07ASTANA1240, KAZAKHSTAN: PRIME MINISTER DISCUSSES OIL SECTOR

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Reference ID Created Released Classification Origin
07ASTANA1240 2007-05-08 07:28 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Astana

VZCZCXRO8485
PP RUEHDBU
DE RUEHTA #1240/01 1280728
ZNY CCCCC ZZH
P 080728Z MAY 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 9390
INFO RUCNCIS/CIS COLLECTIVE 0154
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 001240 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
 
E.O. 12958: DECL: 05/07/2017 
TAGS: ENRG EPET KZ
SUBJECT: KAZAKHSTAN: PRIME MINISTER DISCUSSES OIL SECTOR 
DEVELOPMENT STRATEGY, AUDITS OF CONTRACT COMPLIANCE 
 
REF: A. ASTANA 684 
     B. ASTANA 908 
     C. ASTANA 848 
     D. ASTANA 443 
     E. 06 ASTANA 738 
     F. 06 ASTANA 501 
 
Classified By: Ambassador John Ordway; reasons 1.5(b) and (d). 
 
1. (C) Summary: In back-to-back April 26-27 conversations 
with Commercial and Business Affairs Special Representative 
(S/R) Frank Mermoud and the Ambassador, Prime Minister 
Masimov discussed his government's strategy for developing 
Kazakhstan's oil and gas sector, its intent to audit existing 
subsoil users for compliance with their contracts, and its 
plan to review all (historical) privatization deals, to 
ensure that beneficiaries have fulfilled their contractual 
obligations.  Masimov confirmed that action on the "N Block" 
(Ref A), as well as all other oil tenders, has been 
suspended, "for a maximum of six months," while the 
Kazakhstani government figures out how to leverage the deals 
to achieve economic diversification and to increase 
value-added in hydrocarbon production.  In an April 26 
conversation with S/R Mermoud, Masimov's Advisor Yerlan 
Sagadiyev added that a lack of oil and gas transportation 
routes rendered further development of the Caspian 
problematic.  A Kazakhstani government initiative to select 
thirty domestic corporations as "national champions" and 
entrust them with large-scale investment projects as a means 
of spurring economic diversification will be reported septel. 
 End summary. 
 
New Oil Project Negotiations Suspended -- Six Months Maximum 
--------------------------------------------- -------- 
 
2. (C) On April 27, Masimov elaborated on his April 9 
conversation with the Ambassador (Ref B), telling the latter 
that the GOK had temporarily suspended action, not only on "N 
Block" negotiations, but on all ongoing oil tender 
negotiations.  (Including, presumably, ExxonMobil's efforts 
to secure rights to onshore acreage -- Ref C.)  The 
suspension would last "six months maximum," Masimov assured 
the Ambassador, while the GOK figured out how to leverage the 
tender process to achieve economic diversification and 
capture more value-added from hydrocarbon production.  (On 
April 17, Energy Minister Izmukhambetov commented publicly on 
one way in which this might be achieved, suggesting that the 
GOK might amend the hydrocarbon legislation to obligate 
subsoil users to construct refineries and other processing 
facilities.  The current, 2005 Production Sharing Agreement 
law indicates that bidders who undertake such projects will 
get preference in the allocation of offshore assets, but 
stops short of requiring them.)  The Ambassador observed 
that, if not carefully administered, such a policy could lead 
to the construction of "uneconomic" projects -- subsidized, 
in effect, by the production of crude oil.  Masimov 
acknowledged the point. 
 
