07ASTANA1110, KAZAKHSTAN: CHEVRON MANAGER DISCUSSES ORENBURG

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Reference ID Created Released Classification Origin
07ASTANA1110 2007-04-26 09:38 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO7861
PP RUEHDBU
DE RUEHTA #1110/01 1160938
ZNY CCCCC ZZH
P 260938Z APR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 9259
INFO RUCNCIS/CIS COLLECTIVE 0142
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 001110 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 04/25/2017 
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: CHEVRON MANAGER DISCUSSES ORENBURG 
DEAL, KCTS 
 
REF: A. ASTANA 563 
 
     B. 06 ALMATY 2273 
     C. 05 ALMATY 4264 
 
Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5 (b) 
and (d). 
 
1. (C) Summary: Luis Coimbra, Marketing and Transportation 
Manager of Chevron's Eurasia Business Unit, briefed Energy 
Officer on April 24 on Chevron's vision for the Kazakhstan 
Caspian Transportation System (KCTS) and the status of the 
Gazprom-KazMunaiGaz (KMG) joint venture to expand the 
Orenburg Gas Processing Plant.  Coimbra contested the 
conventional wisdom that shipping more than 500,000 
barrels/day (b/d) of oil across the Caspian by tanker would 
create congestion and pose safety risks; with the planned 
40-60,000 dead-weight ton (DWT) vessels and state-of-the-art 
mooring technology, he said, the KCTS system could easily 
transport 1.5 million b/d.  On the Orenburg deal, Coimbra 
reported that the Karachaganak Petroleum Operating Company 
(KPO) had finally agreed on a price for the sale of its gas, 
but that the broader negotiations between Gazprom and KMG to 
expand the plant were "falling apart."  Coimbra said that the 
Kazakhstanis were increasingly interested in building a $1.5 
billion gas processing plant near Karachaganak in Kazakhstan. 
 This plant would not only serve Kazakhstan's domestic needs, 
Coimbra said, but potentially feed gas into the 
Central-Asia-Center (CAC) pipeline in a "swap" arrangement, 
freeing Turkmen gas to be exported via a proposed pipeline to 
China.  Coimbra confirmed that TengizChevrOil (TCO) had 
recently concluded a package of agreements for shipping 
second-generation Tengiz oil, including a two-year deal to 
ship approximately 90,000 b/d through the Baku-Tblisi-Ceyhan 
(BTC) pipeline. End Summary. 
 
 
Chevron's KCTS Vision 
--------------------- 
 
2. (C)  Coimbra, TCO's lead negotiator in the KCTS 
discussions,  described the process as "moving very slowly." 
TCO's entry into the negotiations, he said, had "saved a 
dying process," but there were still significant impediments 
to progress, including the Kazakhstanis' desire to consult 
with the Azeris "on every step," and Total's lack of 
efficiency in conducting assigned technical studies. 
Kazakhstan's failure to date to ratify the IGA (Ref A), he 
added, was an additional, looming problem. Among the 
substantive issues to be resolved, the maritime segment 
appeared to be the most complex, with the Azeris promoting 
the use of 12,000 DWT vessels (which the Azeris already 
owned), and the oil companies and the Kazakhstanis favoring 
larger, 40-60,000 DWT tankers.  TCO, Coimbra said, was 
advocating the following compromise: in the initial stages of 
the project, when only Tengiz oil was available, the 12,000 
DWT ships would be used, and would call exclusively at the 
Aktau port, which would be supplied by a spur of the main 
Eskene-Kuryk pipeline.  (This pipeline would initially be 
built to carry one million b/d, expandable to 1.5 million.) 
Later, in anticipation of Kashagan oil production, a second, 
deep-water terminal would be built at Kuryk to accommodate 
the larger vessels. (Coimbra noted that it appeared as though 
the Kazakhstanis were intent on shipping their share of the 
oil -- which would increase when the "cost recovery" phase of 
Tengiz production ended -- by tanker to Iran.  This oil, he 
said, would flow from the KazTransOil terminal in Aktau.) 
 
3. (C) Asked whether the anticipated vessel traffic across 
the Caspian posed serious safety and environmental concerns, 
Coimbra acknowledged that using "fifteen" 12,000 ton vessels 
was not ideal.  However, he said, once the 40-60,000 DWT 
vessels were incorporated, with dynamic positioning systems 
and state-of-the-art loading and unloading facilities, "even 
1.5 million b/d" was feasible without significant risk. 
 
Orenburg Expansion "Falling Apart"? 
----------------------------------- 
 
4. (C) Coimbra informed Energy Officer that KPO had recently 
reached an agreement with KazRozGaz on a long-term price for 
delivery of gas to Orenburg.  (Note: British Gas Deputy Asset 
General Manager Claire Hawkings confirmed on April 13 that 
the two parties had agreed on a short-term price, but told 
Energy Officer that they were still negotiating a formula for 
adapting that price to market prices.  End note.)  However, 
Coimbra said, negotiations between KazMunaiGaz and GazProm on 
 
ASTANA 00001110  002 OF 003 
 
 
the broader terms of the joint venture to expand the Orenburg 
plant were "falling apart."  While many issues remained 
unresolved, he said, one critical one concerned the pricing 
of Kazakhstani gas.  Of the 16 billion cubic meters (bcms) of 
gas which KPO envisioned shipping to Orenburg, he explained, 
half was allocated to the Kazakhstanis:  five for re-export 
to Kazakhstan for domestic use, and another three for sale to 
Europe at $147 / thousand cubic meters (tcm), the price which 
had been announced during the July 2006 G8 Summit.  However, 
Coimbra said, the Kazakhstanis wanted
 to take the five bcms 
needed for domestic use at the front end of the deal, and 
then split the remainder (11.5 bcms) with the Russians for 
sale at $147/tcm.  (Note: Prime Minister Masimov recently 
announced that the Orenburg discussions were near completion, 
and that the Orenburg joint venture could be finalized by 
mid-May.  End note.) 
 
