06ASTANA737, TENGIZ UPDATE: RIOT DELAYS PRODUCTION INCREASE

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Reference ID Created Released Classification Origin
06ASTANA737 2006-12-06 02:55 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO7229
PP RUEHDBU
DE RUEHTA #0737/01 3400255
ZNY CCCCC ZZH
P 060255Z DEC 06
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7845
INFO RUCNCIS/CIS COLLECTIVE
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 000737 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 12/05/2015 
TAGS: ENRG EPET KZ
SUBJECT: TENGIZ UPDATE: RIOT DELAYS PRODUCTION INCREASE 
 
REF: A. ASTANA 501 
 
     B. ALMATY 2273 
 
Classified By: DCM Kevin Milas; Reasons 1.5(b) and (d). 
 
1. (C) Summary: TengizChevrOil (TCO) General Director Todd 
Levy told DCM on November 27 that the October 20 riot at 
Kazakhstan's Tengiz oil field (Ref A) -- and the subsequent 
exodus of site workers -- would likely delay "second 
generation" Tengiz production from 4-6 months, until year-end 
2007.  Levy was more sanguine about TCO's ongoing dispute 
with the GOK about sulfur disposal, reporting that the GOK 
appeared satisfied with work being done on the subject by a 
recently-created Joint Task Force.  Levy described how, 
following a request from President Nazarbayev to Chevron 
Chairman David O'Reilly, TCO had entered into negotiations to 
supply ethane (on "uneconomic terms") to a planned 
petrochemical plant near Atyrau.  The negotiations, Levy 
predicted, would fail absent renewed high-level political 
pressure.  TCO has identified several other promising oil and 
gas fields within its license area; however, with production 
"limited by surface facilities," development of these fields 
is unlikely until Tengiz is in decline.  Levy's comments on 
TCO's oil transportation vision reported septel by Embassy 
Moscow.  End summary. 
 
Brawl Delays Second-Generation Production 
----------------------------------------- 
 
2. (C) Astana DCM and Energy Officer, along with Moscow 
Energy Officer, called on Levy in Atyrau on November 27. 
Levy informed the DCM that the recent riot at Tengiz would 
likely delay the start-up of "second generation" Tengiz 
production "four to six months" from the target date of June 
2006 (Ref B).  (Note: the production increase, which will 
roughly double TCO's current output of 270,000 barrels/day, 
will occur in two stages, with an additional 100,000 b/d 
added in 2007, and another 130,000 b/d added in 2008. End 
note.)  The brawl had not interrupted current production, 
Levy explained -- TCO would meet 98.5% of its targeted 2006 
output.  However, the construction project was suffering from 
the absence of workers who had left the site after the 
incident.  (TCO Government Relations Director Anthony 
Palmeirim later specified that 1600 expatriate workers -- the 
vast majority Turks -- had left the site and had yet to 
return.  On December 1, ExxonMobil's Government Relations 
Director, Patty Graham, told Energy Officer that a total of 
4000 workers were absent, many of them Kazakhstani workers 
finding themselves without supervision.) 
 
3. (C) Levy explained that, as a consequence of the incident 
and pressures from both the central and the oblast 
governments, TCO had doubled the minimum construction wage at 
the site to roughly 54,000 tenge a year (USD 420).  Levy 
noted that TCO was actively seeking to replace Turkish 
workers on site with those of other nationalities, 
"particularly Poles and Hungarians," as the site's 
Kazakhstani workers were more accepting of non-Turkish 
supervisors. TCO was also taking a general (and much-needed, 
Levy admitted) look at the overall living conditions at the 
contractor work camps.  While the local akim would 
undoubtedly continue to get "political mileage" out of the 
incident, and made occasional threats about withholding 
low-skilled work permits, Levy was optimistic that the 
political aspects of the crisis were under control, leaving 
him to wrestle with the issue of labor supply. 
 
