06ASTANA379, KAZAKHSTAN: ACCESS INDUSTRIES TO MANAGE EKIBASTUZ

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Reference ID Created Released Classification Origin
06ASTANA379 2006-11-01 06:16 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO5892
PP RUEHDBU
DE RUEHTA #0379/01 3050616
ZNY CCCCC ZZH
P 010616Z NOV 06
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7486
INFO RUCNCIS/CIS COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1285
RUEHIL/AMEMBASSY ISLAMABAD 2089
RUEHBUL/AMEMBASSY KABUL 0273
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 000379 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
USTDA FOR DAN STEIN, SCOTT GREENIP 
COMMERCE FOR PAUL HUEPER 
 
E.O. 12958: DECL: 11/01/2016 
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: ACCESS INDUSTRIES TO MANAGE EKIBASTUZ 
GRES II POWER PLANT 
 
REF: A. ALMATY 2155 
 
     B. ALMATY 2054 
 
Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5 (b) and (d). 
 
1. (C)  Summary:  In August 2006, U.S.-based Access 
Industries assumed management control of Kazakhstan's 50% 
share of the 1000 MW Ekibastuz Gres II power plant, 
reportedly in return for financing plant upgrades and 
constructing one or two additional 500-600 MW generating 
units.  (Russia's RAO UES owns the other 50% of Gres II.)  An 
executive of a rival generating company, AES, told Econoff 
that the decision to allow Access to buy into Gres II appears 
to have been facilitated by conflicts between RAO UES, which 
sought to sell the plant's output at below-market prices to 
Russia's electricity import monopoly, INTER RAO UES; and the 
Government of Kazakhstan (GOK), which habitually sold a 
portion of the plant's output to well-placed Kazakhstani 
entities at below-market prices.  In AES's view, Access is 
likely to impose discipline on the plant's selling 
agreements, and undertake the investment necessary to 
maintain the existing capacity, but is unlikely to spend the 
estimate $1.2 billion necessary to add 1000 MW of generating 
capacity.  End summary. 
 
2. (C) Access Industries and Kazakhstan's Ministry of Energy 
and Mineral Resources signed an agreement on August 21, 
granting Access a 50% interest of Gres II "in trust 
management" for a period of 10 years, in return for upgrading 
the plant's two existing 500 MW blocks and financing the 
construction of a third (and possibly a fourth) 500-600 MW 
block.  The deal follows by 27 months Kazakhstan's transfer 
of 50% of the plant to RAO UES as settlement of a 
long-standing, Soviet-era debt (reportedly $200 million) for 
unpaid electricity. 
 
3. (C) Access executives have thus far dodged post's requests 
for further information about the deal.  Executives of rival 
generating company AES, however, have suggested that Access 
was brought in to manage the plant in order to reconcile the 
incompatible business interests of RAO and state-owned 
Ekibastuz Energocenter JSC. AES's Regional Director for 
Eastern Europe and the CIS, Dale Perry, explained to Econoff 
that Russia wanted RAO to sell the plant's electricity at 
below-market prices to Russia's electricity import 
monopolist, INTER RAO UES, which would then resell the power 
within Russia, cutting Kazakhstan out of the profit.  The 
Kazakhstanis, in turn, were accustomed to selling Gres II 
power to well-placed Kazakhstani entities at less-than-market 
prices.  Two years after forming the joint venture, neither 
partner was happy with the other's loss-making business 
decisions, Perry concluded, so Access was brought in. 
 
4. (C) AES's Kazakhstan Country Manager, Mike Jonagan, 
amplified on the subject on September 15, telling Econoff 
that Access had been brought in to "say 'no' to 
bargain-seekers the GOK couldn't say 'no' to."  Jonagan 
explained that Access's expected rationalization of the Gres 
II contracts had already had an effect.  KazPhosphate, he 
explained -- one of Kazakhstan's largest electricity 
consumers -- had already approached AES looking for a 
low-cost electricity deal, anticipating that its below-market 
deal with Gres II would now be terminated.  (Jonagan 
explained that KazPhosphate's very survival in the face of 
low-cost Chinese competition hinged on below-market 
electricity subsidies. KazPhosphate executives and GOK 
officials alike periodically approached AES, he said, asking 
for below market electricity in order to keep the company 
alive.  Much of the rationale for GOK subsidization of the 
Zhambyl fuel-oil power plant, he added, was to keep 
KazPhosphate, and its estimated 6500 jobs, afloat.) 
 
5. (C) According to press reports, approximately $90 million 
will be needed over the next four years to upgrade Gres II's 
existing 500 MW blocks.  Perry and Jonagan estimated the cost 
of installing additional generating capacity at $600-$700 
million per 500 MW.  Jonagan told Econoff that he doubted 
that the expansion would occur at that price, especially in 
light of the fact that AES had unused 500 MW blocks at its 
Ekibastuz Gres I plant which could be brought on-line for 
 
ASTANA 00000379  002 OF 002 
 
 
$250 million apiece.  In fact, he said, Gres II management 
was actively negotiating to buy AES's Gres I spare capacity. 
"We will offer them a price," he said, "but we're unlikely to 
reach agreement."  Gres II needed the space capacity, he 
explained, in order to pursue higher-paying customers. 
Without spare capacity, he explained, Gres II could not 
guarantee uninterrupted supply, and hence had to pursue 
low-price buyers -- "regional energy companies (RECs) and 
mining compani
es."  AES, on the other hand, could guarantee 
100% reliability, and hence had its choice of the "premier 
clients."  (Access Industries President Len Blavatnik 
described another possible means for expanding Gres II 
generating capacity in a June conversation with Ambassador 
Ordway reported ref A, saying that if Access was successful 
at buying into Gres II, it might consider transferring the 
turbines from its unprofitable Petropavlosk CHP plant to Gres 
II.  The objective, he said, was to increase capacity in 
order to sell additional power into Russia.) 
 
6. (C) Comment:  While Blavatnik / Access may be targeting 
the Russian market in the short-term, the recent news that 
Blavatnik's Siberian-Urals Aluminum Company (SAUL) plans to 
launch a feasibility study for construction of an aluminum 
smelter in Kazakhstan suggests possible alternative future 
use for Gres II electricity.  End comment. 
ORDWAY

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