08ASTANA206, OIL COMPANIES AND AMBASSADORS DISCUSS OIL AND GAS

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Reference ID Created Released Classification Origin
08ASTANA206 2008-02-04 08:04 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0002
OO RUEHWEB

DE RUEHTA #0206/01 0350804
ZNY CCCCC ZZH
O 040804Z FEB 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1655
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0379
RUEHAK/AMEMBASSY ANKARA PRIORITY 2127
RUEHTH/AMEMBASSY ATHENS PRIORITY 0144
RUEHSF/AMEMBASSY SOFIA PRIORITY 0181

C O N F I D E N T I A L ASTANA 000206 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 02/04/2018 
TAGS: EPET EINV ECON PREL KZ
SUBJECT: OIL COMPANIES AND AMBASSADORS DISCUSS OIL AND GAS 
ISSUES WITH ENERGY COORDINATOR AMBASSADOR MANN 
 
 
Classified By: Ambassador John Ordway, Reasons 1.4 (b) and (d) 
 
------- 
SUMMARY 
------- 
 
1. (C) Foreign oil company representatives told visiting 
Eurasian Energy Diplomacy Coordinator Ambassador Mann on 
January 25 that much remains to be worked out in finalizing 
the details of the new Kashagan agreement, including the role 
of KazMunaiGaz (KMG).  The EC head of delegation to 
Kazakhstan told Mann that there are serious doubts about the 
availability of sufficient quantities of Caspian gas for a 
new gas pipeline.  TengizChevrOil (TCO) executives in Atyrau 
explained to Mann on January 26 that TCO will use rail to 
move the additional crude production from TCO's second 
generation expansion, which is scheduled to come on line 
later this year.  Further TCO expansion would necessitate 
expanding the CPC pipeline or building a new pipeline route. 
TCO is continuing to reinject most of its gas production and 
thus has very limited volumes to bring to market.  TCO has 
paid its $300 million sulfur-related environmental fine, but 
will take the whole matter to arbitration, if necessary, 
including the issue of TCO's right to deduct the fine from 
royalties paid to Kazakhstan.  ExxonMobil Kazakhstan's 
General Manager in Atyrau stressed the importance of moving 
forward on the Kazakhstan Caspian Transportation System 
(KCTS) to export Kashagan's future production.  End Summary. 
 
2. (U) This cable contains sensitive proprietary business 
information. 
 
------------------------------------ 
MANY DETAILS TO WORK OUT ON KASHAGAN 
------------------------------------ 
 
3. (SBU) At a January 26 meeting in Astana, Eurasian Energy 
Diplomacy Coordinator Ambassador Steven Mann briefed local 
representatives of ExxonMobil, Chevron, ConocoPhilips, Shell, 
Eni, British Gas, and Statoil on the State Department's 
revived energy coordinator's office and USG policy for the 
second phase of Caspian oil and gas development.  New Shell 
Country Chairman Campbell Keir noted that the recent Kashagan 
deal consisted of a "one and quarter page MOU," and thus that 
many details still need to be worked out in finalizing the 
agreement over the coming months.  What exactly KazMunaiGaz 
(KMG) wants to do regarding an enhanced Kashagan role -- as 
well as what they are actually capable of doing -- remains to 
be seen, Keir stressed.  Chevron Eurasia Managing Director 
Jay Johnson said that the GOK's efforts to renegotiate 
Kashagan's terms raised serious concerns that the GOK might 
challenge other contracts, such as TengizChevrOil (TCO). 
Johnson added that there has been some positive movement on 
CPC expansion, though he acknowledged that expansion would 
not happen soon, which is why Chevron is also focusing on 
southern routes to get Kazakhstani oil to market. 
ConocoPhilips Country Manager Nick Olds noted that the GOK 
had recently instituted a new protocol under which in-country 
oil company representatives will henceforth only be received 
at the vice minister-level, not at the minister-level, as in 
the past.  From now on, ministers will only meet with more 
senior company officials from headquarters.   Olds and 
several other attendees said that this will make it more 
difficult for the companies to expeditiously resolve problems 
with the GOK. 
 
