08ASTANA1382, KAZAKHSTAN – SPECIAL ENVOY GRAY DISCUSSES ENERGY

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Reference ID Created Released Classification Origin
08ASTANA1382 2008-08-04 02:11 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXRO2234
RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHTA #1382/01 2170211
ZNY CCCCC ZZH
R 040211Z AUG 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 2892
INFO RUCNCIS/CIS COLLECTIVE 0597
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 04 ASTANA 001382 
 
SIPDIS 
 
E.O. 12958: DECL: 08/04/2018 
TAGS: EPET EINV PGOV PREL KZ
SUBJECT: KAZAKHSTAN - SPECIAL ENVOY GRAY DISCUSSES ENERGY 
ISSUES WITH GOVERNMENT AND MAJOR COMPANIES 
 
Classified By: Amb. Ordway for reasons 1.4 (b) and (d) 
 
------- 
SUMMARY 
------- 
 
1. (C) During July 22 meetings, Kazakhstani government 
officials expressed optimism to visiting Special Envoy Boyden 
Gray regarding the restructuring of Kashagan.  They explained 
that Kazakhstan was moving forward with Azerbaijan and the 
companies on the Kazakhstan-Caspian Transportation System 
(KCTS).  They indicated that there had been forward movement 
on expansion of the Caspian Pipeline Consortium (CPC) 
pipeline.  The officials reminded Gray that Kazakhstan has 
only limited quantities of gas available. Western oil and gas 
companies stressed the high costs of energy exploration and 
development in Kazakhstan.  End Summary. 
 
-------------------- 
OPTIMISM ON KASHAGAN 
-------------------- 
 
2. (C) Special Envoy for Eurasian Energy Issues Boyden Gray 
met in Astana on July 22 with Prime Minister Karimov Masimov, 
Deputy Energy Minister Lyazzat Kiinov, KazEnergy Chairman 
Timur Kulibayev, Samruk Deputy Chairman Kairgeldy Kabyldin, 
KazMunaiGaz (KMG) First Vice President Maksat Idenov, KMG 
Vice President Daniyar Berlibayev, and representatives of 
U.S. and other western oil and gas companies.  Gray was 
accompanied by Eurasian Energy Diplomacy Coordinator 
Ambassador Steve Mann, SCA Deputy Assistant Secretary George 
Krol, and Ambassador Ordway.  Gray explained to his 
interlocutors that he was particularly interested in 
discussing the latest developments in Kazakhstan,s oil and 
gas sector, including the status of Kashagan, relations 
between the Kazakhstani government and the international 
energy companies, and energy transport issues. 
 
3. (C) Gray,s Kazakhstani government interlocutors stressed 
that Kazakhstan by and large enjoys good relations with the 
international oil and gas companies.  The officials expressed 
optimism regarding Kashagan.  Prime Minister Masimov 
explained that he had several days previously spoken by 
conference call to all the Kashagan partners.  The key issues 
have been resolved, with the project ready to move forward. 
He noted that under the latest terms, the companies will bear 
all the costs for any additional delays of first oil beyond 
2013.  Providing additional details, KMG Executive Vice 
President Idenov said that Eni, which last year had fought 
furiously to remain sole Kashagan operator, would lose that 
status within a matter of weeks.  Idenov,s vision is for 
ExxonMobil to operate onshore activities and Shell offshore, 
with Total managing the Kashagan joint operating company and 
ConocoPhillips taking the lead on budget issues.  Inpex, he 
noted, does not want to play a lead role.  Idenov explained 
he had recently raised the needed $3 billion for KMG to meet 
upcoming Kashagan cash calls, claiming that investors had 
actually oversubscribed, offering $6.4 billion in total. 
Deputy Energy Minister Kiinov complained that Kashagan,s 
delays had forced Kazakhstan to make significant revisions to 
its development plans.  The country had expected to be 
producing 130 million tons of crude by 2015.  With the latest 
delay in Kashagan,s first oil, that figure has been lowered 
to 100 million tons )- a big difference for Kazakhstan, he 
stressed. 
 
---------------------------------------- 
KAZAKHSTAN-CASPIAN TRANSPORTATION SYSTEM 
---------------------------------------- 
 
4. (C) KazEnergy Chairman Timur Kulibayev (who is also 
President Nazarbayev,s son-in-law) reminded Gray that 
Kazakhstan and Azerbaijan had signed an Inter-Governmental 
Agreement (IGA) on the Kazakhstan-Caspian Transportation 
System (KCTS) in 2007.  KCTS, he maintained, enjoys the 
support of Azerbaijan,s President Aliyev, and KazMunaiGaz 
and Azerbaijan,s SOCAR have agreed to exchange &task 
forces8 to hash out further details, which will also require 
close consultations with the international companies. 
 
