06ASTANA824, KAZAKHSTAN: PREPARING FOR FUTURE ROUND OF OFFSHORE

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Reference ID Created Released Classification Origin
06ASTANA824 2006-12-12 12:04 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO2719
PP RUEHDBU
DE RUEHTA #0824/01 3461204
ZNY CCCCC ZZH
P 121204Z DEC 06
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7925
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 03 ASTANA 000824 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 12/11/2016 
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: PREPARING FOR FUTURE ROUND OF OFFSHORE 
OIL TENDERS? 
 
REF: ASTANA 738 
 
Classified By: Pol-Econ Chief Deborah Mennuti; reasons 
1.4 (b) and (d). 
 
1. (C) Summary:  In early 2006, the Government of Kazakhstan 
granted a small geophysical company, Caspian Veritas LLP, 
exclusive rights to acquire seismic data over the entire 
"open" (unassigned) acreage of the Kazakhstani sector of the 
Caspian Sea.  The company -- and at least one major 
prospective client -- believe this data will be used to 
launch Kazakhstan's first-ever round of "open" tenders for 
offshore fields, perhaps as early as late 2007.  Moving to an 
open tender system would be consistent with the 2005 
Production Sharing Agreement Law, which grants priority to an 
open tender system. In the current system, individual 
companies are invited to negotiate their participation in a 
project with KazMunaiGaz (KMG), the national oil and gas 
company.  Energy Minister Izmukhambetov, however, has spoken 
publicly of delaying new tenders indefinitely, focusing the 
GOK's resources instead on developing existing fields and 
finalizing contracts already under negotiation.  A Shell 
executive, experienced in competing -- and winning -- in the 
current system, believes the "direct negotiation" approach is 
well-suited to Kazakhstan and unlikely to change in the near 
future.  End summary. 
 
Kazakhstani Law -- and Current Practice 
--------------------------------------- 
 
2. (C) Kazakhstan's July 2005 Production Sharing Agreement 
(PSA) Law was the first legislation to systematically outline 
a process for assigning offshore rights.  (Of course, PSAs 
had been signed prior to passage of the law, at Kashagan, 
Karachaganak, Tyub-Karagan, and Kurmangazy.)  The law 
specifies three ways in which offshore blocks can be 
assigned.  The "primary" method is by open or closed tender 
-- though, to date, none have been held.  The PSA Law also 
grants the GOK the right to assign blocks, without tender, if 
provided for by treaty or to "fulfill other obligations" of 
the State.  (This process was used in creating the Kurmangazy 
PSA.  Kurmangazy straddles the Kazakhstani/Russian Caspian 
boundary line, and thus presented treaty implications.) 
Finally, the PSA Law allows the "national company" 
(KazMunaiGaz) to obtain fields by "direct negotiations" with 
MEMR, and then subsequently to seek a "strategic partner" 
(without tender) to participate in field development.  This 
process, in fact, has been pursued in all of the offshore 
projects currently being negotiated with foreign oil 
companies. 
 
3. (C) The passage of the PSA Law spurred much speculation 
that, with the fundamental tender rules outlined and 
codified, the GOK would soon prepare an open tender for an 
offshore field. On several occasions since the passage of the 
law, however, Energy Minister Izmukhambetov has announced the 
GOK's intent to indefinitely postpone the tender process, in 
favor of concentrating on concluding ongoing negotiations and 
developing existing projects -- notably, Kashagan -- in which 
KMG is already a partner.  Many oil executives here subscribe 
to the theory, implicit in Izmukhambetov's statements, that 
KMG lacks the institutional capacity to manage more offshore 
projects, and/or the finances to uphold its share of further 
offshore projects. 
 
Shell Articulates Advantages of Direct Negotiations 
--------------------------------------------- ------ 
 
4. (C) With a share in Kashagan and offshore Zhemchuzhnaya, 
and an apparent lock on participation in the "N Block" 
project (reftel), Shell has arguably had more recent success 
in securing offshore Kazakhstani prospects than any other 
company.  On December 8, Martin Ferstl, Shell's Country 
Chairman, shared his impressions of the process with Econoff. 
 Ferstl suggested that the GOK preferred having companies 
negotiate directly with KMG, rather than conducting open 
tenders, because the former process allowed KMG to negotiate 
with several companies at once.  This benefited KMG early in 
the process, he said, because it allowed KMG to see each 
company's seismic data set -- and thus compensate for the 
fact that the GOK often did not have independent access to 
the best data in existence.  After seeing each company's data 
set, Ferstl continued, KMG would acquire the technical 
knowledge of the block in question well enough to conduct 
intelligent negotiations over the financial terms for access 
to the process.  Finally, he said, KMG benefited from having 
 
ASTANA 00000824  002 OF 003 
 
 
two or more project finalists bid against one another, 
because KMG was more likely to receive a fair bid that way 
than if it had to evaluate a series of tender bids against 
the technical baseline of a project that it did not 
understand very well. 
 
