07ASTANA848, KAZAKHSTAN: EXXONMOBIL PURSUING ONSHORE

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Reference ID Created Released Classification Origin
07ASTANA848 2007-04-03 08:58 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO2780
PP RUEHDBU
DE RUEHTA #0848/01 0930858
ZNY CCCCC ZZH
P 030858Z APR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 8980
INFO RUCNCIS/CIS COLLECTIVE 0109
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 000848 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
COMMERCE FOR ADVOCACY CENTER: BLOPP 
 
E.O. 12958: DECL: 04/02/2017 
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: EXXONMOBIL PURSUING ONSHORE 
PARTNERSHIP WITH KAZMUNAIGAZ SUBSIDIARY 
 
REF: 06 ASTANA 3178 
 
Classified By: Ambassador John Ordway; reasons 1.5(b) and (d). 
 
1. (C) Summary: Rick Vierbuchen, Vice President of ExxonMobil 
Exploration Company, informed Ambassador Ordway on March 28 
that ExxonMobil is negotiating a long-term partnership with 
KazMunaiGaz's (KMG) onshore exploration and production 
subsidiary (KMG E&P) to evaluate, acquire acreage, and 
potentially develop, acreage on Kazakhstan's northern Caspian 
shore.  Vierbuchen told the Ambassador that he had traveled 
to Kazakhstan hoping to finalize the deal, only to be told by 
KMG (parent company) President Uzakbay Karabalin that, before 
signing off on the deal, KMG needed to "sort out" KMG E&P's 
relationship with the GOK, and with KMG, following KMG E&P's 
partial privatization in September (reftel). In fact, 
Vierbuchen explained, KMG appeared to be questioning whether 
KMG E&P should, in principle, sign an "exclusivity" agreement 
covering such a large area with an international oil company 
(IOC), given that KMG E&P's "preferential rights" to that 
acreage would then be conferred indirectly upon the IOC. 
Vierbuchen asked for Embassy assistance in clarifying GOK 
intentions, and, potentially, in pursuing the deal. 
Ambassador Ordway agreed to help, while reminding Vierbuchen 
of the requirements of the advocacy process.  End Summary. 
 
ExxonMobil VP Describes New Business Interest... 
--------------------------------------------- --- 
 
2. (C) Vierbuchen, VP of the company's Caspian and Middle 
East operations, opened the March 28 meeting with a smile, 
telling the Ambassador that, though it might seem 
"masochistic" in light of Kashagan delays and the stalled CPC 
negotiations, he had come to Kazakhstan to seek new business. 
 ExxonMobil, he explained, was negotiating a "long-term" 
partnership with KMG E&P to evaluate, acquire, and 
potentially develop acreage on Kazakhstan's North Caspian 
shore.  (For details on the project, see paragraph 5.)  The 
deal had generated "a lot of low-level interest" in KMG, 
Vierbuchen explained, and he had traveled to Kazakhstan in 
hopes of finalizing the deal.  However, Karabalin had told 
him earlier in the day that KMG needed time to "sort out" KMG 
E&P's relationship with KMG, and with the GOK, following KMG 
E&P's partial privatization in September.  (Note: 
Approximately 40% of the company was sold on London's AIM and 
the Kazakhstan Stock Exchange.  End note.) 
 
3. (C) Karabalin, Vierbuchen continued, had also voiced 
concern whether KMG E&P should rightfully sign an exclusivity 
agreement, governing such a large area, with an IOC, 
particularly in light of KMG E&P's existing "preferential 
rights" to onshore acreage.  (Note: By virtue of a renewable, 
one-year "services agreement" with KMG, KMG E&P enjoys 
preferential access to unlicensed onshore oil and gas 
acreage.  The company is also the beneficiary of the State's 
"right of first refusal" upon the transfer of existing 
onshore contracts.) 
 
..and Asks for USG Assistance 
----------------------------- 
 
4. (C) Vierbuchen asked the Ambassador for help in discerning 
whether Kazakhstan's decision-makers were, in fact, seriously 
reassessing KMG E&P's role (and priority rights) in light of 
the partial IPO.  Vierbuchen also asked if, depending on the 
answers received, the Embassy would be willing to advocate 
for EM's business interest.  Ambassador Ordway told 
Vierbuchen that the USG would be happy to help in any way it 
could, subject to the legal and formal requirements of the 
advocacy process. 
 
Details of ExxonMobil's Potential Project 
----------------------------------------- 
 
5. (C) Vierbuchen characterized the new venture as "high 
risk," in part because of the relative lack of seismic data 
covering the deep strata.  The venture was decidedly 
long-term, he added, with "first oil" likely ten years away. 
The partners would first perform a "Joint Technical Study," 
including a high-definition aeromagnetic survey, over a broad 
section of the onshore.  Once promising areas were identified 
within a smaller (but still vast) "Area of Mutual Interest" 
(AMI), the partners would pursue the rights to the relevant 
acreage, either by farming-in with current owners or waiting 
until the assets were sold or licenses expired (whereupon KMG 
 
ASTANA 00000848  002 OF 002 
 
 
E&P's preferential rights could be exercised).  Only when 
this was accomplished would full production begin. 
 
6. (C) On March 29, ExxonMobil Exploration Company's 
Astana-based representative, Peter Claypoole, showed Energy 
Officer a map of the proposed AMI. The AMI extends 
approximately 100-125 kilometers inland from the Caspian Sea 
all the way around the North Caspian from the Tengiz oil 
field to the Russian border.  Claypoole explained that the 
existing leaseholders -- including British "Max Petroleum" 
and China's SINOPEC -- were currently producing oil from 
tec
hnically-easy, shallow reservoirs, while attempting to do 
what ExxonMobil was proposing to do -- conduct difficult, 
expensive seismic surveys of the deep strata whose 
characteristics were largely hidden from seismic view by 
intervening "salt caps."  These strata, Claypoole explained, 
were the same strata in which the bulk of offshore Kashagan 
reserves lay, as well as other major finds throughout the 
geological basin.  However, both because the strata were even 
deeper onshore than off, and because the intervening salt 
"cap" dissipated seismic signals, relatively little was known 
about potential reserves.  Claypoole noted that the technical 
challenges also meant that companies like Max Petroleum or 
SINOPEC -- or KMG E&P, for that matter -- were unlikely to be 
able to analyze or develop the structures on their own, 
making it more likely that the ExxonMobil/KMG E&P partnership 
would be able to obtain the relevant acreage in time. 
 
7. (C) Comment:  It would surprise us if the GOK were 
seriously considering rescinding KMG E&P's "preferential 
rights" due to the company's 40% IPO.  After all, KMG E&P 
aggressively marketed the existence of those rights in the 
run-up to the IPO, and their existence presumably does much 
to justify the current share price.  The GOK's more likely 
concern is whether it makes strategic sense for KMG E&P to 
bind itself to a single international company in the 
development of such a large portion of its onshore. 
Furthermore, it is one thing for ExxonMobil to succeed in 
promoting itself at the "working" (KMG E&P) level for a 
project like this; it is an entirely different matter to 
succeed at the "political" level (Karabalin and above), where 
ExxonMobil's current reputation as CPC expansion spoiler will 
likely lengthen the odds against it in this bid for new 
business.  End comment. 
ORDWAY

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