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Reference ID Created Released Classification Origin
07ASTANA3318 2007-12-14 09:27 2011-08-30 01:44 CONFIDENTIAL Embassy Astana


DE RUEHTA #3318/01 3480927
O 140927Z DEC 07 ZDK CITING RUEHCB #6313 3481213

C O N F I D E N T I A L ASTANA 003318 
E.O. 12958: DECL: 12/14/2017 
REF: (A) ASTANA 3281 (B) ASTANA 3226 
Classified By: Ambassador John Ordway, Reasons 1.4 (b) and (d) 
1. (C) ConocoPhillips CEO James Mulva told the Ambassador on 
December 13 that he sees prospects for a deal under which Eni 
will be replaced as Kashagan operator, with three of the 
larger consortium members developing the field as joint 
operators.  All companies in the Kashagan consortium except 
ExxonMobil have agreed to increase the stake of KazMunayGaz 
(KMG) in the project.  A negotiating group is working in 
London to establish the compensation due Kazakhstan for 
Kashagan delays and cost overruns.  While in Kazakhstan, 
Mulva will also discuss with the GOK the results of a 
ConocoPhillips study of the country's gas transportation 
options and make a renewed pitch for a ConocoPhillips role at 
N-Block and the Northern Caspian Jurassic Block.  End Summary. 
2. (C) In a meeting with the Ambassador on December 13, 
ConocoPhillips CEO James Mulva discussed two key outstanding 
issues in the Kashagan dispute:  operatorship and 
compensation for Kazakhstan.  Mulva told the Ambassador that 
he sees the emergence of a deal under which three of the 
larger companies in the Agip Kashagan Consortium (which 
consists of Eni, Total, ExxonMobil, Shell, ConocoPhillips, 
and KazMunayGaz) will develop the field under a joint 
operator model, with perhaps one company taking the lead on 
each of the three main aspects of the project:  on-shore, 
off-shore, and pipeline.  A joint operatorship might require 
the creation of a new entity, which could be lightly staffed 
with just a dozen or so key people, he explained.  According 
to Mulva, Eni may remain responsible for developing 
Kashagan's initial phase - and may even be left in place for 
the longer run as the formal operator, in order for the 
company to "save face."  Full-field development, however, is 
beyond Eni's capabilities and must be performed by larger 
companies, contended Mulva.  Since ConocoPhilips owns a 
smaller share than the others, it has decided not to take a 
leading role in the negotiations, and will accept what 
ExxonMobil, Shell, and Total work out. 
3. (C) Mulva explained that the Kazakhstanis continue to ask 
for $7 billion dollars in compensation for the Kashagan 
development delays.  At a $55 per barrel price for oil, the 
project is not even worth $7 billion dollars, he argued. 
Thus, the consortium members have said no to this demand. 
Mulva said that all the companies except ExxonMobil have 
agreed to a dilution of their ownership share and thus an 
increase in KMG's equity stake of 8.33 percent.  The sides 
are negotiating in London to establish the value of the 
additional ownership stake.  The companies expect that KMG 
would pay something for the stake, and the difference between 
the valuation of the stake and KMG's payment would be part of 
Kazakhstan's compensation.  Mulva reminded the Ambassador 
that valuation is a very complicated process, requiring the 
sides to agree on a number of factors, including future oil 
prices and an appropriate discount rate. 
4. (C) Mulva contended that the main issue for ExxonMobil is, 
in fact, what the fair market price is for KMG's increased 
share - hinting that in the end, ExxonMobil would agree to go 
along with dilution once this is worked out.  (Note:  During 
a December 3 meeting in Washington, ExxonMobil International 
Governmental Affairs Manager David Bailey told the Ambassador 
that ExxonMobil is prepared to agree to dilution if 
compensated.  End Note.)  Mulva explained that if ExxonMobil 
is offered a piece of the operatorship and the valuation 
issue is resolved, then the other companies will have more 
leverage to pressure ExxonMobil to finalize a deal.  Mulva 
argued that all of the consortium members agree that "we need 
to get this done," particularly because further delays may 
force the consortium to shut down portions of the project. 
Even brief delays now may delay the project by several years, 
as equipment, supplies, and personnel are reallocated to 
other projects around the world. 
--------------------------------------------- ------------- 
ConocoPhilips Pushes for Additional Projects in Kazakhstan 
--------------------------------------------- ------------- 
5. (C) Mulva told the Ambassador that the main reason for his 
trip to Kazakhstan is, in fact, to lobby for a role for 
ConocoPhillips in two major off-shore projects and to discuss 
the results of a ConocoPhillips study on gas.  ConocoPhillips 
remains very interested in developing N-Block, said Mulva. 
Nevertheless, Kazakhstan still insists that it will undertake 
at least the initial project development on its own. 
ConocoPhillips has also conveyed its interest on the Northern 
Caspian Jurassic field and will continue to push for 
involvement, although Kazakhstan has received 15-20 other 
proposals, according to Mulva.  In general, he said,
Kazakhstan is delivering the message that it wants to solve 
Kashagan before discussing new projects. 
6. (C) Mulva will also discuss with the Kazakhstanis the 
results of a study on Kazakhstan's gas performed by 
ConocoPhillips upon the suggestion of Prime Minister Masimov 
in June.  Masimov expressed Kazakhstan's interest for further 
information on options beyond traditional exploration and 
development projects, including LNG, CNG, and pipelines. 
Nick Olds, Conoco Phillips Country Manager for Kazakhstan, 
reported that the study revealed that Kazakhstan's three best 
gas options are continued northern transport through Russia, 
a trans-Caspian option, and a pipeline to China. All other 
options, including LNG and CNG, make little economic sense. 
7. (C) Mulva's comments, and President Nazarbayev's recent 
assurances to the Ambassador that Kazakhstan will not 
invoke its sub-soil law, strengthen our belief that the 
Kashagan dispute will be resolved through negotiations, 
although not likely before the latest December 20 deadline. 
Thus far, Kazakhstan has handled the negotiations skillfully, 
driving a hard bargain without scaring off investors, as 
witnessed by Mulva's visit to push for further investment in 
the country. 


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