5. (C) Kulibayev said the Kazakhstanis have been in 
discussions with Chevron on the pipeline portion of KCTS )- 
i.e., the pipeline to bring crude from the oil fields to 
Kazakhstan,s Caspian coast.  Chevron is prepared to move 
forward now, finance half of the pipeline's construction, and 
take an initial share of 50 percent while also agreeing to 
reduce that later to 10 or 15 percent to allow other 
companies to gain ownership shares.  ExxonMobil, with its 
stakes in both Tengiz and Kashagan, is also positive on the 
pipeline, Kulibayev maintained, but not all the other 
companies in the Tengiz and Kashagan consortiums are on board 
 
ASTANA 00001382  002 OF 004 
 
 
yet.  (Note:  Idenov claimed that Total was a particular 
problem, as it would not be able to export to Iran if U.S. 
companies had equity stakes in KCTS oil terminals.  End 
Note.)  Kulibayev recognized that this is an issue for the 
companies to resolve, but said Kazakhstan would welcome USG 
assistance in getting them to resolve their differences. 
With a lack of agreement among the c
ompanies, Kazakhstan is 
constrained in negotiating with the Azeris on the 
trans-Caspian portion of KCTS and with the Azeris and 
Georgians on transport from Baku onward.   In the meanwhile, 
TengizChevrOil is losing money by having to ship large 
volumes by rail, Kulibayev argued. 
 
-------------------------- 
TRANSPORT FROM BAKU ONWARD 
-------------------------- 
 
6. (C) Gray,s interlocutors touched only briefly on the 
issue of moving crude from Baku onward.  Masimov noted that 
Kazakhstan had committed to use the Baku-Tbilisi-Ceyhan (BTC) 
pipeline in 2006.  Kazakhstan is pleased with how things have 
been developing.  Masimov said the Kazakhstanis were 
discussing with the companies the possibility of building an 
additional pipeline from Baku, and did not think this would 
be a problem for the Azeris or Georgians.  Kulibayev said the 
Georgians were vocally supportive of Kazakhstan moving its 
crude through Georgia )- and also welcomed KMG,s 
acquisition of the Batumi oil terminal.  The Georgians, he 
explained, were willing to give Kazakhstan all opportunities 
to use existing pipelines and build new ones. 
 
----------------------------- 
CPC EXPANSION MOVING FORWARD? 
----------------------------- 
 
7. (C) Masimov told Gray that Kazakhstan,s success in moving 
forward on KCTS is leading to progress on expansion of the 
Caspian Pipeline Consortium (CPC) pipeline.  KMG Vice 
President Berlibayev said that Russia's approach had changed 
on CPC and was now closer to that of the companies.  The 
Kazakhstanis and Transneft had reached agreement.  What is 
needed now is a political decision from the Russian 
government, Kulibayev explained, adding that Kazakhstan hoped 
to get it soon.  Kiinov argued that CPC expansion is 
particularly important in handling future Kashagan volumes, 
as Kazakhstan considers a trans-Caspian pipeline to be a 
no-go for now for political reasons, as well as because of 
the topography of the sea-bed.  He also suggested expanding 
CPC to Odessa, to make the Odessa-Brody pipeline more 
commercially viable.  This would require giving Russia a 
small share in CPC, perhaps 5 or 10 percent )- but that 
should not cause any problems, Kiinov argued. 
 
------------------- 
LIMITED NATURAL GAS 
------------------- 
 
8. (C) The Kazakhstani government interlocutors explained to 
Gray that Kazakhstan produces only limited quantities of gas, 
most of which is used for domestic consumption.  Prime 
Minister Masimov argued that Kazakhstan had made a mistake in 
not focusing more on gas when it signed contracts for Tengiz 
and Kashagan that allowed the companies to reinject most gas. 
 He said Kazakhstan would respect the sanctity of those 
contracts, but would separate oil and gas components in 
future contracts.  Masimov noted that Kazakhstan actually has 
a shortage of gas in the south, because its gas is mostly 
found in the west, as a result of which it imports gas from 
Uzbekistan and is building a pipeline to bring gas from the 
west to the south.  Masimov noted that Kazakhstan had started 
negotiations with ConocoPhillips and the UAE regarding &N 
Block,8 which may be a promising area for gas.  Kulibayev 
noted the importance of a Kazakhstani gas pipeline to China, 
explaining that it will give Kazakhstan two gas customers. 
That said, gas is a very sensitive issue for the Russians, in 
a way that crude is not, he stressed.  Kazakhstan has good 
relations with Gazprom, and both the Russian and Kazakhstani 
governments support Gazprom-KMG cooperation.  Every year, 
Kazakhstan is getting a better price for the gas it sends to 
Russia, Kulibayev argued. 
 