-------------------------------- 
DOUBTS ABOUT AVAILABILITY OF GAS 
-------------------------------- 
 
4. (C) At a subsequent January 26 meeting with several 
European ambassadors, EC Head of Delegation Adriaan van der 
Meer told Mann that "2007 was a bad year for us on 
pipelines," complaining specifically that the Bulgarians 
"shot us in the foot."  A trans-Caspian gas pipeline, he 
argued, would certainly be the cheapest option to bring gas 
from Kazakhstan and Turkmenistan to Europe, but there are 
serious questions about the availability of sufficient 
quantities, especially because for the foreseeable future, 
most Kazakhstani gas has to be reinjected.  He argued that 30 
bcm would be needed to make such a pipeline profitable.  On 
the more positive side, van der Meer noted that the EU's 
European Investment Bank now has a Central Asia mandate, 
which means that it could be an additional funding source for 
a pipeline.  Van der Meer also contended that the 
Kazakhstanis would much rather make deals on gas with Russia 
than with Turkey.  They appear to have struck a bad deal with 
the Turks in the past and are still upset about it.  The 
attendees agreed that there should be regular meetings in 
 
Astana of the U.S., UK, French, German, Italian, and Dutch 
ambassadors and EC head of delegation to share ideas and 
coordinate policy on oil and gas issues. 
 
--------------------------------------------- 
TENGIZCHEVROIL: CHEVRON'S MOST VALUABLE ASSET 
--------------------------------------------- 
 
5. (SBU) TengizChevrOil (TCO) General Director Todd Levy and 
his team gave Ambassador M
ann a detailed briefing on TCO's 
operations and future plans during a January 27 meeting in 
Atyrau.  Levy noted that TCO is Chevron's most valuable asset 
-- worth $24 billion to the company - and its largest revenue 
generator "by a wide margin."  Chevron made $2.7 billion in 
profit from TCO in 2007.  Levy explained that TCO produced 
just under 14 million tons of crude in 2007, which was mostly 
exported through the CPC pipeline, with just 1 million tons 
shipped by rail (to Odessa).  TCO's second generation 
expansion is expected to come on line this summer, as a 
result of which production should rise to 25 million tons by 
2010.  The additional volumes will be exported by rail.  TCO 
Strategic Planning Manager Norman Hansen explained that TCO 
had constructed "a world class rail station" at Tengiz and 
would have 13,000 rail cars for crude transport, enabling TCO 
to move by rail 15 million tons of oil annually -- 10 million 
north through Russia, and 5 million south to Aktau.  He said 
that the southern route is cheaper for TCO than the northern 
one, and added that TCO will be quiet about the large volumes 
it will move north through Russia, so as to not draw too much 
attention from the Russians. 
 
------------- 
FUTURE GROWTH 
------------- 
 
6. (SBU) A TCO "future growth option" (i.e., a third phase) 
could theoretically raise crude production to 40 million tons 
by 2015, Levy explained.  To export those volumes, a CPC 
expansion or an additional pipeline would be necessary. 
(Note: With CPC's current capacity, TCO can move between 11.5 
and 17.5 million tons of crude annually through CPC. End 
Note.)  Hansen explained that the netback from exporting via 
CPC is currently $50 per ton higher than by rail through 
Russia.  He also noted that the Atyrau-Samara pipeline, which 
has half of CPC's capacity, has no room for additional volume. 
 
7. (SBU) Discussing the southern rail route, Hansen noted 
that the Kazakhstanis had expanded rail capacity at Aktau. 
This crude is expected to be transported by 12,000 DWT, St. 
Petersburg-built tankers, making approximately 400 voyages 
annually across to Baku.  From Baku, the crude will be moved 
to the Black Sea via the Baku-Tbilisi-Ceyhan (BTC) pipeline, 
or from Baku to Supsa or Batumi.  Hansen said that TCO 
believes a good portion of the volume can go through BTC, 
though TCO does not have preferential access, since it is 
exactly 50 percent, rather than majority-owned, by Chevron. 
 
------------- 
GAS PROSPECTS 
------------- 
 
8. (SBU) Levy explained to Mann that TCO's current gas 
production is quite limited -- approximately 4 bcm, with 
about 2.3 bcm sold for Kazakhstani domestic consumption and 
the rest exported to Russia.  With the second generation 
expansion, production should rise, but only to 7 bcm.  Most 
gas is being reinjected into the reservoir to promote crude 
production.  Levy said the Kazakhstanis are not happy with 
TCO's decision to reinject, because they would like to sell 
more gas to Europe.  (Note: GOK Vice Minister of Energy 
Kiinov had argued to Levy that it does not make sense to 
reinject, because TCO is not replacing sufficient volume. 
TCO clearly disagrees with this assessment.  End Note.)  Levy 
told Mann that he did not believe TCO would be producing 
sufficient gas to justify even a small pipeline to 
Turkmenistan that would link up with a trans-Caspian 
pipeline.  Levy also noted that Kashagan initially will be 
reinjecting as well.   As far as Levy was concerned, "an oil 
pipeline is an order magnitude higher pri 
ority for TCO than a gas pipeline." 
 
