08ASTANA1209, KASHAGAN UPDATE: GOK CONFIRMS DELAY OF COMMERCIAL

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Reference ID Created Released Classification Origin
08ASTANA1209 2008-07-03 05:29 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0000
RR RUEHWEB

DE RUEHTA #1209/01 1850529
ZNY CCCCC ZZH
R 030529Z JUL 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 2692
INFO RUCNCIS/CIS COLLECTIVE 0542
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L ASTANA 001209 
 
SIPDIS 
 
STATE FOR SCA/CEN M. O'MARA 
 
E.O. 12958: DECL: 06/24/2018 
TAGS: PGOV PREL EPET KZ
SUBJECT: KASHAGAN UPDATE: GOK CONFIRMS DELAY OF COMMERCIAL 
PRODUCTION 
 
REF: A. DOE FOR EKIMOFF 
     B. COMMERCE FOR HUEPER 
 
Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4(B) AND (D) 
 
1.(C) Summary:  Representatives from the Kashagan consortium 
met with their Kazakhstani counterparts in Astana the week of 
June 23 in an effort to reach final agreement on a new 
commercial development plan for Kashagan.  The two sides 
reached a tentative understanding in January, but the 
Kazakhstanis subsequently disagreed with a draft budget 
submitted by the consortium.  On June 27, the parties signed 
two memoranda, one postponing the start of commercial 
production until 2013, the other confirming the fixed tax 
regime for the consortium. A prolonged standoff was unlikely, 
with both sides negotiating from vulnerable positions.  End 
Summary 
 
2. (C) Representatives from the Kashagan consortium travelled 
to Astana on June 23 to resume negotiations with the GOK. 
The two sides reached a tentative agreement in January, with 
the consortium agreeing to pay Kazakhstan up to $5 billion 
for project delays, double the stake of KazMunayGas, and 
replace Eni as sole operator of the project.  In May, 
however, Kazakhstan asked for "more money and more value," 
ExxonMobil General Relations and Public Affairs Director for 
Kazakhstan Patty Graham told Poloff on June 19. Nevertheless, 
both sides have demonstrated good faith in trying to finalize 
an agreement, Shell's Country Manager Campbell Keir told the 
Ambassador on June 23. 
 
3. (SBU) On June 28, Energy Minister Sauat Mynbayev announced 
that the GOK has agreed to postpone the start of commercial 
extraction at Kashagan from 2011 to 2013.  If extraction is 
delayed beyond October 1, 2013, Kazakhstan will not 
compensate the consortium for its subsequent expenses, he 
said. According to Mynbayev, the two sides also signed a 
second memorandum on the tax regime for the PSA.  The 
agreement calls for "old taxes plus new estimates of 
royalty."  The tax regime for the PSA will thus remain 
unchanged and not affected by new export duties and 
extraction taxes, but the royalty rates will be increased. 
 
4. (C) Several western oil company representatives close to 
the negotiations noted that KazMunayGas is under increased 
financial pressure.  Graham described KMG as "in survivor 
mode" as they cope with a number of significant projects, 
including the purchase of a stake of MangistauMunaiGas (MMG), 
the acquisition of RomPetrol, the development of the "N" 
Block and String of Pearls fields, and the construction of 
the Pri-Kaspisky gas pipeline.  John Dabbar, Conoco Phillips 
Transportation Manager for Russia and Eurasia, told DCM on 
June 26 that the Kazakhstanis are maintaining a confident 
attitude in public, but that "when the door closes, the 
begging starts." Shell Country Manager Campbell Keir told the 
Ambassador that KMG seems short of money and that rumors 
abound that changes will occur after the July 6 national 
holiday, including KMG increasing its share of MMG from 51 to 
71 percent (Comment: KMG may need to tighten its belt, but it 
is hardly headed for the poorhouse. Just last week, KMG 
floated five- and ten- year bonds worth three billion 
dollars) . 
 
5. (C) The western oil companies are not in a better 
bargaining position, as they face damaging production delays. 
 During the final weeks of negotiations, ConocoPhillips' 
Country Manager Nick Olds reported that the Kazakhstanis were 
only approving two to three weeks of work at a time and 
withholding approval of the overall budget. According to 
Shell's Keir, costs are increasing at Kashagan because of the 
mounting costs of transporting and operating equipment, 
ironically because of rising oil prices.  Like Olds, he noted 
that the Kazakhstanis had not approved the new budget and 
called it one of the factors delaying first oil production 
(Comment: If, as we expect, KMG now approves the budget, it 
in fact will have no impact on any further delays). 
ExxonMobil's Graham said that without action the consortium 
risks losing steel mill slots for 9-18 months.  She estimates 
that the eroded value of the project is already 50% 
(Comment: Graham did not explain how she reached this figure, 
and much, if not all,  of the blame for the delays rests with 
the consortium) 
 
6. (C) The two sides are moving forward on finalizing an 
operating agreement, said Keir. According to Olds, Total will 
run the new joint operating company, with Shell responsible 
for phase two offshore development and ExxonMobil subsoil and 
drilling. Eni will complete phase one development and remain 
 
responsible for phase two onshore activity. KMG will assume 
operatorship when they are capable (Comment: A date not 
likely in the near future). 
 
7. (C) Although the new operating structure appears set, the 
road ahead for the troubled project remains difficult. Graham 
told Poloff that the Kazakhstanis assumed that when Eni was 
replaced Shell and ExxonMobil would assume the operatorship 
and "carry things
home" on the project.  Such an easy 
solution is not realistic at this point, said Graham, which 
displeases the Kazakhstanis.  Keir told the Ambassador that 
"getting from where we are now to where we want to be is not 
going to be pretty, especially for Eni." 
 
8. (C) Comment: The GOK and the Kashagan consortium took the 
first steps to resolving their conflict in January, but 
reaching a final agreement has proven difficult. 
Nevertheless, with both sides now increasingly exposed, 
pressure is escalating to find common ground.  The positive 
developments of the last week are a hopeful sign that the GOK 
and the consortium are ready to move beyond the acrimony of 
2007. Ultimately, both the GOK and the IOCs need each other, 
and have too much riding on the project to let it fail.  End 
Comment. 
 
ORDWAY

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