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Reference ID Created Released Classification Origin
07ASTANA562 2007-03-02 10:53 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

DE RUEHTA #0562/01 0611053
P 021053Z MAR 07

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000562 
E.O. 12958: DECL: 03/01/2017 
REF: 06 ASTANA 738 
Classified By: Ambassador John Ordway; Reasons 1.5 (b) and (d). 
1. (C) Summary:  Don Wallette, ConocoPhillips' (CP) Russia 
and Caspian Region President, told the Ambassador on February 
28 that the GOK had decided to postpone, indefinitely, its 
selection of foreign partners to participate in the 
development of the offshore "N" block, in order to 
re-evaluate the reservoir in light of indications that the 
block's reserves are larger than previously assumed.  This 
unexpected news follows high-level GOK assurances in 
December, given both to CP and the Ambassador, that CP would 
be given an initial 10% stake in the project, with the 
details of CP's partnership with Shell and KazMunaiGaz (KMG) 
to be worked out in early 2007.  According to Wallette, 
CP's main rival for the project, Shell, has received the same 
bad news, leaving both companies in a state of uncertainty. 
2. (C) Summary (continued):  Discussing Kashagan, Wallette 
noted that ENI's recent announcement of a late 2010 date for 
"first Kashagan oil" was still "somewhat optimistic"; a 
late-summer 2007 engineering review might bring more 
certainty.  Wallette explained that the North Caspian PSA 
partners were increasingly interested in bringing Kashagan's 
sister field, Kalamkas, online in the short term, even before 
first Kashagan production.  ENI was receptive to the idea of 
another consortium partner operating Kalamkas, Wallette 
explained, and Shell had approached CP with a joint 
operatorship proposal.  However, Wallette concluded, given 
CP's small stake (9%) in the consortium, and Kalamkas's 
relative insignificance in CP's global portfolio, the company 
was unwilling to make the personnel commitments required of 
an operator.  End summary. 
N Block: Back to Uncertainty 
3. (C) Wallette informed the Ambassador on February 28 that 
CP had recently been notified that, due to KMG's desire to 
re-evaluate the "N Block" reservoir, further negotiations on 
CP and Shell's participation in the project would be 
postponed, "perhaps until May or June."  (When CP first 
learned of the postponement, KMG sources told CP Country 
Manager Nick Olds that Kashagan delays had triggered a broad 
GOK review of its offshore Caspian development plans; later, 
however, CP received a more authoritative explanation: that 
the GOK had reason to believe that "N" Block reserves were 
larger than previously thought, and wished to re-evaluate the 
available seismic data.) Olds told the Ambassador that, as 
far as CP knew, KMG had not acquired any new data; rather, it 
would re-interpret existing data.  (Earlier in the week Olds 
speculated to Energy Officer that perhaps KMG had acquired 
new data from Chevron, which has been undertaking seismic 
data collection over a broad portion of the Caspian, 
overlapping "N" -- but by February 28 Olds seemed to have 
dismissed the possibility that Chevron's study had provoked 
the decision.) 
4. (C) Wallette termed the GOK stance "an abrupt change," 
recalling that CP had received clear notice in December, both 
from Energy Minister Izmukhambetov and Presidential 
son-in-law Timur Kulibayev, that CP would receive an initial 
10% share of the project, and partner with both Shell and 
KMG; further, CP had been told that detailed negotiations 
among the three partners, leading to signature of a "Heads of 
Agreement" (HOA), would commence in January.  While Mulva had 
not accepted that CP would receive only 10%, arguing instead 
for a 20% (CP), 20% (Shell), 60% (KMG) initial split, the 
company had weathered the delays caused by the January change 
of government fully expecting to reach closure on a deal soon 
after.  (Note: On December 15, both Izmukhambetov and Prime 
Minister Akhmetov told the Ambassador, as well, that CP would 
get an initial 10% of "N." The same day, President Nazarbayev 
also informed the Ambassador that CP would be included. End 
5. (C) Wallette noted that "N" block rival -- and potential 
partner -- Shell had also been caught off-guard by the 
announcement; Shell's Country Manager, Martin Ferstl, had 
called Olds in an attempt to understand the GOK's decision. 
(Olds reported that a KMG source had told him that, upon 
hearing the news, Prime Minister Blair had called Nazarbayev, 
only to be told the same thing -- that KMG was re-evaluating 
the field.) 
ASTANA 00000562  002 OF 002 
6. (C) Olds told the Ambassador that KMG sources had informed 
him that the GOK's "N" block strategy was dependent on the 
outcome of the reevaluation.  If the reserve estimates grew 
substantially, the GOK would either launch an entirely new 
tender process, split the block in two and run separate 
tenders -- or, conceivably, "stay the course" with Shell and 
CP.  Ambassador Ordway raised the possibility that this 
latest news was (another) GOK tactic designed to squeeze the 
maximum amount of money out of Shell and CP before going &#x
000A;forward.  Did it not make sense, he asked, for Shell and CP 
to join forces, both to consolidate their position and to 
eliminate the possibility of being played off against one 
another?  Wallette and Olds agreed that it was time to 
re-evaluate CP's strategy, and that approaching Shell with 
such an offer was certainly worth another look. 
Kashagan:  Kalamkas Oil First? 
7. (C) Turning to Kashagan, Wallette suggested that operator 
ENI's recent announcement that first oil would be delayed 
until 2010 "meant December 31, 2010," and, even at that, was 
still "somewhat optimistic."  The consortium would likely 
know more by the end of the summer, he said, after further 
engineering work was done.  Wallette added that the 
consortium would have to provide the GOK with a revised 
development plan and budget during the summer -- which would 
likely provoke a "tough" GOK reaction. 
8. (C) Wallette told the Ambassador that a recent appraisal 
well at Kashagan's sister field, Kalamkas, had been "very 
successful."  Furthermore, he said, unlike Kashagan, Kalamkas 
gas was "sweet," making overall field development "no harder 
than routine North Sea work."  As a consequence, the 
consortium partners were seriously considering bringing 
Kalamkas oil to market early, ahead of Kashagan first oil. 
ENI, Wallette added, was open to the idea of appointing a 
sub-contractor as Kalamkas operator, so long as the field 
remained under the Kashagan Production Sharing Agreement, and 
so long as the operator adhered to the current development 
concept -- i.e., so long as Kalamkas oil was produced early, 
in order to help compensate for Kashagan delays.  (Wallette 
pointed out that accelerating the date of Kalamkas production 
was not necessarily the best economic decision.) 
9. (C) Shell had approached CP with a proposal to jointly 
operate Kalamkas, Wallette said.  Given their respective 
shares in the AGIP KCO consortium, and Kalamkas's relatively 
small size, neither company wanted to operate alone.  In 
fact, Wallette added, CP had turned down Shell's offer, 
unwilling to commit large numbers of its skilled personnel to 
operate what was, in global terms, a relatively insignificant 
project.  The CP executives reported that ExxonMobil was also 
rumored to be a candidate for the Kalamkas operatorship. 
10. (C) Comment.  The GOK's decision to delay a "N" Block 
deal is, of course, disappointing.  It is also mysterious -- 
is there, in fact, new seismic data?  Is this move a GOK ploy 
to squeeze more money out of CP and Shell, or perhaps to 
introduce new partner companies into the deal?   However, it 
is too early to assume that the GOK's promise of 10% CP 
participation has been broken.  While CP may find itself 
forced to raise its offer in the face of new reserve 
estimates, or even match another company's better offer in 
order to secure its promised 10%, we continue to take some 
comfort, at least, in the high-level promises made in 
mid-December.  End comment. 


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