5. (C) To succeed in the current system, Ferstl continued, a 
company had to establish good personal relationships with 
Kazakhstani energy insiders.  Over time, he explained, the 
Kazakhstani offshore had come to be divided into separate 
"fiefdoms" associated informall
y with the one (or more) 
companies which had demonstrated persistent interest.  These 
companies tended to be the ones invited into negotiations 
with KMG.  This relationship-oriented process, Ferstl argued, 
fit Kazakhstan's culture better than the "objective," 
bureaucratic approach of a formal tender -- one reason, he 
said, why the GOK was unlikely to adopt the open tender 
process in the near future. 
 
6. (C) At the same time, Ferstl described the Kazakhstani 
system of direct negotiation with KMG as "immensely 
frustrating." Shell had spent four-and-a-half years 
negotiating access to the "N Block," he cited by way of 
example, while in most countries "a tender process would be 
concluded in six months."  Part of the reason for the long 
process, he said, was that the GOK was in no hurry to develop 
the offshore Caspian.  Ferstl cited the shortage of 
institutional resources (para. 3) as one example, along with 
the idea that the GOK's cash flow from current projects meets 
the GOK's development goals. 
 
Seismic Data Acquisition Project 
-------------------------------- 
 
7. (C) Despite the GOK's established preference to assign 
blocks via direct negotiation, there are those who believe an 
open tender process is on the horizon.  In early 2006 the 
Ministry of Energy and Mineral Resources (MEMR) concluded an 
agreement with Veritas Caspian LLP (a 50/50 joint venture 
between Salt Lake City-based Caspian Services, Inc., and 
Veritas DCG of Houston) giving Veritas Caspian an exclusive 
right to obtain seismic data over the entire open 
(unassigned) acreage of the Kazakhstani sector of the 
Caspian.  Veritas Caspian also secured the right to market 
the data for ten years on behalf of the GOK, which it will do 
by creating a seismic data database available for purchase by 
interested oil companies.  Veritas Caspian recently completed 
its first season of work, shooting approximately 660 
kilometers of 2D seismic data in the "Chagala" area of the 
Caspian -- just South of the super-giant Kashagan field. 
Veritas Caspian has largely funded its seismic acquisition 
project by offering "subscriptions" to oil companies.  In 
return for an upfront, one-time payment, subscribers are 
allowed input into which sectors of the sea Veritas Caspian 
will shoot first and most comprehensively, along with 
preferential access to the finished data, which will 
eventually be distributed to any interested buyer. 
 
8. (C/NF) Terrance Powell, Caspian Services' Vice President 
for Investor Relations, told Econoff that oil companies had 
eagerly paid to become "subscribers" to the service, and at 
least one oil major had "screamed bloody murder" after being 
told they had missed the deadline to participate.  Peter 
Claypoole, ExxonMobil's Manager for New Business Development, 
told Econoff that his company was an eager "subscriber" to 
the process, and expected that the seismic data would be used 
to launch future rounds of open tenders for offshore blocks. 
ExxonMobil, he added, was extremely interested in the 
"Primorsk" block (estimated 2 billion barrels) of the Chagala 
area, and was eagerly awaiting the completed data package and 
an anticipated tender.  Powell told Econoff that his company 
had been told that the seismic data would be used as the 
basis for an "open tender" round, perhaps as early as 
year-end 2007, but acknowledged that MEMR had sent 
conflicting signals about its intent. 
 
9. (C) Comment:  While the seismic data database being built 
could, presumably, give KMG the technical expertise it 
currently lacks to conduct an open tender, it would not 
appear to necessitate a change in the current process for 
assigning offshore blocks.  If, as Ferstl indicated, the GOK 
is comfortable linking the assignments process to various 
"soft" considerations, including interpersonal relationships 
and, presumably, Kazakhstan's broader geopolitical concerns, 
then a continuation of the status quo might be the most 
likely outcome.  End comment. 
 
ASTANA 00000824  003 OF 003 
 
 
MILAS

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