---------------------- 
BENEFITS TO KAZAKHSTAN 
---------------------- 
 
9. (SBU) Levy told Mann that through the end of 2007, TCO has 
paid out over $21 billion to Kazakhstani entities (including 
taxes and royalties paid to the government, tariffs and fees 
paid to state-owned companies, purchases of 
 
Kazakhstani-produced goods and services, and salaries to 
local employees). In the next quarter, quarterly royalties to 
the GOK would rise to $600 million, from $300 million 
previously. 
 
----------------------------------- 
SULFUR AND TCO'S ENVIRONMENTAL FINE 
----------------------------------- 
 
10. (SBU) Levy explained to Mann that TCO is finally 
exporting more sulfur than the operation is producing.  Last 
year, TCO exported just over 2 million tons of sulfur, mostly 
to China and Russia, with the rest shipped primarily to the 
Mediterranean region.  Sulfur prices, he noted, are at a 
historic high.  If there were not a CIS-region shortage of 
railcars -- of open gondolas -- TCO would export more.   The 
GOK, Levy explained, was still pushing for central storage of 
the sulfur.  TCO's overall sulfur strategy is to export as 
much as possible to reduce the "backlog" further, work 
parallel on a central repository, and move forward on a pilot 
project testing several types of covers for its sulfur stacks. 
 
11. (SBU) Levy also discussed the $300 million fine for 
environmental damage from sulfur storage that Kazakstani 
courts had upheld against TCO.  Levy contended that the 
stacks have, in fact, caused no environmental damage 
whatsoever.  There has been little sulfur loss from the 
stacks, and no sulfur at all has been detected outside of 
TCO's sanitary zones.  He explained that TCO had obtained all 
the appropriate permits for sulfur production, and that there 
was no permit available or necessary for continued sulfur 
storage.  TCO had nevertheless paid the fine and had not 
withheld any royalties to the GOK to offset it.  However, TCO 
intended to take the matter to arbitration, if necessary.  It 
would insist on both its right to store sulfur without 
penalty as well as its right to consider the fine as an 
exaction and thus to offset it against royalties.  Chevron 
and ExxonMobil attorneys, together with outside counsel, 
would be arriving soon to work on the issue.  It was critical 
for Chevron and ExxonMobil to be completely linked up, Levy 
explained.  This is a sanctity of contract issue, which is 
why it is so important to the companies, he emphasized. 
 
------------------ 
LABOR PERMIT ISSUE 
------------------ 
 
12. (SBU) Levy said that local prosecutors intend to take TCO 
to court to force it to get work permits for its foreign 
employees.  He explained that under TCO's formation agreement 
-- which was signed by President Nazarbayev, though, in 
accordance which Kazakhstani law at the time, was apparently 
not ratified by Parliament -- such work permits are not 
required.  The companies, he insisted, are not going to allow 
TCO to request permits because, once again, this touches on 
sanctity of contract. 
 
--------------------------------------------- 
EXXONMOBIL:  KASHAGAN MAY NEVER BE PROFITABLE 
--------------------------------------------- 
 
13. (
SBU) In a separate January 27 meeting in Atyrau, 
ExxonMobil Kazakhstan General Manager Steve Rose told Mann 
that the Kashagan deal was a "very expensive one" for 
ExxonMobil for a project without a lot of profitability.  "We 
will have to wait and see if it ever makes money," Rose 
argued.  (Note:  Kashagan may turn out to be less profitable 
than ExxonMobil's normal standards for investment, but we 
have not heard elsewhere that Kashagan could be a money loser 
for the companies over the lifetime of the project.  End 
Note.)  The deal should lead to ExxonMobil increasing its 
Kashagan presence, though it is unclear where the new 
operating model will end up, he contended.  Rose said that 
with the Kashagan agreement, a proposal ExxonMobil had 
previously made to do joint onshore exploration with 
KazMunaiGaz (KMG) north of the Caspian is now back on, though 
it will probably take two or three years for this to turn 
into something meaningful.  The key for Kashagan is getting 
the transport agreements nailed down, Rose explained.  It is 
important for Azerbaijan and Kazakhstan to move forward on 
the Kazakhstan Caspian Transportation System (KCTS) to move 
crude by tanker across the Caspian.  With small tankers, the 
system could transport up to 1.2 million barrels per day, and 
with large ones perhaps up to 1.8 million.  Rose explained to 
Mann that it would be difficult to bypass tankers and move 
straight to a trans-Caspian pipeline for a variety of 
reasons, including Kashagan phasing issues, the time needed 
to build a pipeline, as well as the unresolved issue of 
Caspian sea delimitation.  Rose said that Nazarbayev believes 
 
he can get a deal on CPC expansion because he is allowing 
Turkmen gas to flow through Kazakhstan to Russia, but the 
prospects for expansion remain iffy. 
ORDWAY

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