07ASTANA563, KAZAKHSTAN: KMG EXECUTIVE DISCUSSES KCTS PROCESS

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Reference ID Created Released Classification Origin
07ASTANA563 2007-03-02 10:58 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO3242
PP RUEHDBU
DE RUEHTA #0563/01 0611058
ZNY CCCCC ZZH
P 021058Z MAR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 8625
INFO RUCNCIS/CIS COLLECTIVE 0045
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 000563 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 03/01/2017 
TAGS: ENRG EPET KZ AJ
SUBJECT: KAZAKHSTAN: KMG EXECUTIVE DISCUSSES KCTS PROCESS 
 
REF: A. 06 ALMATY 1835 
 
     B. 06 ALMATY 1934 
 
Classified By: Ambassador John Ordway; reasons 1.5(b) and (d). 
 
1. (C) Summary: Arman Darbayev, KazMunaiGaz (KMG) Executive 
Director of Transportation Infrastructure, discussed KMG's 
vision of the Kazakhstan Caspian Transportation System (KCTS) 
process with Energy Officer on March 1.  Darbayev (strictly 
protect) acknowledged that the Kazakhstanis intend to use the 
fact the IGA has not yet been ratified in Kazakhstan as 
leverage in early negotiations with the Azeris -- 
negotiations which, given the minimalist nature of the IGA 
and apparent differences of opinion on key issues (Darbayev 
focused on the marine transportation concept), were likely to 
be difficult.  Darbayev explained that KMG hoped to get GOK 
approval on a general set of negotiating principles in the 
coming weeks, then launch preliminary talks with the Azeris; 
should the Azeris support a set of "minimal guarantees" 
(which had been written into the IGA at one time, but removed 
to facilitate agreement), then full HGA negotiations could be 
launched with both governments.  Darbayev indicated that KMG 
viewed the two KCTS segments -- the Eskene-Kuryk pipeline and 
the "Trans-Caspian Project" -- as requiring separate 
negotiating processes.  The pipeline, he said, would not need 
to be covered by an HGA.  The GOK was prodding KMG to move 
quickly on KCTS, he said; at the same time, many in power 
believed that the GOK had erred in rushing to sign a 
stripped-down IGA in Spring 2006, and were determined not to 
give anything away in future negotiations.  End summary. 
 
IGA Ratification as Negotiating Leverage 
---------------------------------------- 
 
2. (C) Darbayev, who as Kairgeldy Kabyldin's Deputy, is an 
active participant in the KCTS negotiations, acknowledged in 
confidence that KMG, at least, viewed the fact that 
Kazakhstan's Parliament had failed to date to ratify the IGA 
as useful leverage in negotiations with the Azeris.  Darbayev 
told Energy Officer that he had heard, indirectly, that 
during his recent visit to Kazakhstan, the Azeri Prime 
Minister had raised the issue of IGA ratification with Prime 
Minister Masimov.  While Darbayev wasn't sure what Masimov's 
had replied, he was "worried that Masimov had not been 
properly briefed" about the strategic value of leaving the 
IGA unratified for the time being. 
 
KMG's Vision of Next Steps 
-------------------------- 
 
3. (C) Darbayev explained that the Kazakhstanis needed all 
the leverage they could get in what he predicted would be 
difficult negotiations with the Azeris.  Darbayev described 
how KMG envisioned the negotiating process:  his office was 
currently drafting a "high-level" set of negotiation 
principles for approval by the GOK.  Once the GOK approved 
the principles, preliminary discussions with the Azeris would 
be launched.  (Darbayev suggested this could occur as soon as 
late March.)  Once the Azeris accepted in principle the 
"basic guarantees" that had been excluded from the IGA 
following Vice-Minister Kiinov's replacement of Kabyldin as 
lead Kazakhstani negotiator in May 2006 (Ref A), then HGA 
negotiations with both governments could begin. 
 
Major Differences on Shipping? 
------------------------------ 
 
4. (C) Darbayev identified four points to be addressed in 
negotiations with the Azeris:  (a) the "basic guarantees" had 
to either be included in the HGA, or adopted by means of a 
Government of Azerbaijan (GOAZ) decree;  (b) the GOAZ had to 
create a special tax regime for the project; (c) basic 
investor rights would have to be elaborated; and (d) the two 
sides would have to agree on a marine transportation concept. 
Darbayev noted that the last issue was likely to be 
problematic.  The GOK and investors envisioned joint 
ownership of the terminals on both sides of the Caspian, he 
said, but SOCAR President Abdullayev had recently lauded the 
planned construction of an entirely new, Azeri-owned terminal 
to receive Kazakhstani oil -- suggesting the Azeris had 
different ideas in mind.  Further, Darbayev said, the 
Kazakhstanis planned to use 40,000 - 60,000 DWT vessels to 
transport oil; the Azeris, confident that their existing, 
10-15,000 DWT fleet would dominate if tanker size were 
restricted, were likely to object. 
 
Two KCTS Segments, Two Negotiation Processes 
 
ASTANA 00000563  002 OF 002 
 
 
-------------------------------------------- 
 
5. (C) Darbayev told Energy Officer that the two components 
of the KCTS Project -- the Eskene-Kuryk pipeline and the 
"Trans-Caspian Project" (comprising a terminal at Kuryk, the 
tankers, an unloading terminal in Azerbaijan, and onward 
pipeline interconnections) -- called for different 
negotiating processes.  For example, he said, the pipeline 
project  would not have to be covered under an HGA; 
"regulation under national legislation" would suffice. 
 
No Specific Deadline f
or KCTS Completion 
---------------------------------------- 
 
6. (C) Darbayev explained that, while including 
TengizChevrOil (TCO) in the KCTS process had added a sense of 
urgency, no specific completion date -- Kashagan "first oil" 
or other -- was driving the process.  At best, he estimated, 
the negotiations could be finished and construction completed 
in 2011.  (Note: ConocoPhillips' Country Manager Nick Olds 
recently confirmed to Energy Officer that Kashagan producers 
are counting on the fact that first Kashagan oil, in fact, 
will be shipped to market by some other means, with the 
Eskene-Kuryk pipeline coming on-line afterwards.  End note.) 
The GOK was urging KMG to move the KCTS process forward 
quickly, Darbayev said.  At the same time, he added, 
"Nazarbayev and other officials recognize that we made a 
mistake in rushing to sign the IGA, and we're determined not 
to make the same mistake again." 
 
7. (C) Comment: As Kabyldin's loyal deputy, Darbayev is 
likely still smarting from Kabyldin's dismissal as lead IGA 
negotiator last Spring, and the subsequent signature of a 
revised IGA under Kiinov's leadership.  For that reason, his 
comments about Nazarbayev's -- and the GOK's -- overall 
assessment of the IGA probably cannot be taken as 
authoritative.  End comment. 
ORDWAY

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