----------------- 
KMG RESTRUCTURING 
----------------- 
 
9. (C) Idenov provided Gray with details on his efforts to 
restructure KMG.  The company, he explained, owns many fields 
that are depleted, at the tail end of the production lives. 
KMG needs to focus more on mega projects that will provide 
large, long-term cash flows.  KMG received $1.4 billion in 
profit from Tengiz in 2007 (which yielded a total of $7.2 
 
ASTANA 00001382  003 OF 004 
 
 
billion in profit for the whole consortium).  Idenov alleged 
that former KMG President Uzakbai Karabalin had made a 
fortune through contracts KMG had with a company he owned. 
Karabalin had, in fact, tried to oust Idenov from the 
company, but in the end, President Nazarbayev supported 
Idenov, and Karabalin wound up losing his job. 
 
------------ 
TURKMENISTAN 
------------ 
 
10. (C) Mann requested to Masimov that the Kazakhstanis 
explain to Turkmen President Berdymukhamedov the importance 
of developing partnerships with the international energy 
companies, as Kazakhstan had done. Masimov promised to pass 
this request to President Nazarbayev.  Kulibayev said there 
had been positive changes in Turkmenistan, and good relations 
between Berdymukhamdov and Nazarbayev, with the former 
willing to learn from the latter.  He expressed doubts about 
Turkmenistan,s capacity to meet all the commitments it had 
made on gas. 
 
------------------------------ 
VIEWS OF THE WESTERN COMPANIES 
------------------------------ 
 
11. (C) Kazakhstan-based representatives of international oil 
and gas companies told Gray that there is a very challenging 
backdrop to the exciting opportunities in Kazakhstan,s 
energy sector.  Campbell Keir, General Manager of Shell 
Kazakhstan Development, argued that the complexity of 
Kazakhstan,s oil and gas projects, together with the fact 
that the country is essentially landlocked, results in very 
high operating costs, such that many projects are only 
worthwhile pursuing if crude is priced above $85 per barrel. 
Project development is also hindered by a lack of 
infrastructure and of domestic human capital, he argued. 
Keir said that companies and governments should encourage the 
Kazakhstanis to package their energy development projects, as 
offering each project separately makes them too expensive. 
Keir pointed out the difficulties of offshore operations in 
the Caspian, where depths range from very shallow (1.5 
meters) to very deep, with work particularly complicated 
below the salt layer.  Steve Rose, General Manager of 
ExxonMobil Kazakhstan, said that there is still &lots of oil 
and gas8 likely to be discovered in Kazakhstan; the question 
is the timeframe for mobilizing the resources to develop new 
fields, as well as whether it will be profitable to do so. 
Oil and gas transport is complicated too, with export routes 
largely having to cross multiple countries, Rose explained. 
 
12. (C) Rose maintained that the Kazakhstani government was 
sending &mixed signals8 on KMG.  On the one hand, it wants 
the company to be an international leader.  On the other 
hand, the crude export duty it recently introduced hits KMG 
very hard.  The government is taking away KMG,s cash flow at 
the same time KMG just increased its stake in
Kashagan, which 
will not yield positive cash flows for many years. 
Responding to a question from Mann, Keir maintained that the 
Samruk state holding company, which is KMG,s sole 
shareholder, plays an influential role in KMG when it wants 
to, noting it had reversed some of the personnel changes new 
KMG President Burkitbayev wanted to make. 
 
13. (C) Mann asked the group how Turkey is regarded in 
Kazakhstan.  Zamira Kanapyanova, Chevron Kazakhstan Country 
Manager, said that in general, relations with Turkey are 
good.  There is appreciation for Turkey,s early recognition 
of and support for Kazakhstan.  That said, sometimes Turkey 
wants to play big brother, which does not go over well, 
Kanapyanova contended. 
 
14. (C) Gray asked the company representatives on what issues 
the USG could be of assistance to them.  Steve Rose responded 
that it is important that the companies be able to engage 
with the Kazakhstan government on its plans to introduce a 
new tax code.  He also contended that the companies are being 
&eaten alive8 by changing regulations, as a result of which 
Todd Levy, General Manager of TengizChevrOil spends 75 
percent of his time dealing with such issues, rather than 
with oil and gas.  The central government, Rose argued, needs 
to find a way to better fund regional governments, so the 
regional governments do not have to raise revenues by finding 
ways to fine the companies for alleged regulatory violations. 
 Rose also expressed the concern that with their growing 
income flows from increased production and higher prices, 
Kazakhstan and Azerbaijan would become complacent, satisfied 
with what they have, and not move forward expeditiously in 
resolving issues like transport. 
 
15.  (U) Ambassadors Gray and Mann have cleared this cable. 
 
ASTANA 00001382  004 OF 004 
 
 
ORDWAY

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