5. (C) Coimbra told Energy Officer that the Kazakhstanis 
appeared to be serious about constructing a five bcm, $1-2 
billion gas processing plant near Karachaganak, on 
Kazakhstani soil.  The plant would be built under terms of 
the KPO Production Sharing Agreement, he said -- and thus KPO 
partners would be able to recover the construction costs. 
The Kazakhstani vision was to reduce gas injection at 
Karachaganak (provided the field engineers confirmed that 
this would have minimal impact on oil production) and thus 
obtain an additional five bcms of gas, beyond the 16 bcms 
destined for Orenburg.  The plant would be designed to be 
easily expanded to process much larger volumes of gas, should 
the Orenburg deal fall through.  (In this "worst case" 
scenario, Coimbra explained, KPO could reinject the gas until 
the proposed gas processing plant could be brought on-line.) 
 
 
6. (C) While the GOK idea was to use the proposed plant to 
serve domestic needs, Coimbra said, there was discussion of 
linking the plant to the nearby Central Asia Center (CAC) gas 
pipeline, and even of using the Karachaganak gas in a "swap" 
operation with Turkmen gas:  five bcms would be pulled from 
the CAC in to supply the proposed pipeline to China;  these 
volumes would then be replaced in the CAC pipeline by 
Karachaganak gas.  Coimbra rated the Chinese gas pipeline 
project as "likely," explaining that, even though Turkmen gas 
supplies might be doubtful, "the Chinese are ready to pay to 
build the whole thing anyway."  Under those terms, he said, 
the project was attractive to the Kazakhstanis, who were 
seeking not only to export gas, but also to supply gas to 
Almaty and other southern population centers. 
 
7. (C) Coimbra mentioned that Chevron was conduction a 
"Caspian area gas utilization study."  One of the feasible 
options being looked at, he said, was to locate a 
gas-to-liquids (GTL) plant in Aktau, and export diesel across 
the Caspian. 
 
Transport Solutions for Second Generation Tengiz Oil 
--------------------------------------------- ------- 
 
8. (C) Coimbra told Energy Officer that TCO had recently 
concluded a series of deals for the transportation of "Second 
Generation" Tengiz production.  Of the 100,000 b/d that would 
be shipped South (by rail to Aktau, then by tanker to Baku), 
he said, around 90,000 b/d would be shipped onward via the 
BTC pipeline, with the remainder sent by rail from Baku to 
both the Batumi and Kulevi terminals on the Black Sea. 
Coimbra indicated that TCO had signed a two-year deal with 
BTC, obtaining a "favorable" $3.50 / barrel "third party" 
price, rather than the $7 / barrel "owners' rate."  (In 
addition to shipping oil South, TCO will send second 
generation oil North, by rail to Odessa.  Refs B,C.) 
 
9. (C)  Coimbra confirmed media reports of a growing rivalry 
between the SOCAR-owned Kulevi terminal and the Batumi 
terminal, now partially-owned by KMG, suggesting that the 
Batumi terminal now looked far less profitable than when KMG 
had bought its stake.  (Note: In a March 13 conversation with 
Energy Officer, KazTransOil Executive Director Sabr 
Yessimbekov admitted that Kulevi appeared destined to be the 
principal oil-export terminal on the Black Sea.  KMG was 
adapting, Yessimbekov explained, by pursuing a deal to 
construct a 5-7 million ton oil refinery adjacent to the 
Batumi terminal, with an eye toward eventually exporting 
refined products from the Batumi terminal -- effectively 
ceding the crude export market to Kulevi.  End note.) 
 
Regional Pipelines: Keen Interest in BTC Expansion 
 
ASTANA 00001110  003 OF 003 
 
 
--------------------------------------------- ----- 
 
10. (C) Coimbra informed Energy Officer that pre-FID (Final 
Investment Decision) work was underway on BTC expansion, with 
approval by partners targeted for early 2008.  In order to 
make any progress on expansion, he confided, those BTC Co. 
partners with Caspian volumes to ship (like Chevron) would 
likely have to compensate those partners which did not. 
Coimbra added that Chevron, Exxon, and Shell were forming a 
consortium and performing pre-FID work for "another (35 
million ton) Baku-Supsa" pipeline.  The ongoing problems with 
the existing Baku-Supsa line (which has been down since 
November), he said, along with a longer and larger projected 
plateau for Azeri oil production, was driving increased 
interest in both BTC expansion and the second Baku-Supsa 
pipeline.  ExxonMobil and Shell were logical partners for the 
second Baku-Supsa project, he noted, because neither had BTC 
pipeline access. 
 
11. (C) Comment:  The fact that Coimbra judges the prospects 
of KPO building a gas processing plant near Karachaganak to 
be realistic is interesting.  The presence of gas processing 
infrastructure at that site, which could be expanded 
relatively cheaply when KPO's deal to supply gas to Orenburg 
expires (if, indeed, it is ever finalized), would contribute 
significantly to prospects for a Trans-Caspian gas pipeline. 
End Comment. 
ORDWAY

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