4. (C) Note: On November 28, Richard Fritz of AGIP KCO (the 
Kashagan field operator), told DCM that AGIP had suffered 
labor unrest a few days after the Tengiz incident.  Turkish 
workers had complained that they "felt threatened," he 
explained, and 3-4,000 Turkish workers had refused to report 
to work.  In the end, he said, AGIP had managed to get the 
vast majority back to work, losing only 200 permanently. 
ExxonMobil's Graham worried about another consequence of the 
riot in a November 29 conversation, telling Energy Officers 
that the Ministry of Education had recently published a 
document in response to the riot which called on greatly 
increased private sector (read: oil company) financing of 
vocational education programs.  The document, she said, would 
likely be a topic of conversation at the upcoming Foreign 
Investor Council meeting, where it would likely draw 
Nazarbayev's attention.  End note.) 
 
Sulfur Disposition On Track 
--------------------------- 
 
5. (C) Levy told DCM that, notwithstanding the GOK's very 
 
ASTANA 00000737  002 OF 002 
 
 
vocal late-summer criticism of TCO's sulfur stockpiles, the 
issue seemed to be under control.  TCO had formed a Joint 
Task Force with various government ministries on the issue 
two months previous, he said, which seemed to have satisfied 
the GOK of TCO's intent to resolve the problem.  TCO, Levy 
explained, was working through the Task Force to fund an 
environmental impact assessment, and to otherwise ground the 
discussion on the real (scientific) impact of the stored 
sulfur.  Levy emphasized th
at TCO was continuing to meet its 
contractual obligations to dispose of sulfur -- in 2006, he 
said, TCO would likely sell 104% of the sulfur it produced, 
while working on a sales expansion project that would 
eventually raise that rate to 125%.  Levy pointed out that, 
by the time the "Second Generation Production / Sour Gas 
Injection" project was completed, Tengiz alone would produce 
15% of the world's supply of sulfur.  Selling the 
newly-produced sulfur would be a daunting task in itself, he 
concluded, even without working to reduce the estimated 8 
million tons of sulfur stored on site. 
 
Petrochemicals -- With Political Pressure 
----------------------------------------- 
 
6. (C) Asked about reports that TCO had agreed to supply 3 
billion cubic meters (bcm) of gas annually to a planned 
petrochemical complex in Atyrau (to be built by "Kazakhstan 
Petrochemical Industries (KPI)" -- which, in turn, is owned 
by Basell, SAT & Co., and KMG E&P), Levy confirmed that 
negotiations were ongoing.  Nazarbayev had "pressed" 
Chevron's Chairman "to be supportive" of the venture, Levy 
said, adding that "the only reason we are doing this is 
politics -- just to support the President." 
 
7. (C) Levy explained that TCO and KPI had already agreed on 
a sales price, "$30-40 / thousand cubic meters," which was 
roughly half of what KPI would pay to draw gas from the 
nearby Central-Asia-Center pipeline.  In the short-term, Levy 
said, KPI would sell the unused gas fractions (once the 
ethane and/or propane was extracted) on the market.  However, 
in the medium term TCO would need the gas for re-injection, 
and so would require KPI to "backfill" the volumes it 
received, purchasing additional gas on the open market, if 
necessary, to replace the extracted fractions.  All of this, 
Levy concluded, meant that the project was probably 
"uneconomic."  KPI would likely ask for a lower gas price and 
relief from the backfill obligations, he said, "but we're 
unlikely to reach agreement" -- unless the issues resolved at 
a political level; i.e., between Nazarbayev and Chevron 
Chairman David O'Reilly. 
 
Other Promising Oil Fields 
-------------------------- 
 
8. (C) DCM met separately with a team of TCO geologists, who 
reviewed the characteristics of eight additional "prospects" 
within the license area, including "Ansagan," which had 
excited Levy during conversation in June (Ref B). All of the 
prospects appeared to have between 200 million and 1 billion 
barrels of oil, "not enough to warrant the construction of 
stand-alone facilities."  Tengiz production, in turn, was 
already limited by surface facilities ("and not by reservoir 
performance"), making it unlikely that the Tengiz facilities 
would be used to process oil from a new find.  (Note: Oil 
from Korolev, a field 10 kilometers from Tengiz, is already 
being produced using Tengiz facilities.) Meanwhile, TCO was 
under pressure from regulators to either develop more fields 
or to allow other operators in the area. TCO is contractually 
obligated to relinquish percentages of its license area over 
time -- 50% by 2008, for example.  While TCO was yet to 
relinquish acreage it thought was promising, the challenges 
of "managing the exploration license" would grow with time. 
ORDWAY

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