explained, the  delays in 
both Kashagan production and CPC expansion meant that it made 
sense to build the Eskene (onshore from Kashagan) to Kuryk 
pipeline "early" -- rather than to time its completion to 
coincide with Kashagan production -- and to "anchor" it with 
Tengiz production. Counting both its Kashagan and its Tengiz 
shares, Willis noted, ExxonMobil "will be the biggest shipper 
of all" in the KCTS system.  In recognition of Chevron's 
interest in moving Tengiz oil to market, Willis added, 
ExxonMobil had "brought Chevron" into the KCTS discussions as 
well.  (Asked by the Ambassador whether exporting Tengiz's 
second-generation oil by the KCTS route would lessen the need 
for CPC expansion, Willis replied "no."  By the time Kashagan 
and Tengiz reached full production, he said, Kazakhstani 
shippers would need four pipeline systems: KCTS/BTC, an 
expanded CPC, an expanded Atyrau-Samara pipeline, and a 
"completely new pipeline across Russia.") 
 
3. (C) Willis explained that the KCTS project would likely 
end up consisting of two joint ventures.  The Kazakhstanis, 
he said, wanted to build, own, and operate the Eskene to 
Kuryk pipeline. ExxonMobil, he said, would suggest that they 
also assume ownership of the storage tanks on the Kazakhstani 
shore, since the storage tanks need to be operationally 
integrated into the pipeline system, as well as to avoid the 
possibility that a private, profit-sapping partner might 
enter into the transportation chain.  A different joint 
venture, he said, would likely build and operate the 
trans-Caspian portion (tankers and terminals) of the project. 
 Willis indicated that the Azeris were interested in owning 
and operating the shipping portion of the project -- 
something ExxonMobil was keen to avoid. 
 
4. (C) Willis also noted that ExxonMobil had approached KMG 
to propose that ExxonMobil represent the Kazakhstan-based oil 
producers in their negotiations with the BTC Corporation for 
onward shipment via the BTC pipeline.  ExxonMobil and KMG had 
a unique alignment of interests in all of this, Willis 
explained.  Not only did both companies own shares in both 
Kashagan and Tengiz, they (along with Shell) were the only 
Kashagan partners who did not also own shares in the BTC 
Corporation.   Thus, ExxonMobil had argued to KMG, it made 
sense for ExxonMobil to represent the Kazakhstan-based 
producers in their negotiations with BTC Corporation. 
 
 
ASTANA 00000204  002.2 OF 002 
 
 
CPC Negotiations: New Governance Proposal on Table 
--------------------------------------------- ----- 
 
5. (C) Willis informed the Ambassador that a recent, new 
proposal on CPC corporate governance held some promise for 
unblocking the long-stalled expansion negotiations (Ref B). 
The proposal would arrange voting rights to ensure that the 
GOR d
id not have the ability to change the structure of the 
venture over the objections of the non-governmental 
shareholders.  However, he said, before moving forward 
ExxonMobil needed assurances that the proposal had high-level 
Russian backing, and was not merely the creation of the 
working level team.  If ExxonMobil received a signal however, 
that high-level Russian decision-makers backed the 
compromise, the company would "engage and go forward," with 
the remaining economic issues unlikely to present a serious 
obstacle to agreement. 
 
6. (C) Willis assured the Ambassador that, on the issue of 
governance, at least, the major CPC partners were in sync. 
Willis explained that, of all the CPC partners, British 
Petroleum (BP -- with only a 2.5% share) was most ready to 
give in to Russia's demands, because BP was seeking to sell 
its share of both CPC and TengizChevroil (5%, held as a joint 
venture with Lukoil) and wanted a CPC deal in order to 
enhance the value of its holdings. 
 
ExxonMobil Not Interested in Bosphorus Bypass 
--------------------------------------------- 
 
7. (C) Continuing the conversation about CPC expansion 
negotiations, Willis told the Ambassador that ExxonMobil 
had no interest in participating in any Bosphorus bypass 
project, including Burgos-Alexandropolis.  "We just can't see 
the economics," he said, suggesting that any company which 
joined the project would pay an additional $1 per barrel of 
oil to ship crude to the Black sea, while those which did not 
sign up would "just sail through the Bosphorus, waving."  The 
Ambassador suggested that $1 per barrel seemed like a very 
reasonable "insurance premium" against the possibility that 
an accident or terrorist act might close the Bosphorus. 
Willis disagreed, replying that ExxonMobil "doesn't assess 
the risk as that great." 
 
8. (C) Comment:  We find it interesting that ExxonMobil is 
preparing to assert itself in KCTS negotiations -- both 
within the HGA process and, potentially, by leading 
negotiations between the Kazakhstan-based producers and the 
BTC Co. -- after playing only a passive role in the 
recently-completed BTC IGA negotiations.  ExxonMobil, at 
least, seems to have seized on the future Eskene-Kuryk 
pipeline as a lower-cost way to ship second generation Tengiz 
production to market than the railroad-based route currently 
being negotiated and constructed (Ref C).  Whether the HGA 
negotiations proceed rapidly enough to make KCTS a 
cost-saving alternative for Tengiz may depend on whether KMG 
-- as a Tengiz partner -- buys into ExxonMobil's (and, 
presumably, Chevron's) vision, and whether the Tengiz parties 
can impose their sense of urgency on other negotiating 
parties more habituated to the (receding) deadline of 
Kashagan's first production.  End Comment. 
ORDWAY

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