3. (C) On April 25, Yerlan Sagadiyev, Masimov's Advisor, 
painted a somewhat starker picture of the GOK's latest 
thinking in a meeting with S/R Mermoud. "The problem," he 
explained, is that the government "has too much money" that 
it pours into a broad range of sectors, such as energy, 
telecommunications, and healthcare.  This, Sagadiyev 
continued, creates an unpredictable environment for the 
private sector, "scaring it away" and causing it to invest 
abroad.  Sagadiyev made clear what the government sees as the 
culprit:  "we've got a mess with oil and need to figure 
things out."  Further development of the oil sector in any 
case looks problematic, he added, as the infrastructure for 
transporting oil, "such as roads and port terminals," is 
lacking.  Moreover, Sagadiyev quoted President Nazarbayev as 
saying "I don't think we can do the Caspian without Russia." 
Finally, Sagadiyev added, no one knows how ecologically 
dangerous off-shore drilling really is.  "Too many people 
from the U.S.," he concluded, "come to Kazakhstan and say 
'Drill more, build more pipelines.' But it is not possible to 
do this." 
 
 
Reviewing Privatization Deals and Subsoil Contracts 
--------------------------------------------- ------ 
 
4. (C) Masimov briefed the Ambassador on two additional GOK 
initiatives to ensure that the state's interests were 
respected by private sector entities.  First, the GOK would 
 
ASTANA 00001240  002 OF 002 
 
 
review all past privatization deals in which the beneficiary 
had agreed to perform certain obligations -- for example, to 
create a certain number of jobs, or invest a defined quantity 
of money -- to see if the buyer had, indeed, performed those 
obligations.  Second, the GOK would review all subsoil use 
agreements, again to ensure that the contract terms were 
being respected. 
 
5. (C) While the GOK's intended review of privatization deals 
has not (yet) been publicized, Masimov has spoken publicly 
about the initia
tive to review subsoil contracts, and several 
Western oil companies have already experienced what they 
believe to be its effects.  In some contexts Masimov has 
focused his criticism on companies which obtain subsoil 
licenses but fail to invest and develop the field according 
to the agreed-upon schedule, presumably because the 
license-holders' interests are speculative, and their intent 
is to "flip" the asset rather than develop it. (The GOK 
recently passed legislation to stem this trend -- Ref D -- 
but appears to be making this issue a focus of its contract 
audits as well.)  In the same context, Masimov has also 
alluded publicly to the production delays and cost overruns 
bedeviling Kashagan field development (Ref E), perhaps laying 
the groundwork for a GOK attempt to penalize Kashagan 
partners for the disappointing results -- a battle which the 
Kashagan partners believe could happen as early as late 
summer, on the occasion of a broad project review.  Masimov 
has also pledged publicly to enforce contractual obligations 
to protect the rights, including wage equality, for 
Kazakhstani employees of foreign companies and joint ventures 
-- a hot topic, especially in the oil and gas sector, since 
the October 2006 "Tengiz riot" (Ref F).  (ConocoPhillips, for 
one, recently underwent a full-scale audit of its labor 
practices.) 
 
6. (C) The other area of recent increased GOK scrutiny has 
been in the area of environmental compliance. 
TengizChevrOil's (TCO) April 4 signature of a three-year, 
$800 million environmental spending plan against the backdrop 
of Ministry of Environment threats to revoke TCO's operating 
license is only the most-publicized example.  ExxonMobil's 
Government Relations Director, Patty Graham, told Energy 
Officer on April 25 that ExxonMobil has seen "a vast 
increase" in Environmental Ministry activity in 2007.  Other 
subsoil users -- CNPC Aktobemunaigas, KazakhOil Aktobe, 
Karachaganak Petroleum Operating Company, Karazhanbasmunai, 
PetroKazakhstan Kumkol Resources -- have all been cited in 
recent cases, most of which have been announced in the press. 
 
7. (C) Several oil industry analysts have taken the GOK's 
initiative to review subsoil contracts as a sign of its 
intent to maximize GOK revenue and force a revision of 
contracts which may have been signed on terms less favorable 
to the government than prevail in today's market for the 
country's oil assets.  Masimov, however, has been careful to 
underscore the GOK's respect for contract sanctity.  On April 
24, for example, when summing up his government's first 100 
days, Masimov declared that, "should both parties to a 
contract be fulfilling it, the contract will not be revised." 
 
8. (U) This cable has been cleared by S/R Mermoud. 
MILAS

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