08ASTANA1646, KAZAKHSTAN – KARACHAGANAK FACES DIFFICULTIES AND

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Reference ID Created Released Classification Origin
08ASTANA1646 2008-09-03 06:51 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO4005
OO RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #1646 2470651
ZNR UUUUU ZZH
O 030651Z SEP 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3167
INFO RUCNCIS/CIS COLLECTIVE 0618
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS ASTANA 001646 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET EINV PGOV KZ
SUBJECT:  KAZAKHSTAN - KARACHAGANAK FACES DIFFICULTIES AND 
OPPORTUNITIES 
 
1. (SBU) Summary: Kazakhstan's Karachaganak field has large proven 
reserves of natural gas, but further Karachaganak expansion (i.e., a 
Phase III) faces obstacles, including administrative delays.  The 
Karachaganak consortium, KPO, maintains that it was recently 
pressured into paying an environmental fine, as well as to begin 
paying Kazakhstan's new crude export duty. British Gas recently 
presented a national gasification strategy to KazMunaiGas (KMG) for 
developing downstream markets.  The strategy was well-received and 
will be presented at the December Foreign Investors Council meeting. 
 End Summary. 
 
2. (U) Karachaganak is one of the world's largest oil and gas 
condensate fields, covering an area of over 280 square km and 
holding more than 1.2 billion tons of oil and condensate and 1.35 
trillion cubic meters of gas.  KPO, Karachaganak's operating 
consortium, has four international partners:  British Gas (BG Group) 
and Italy's Eni, each with a 32.5 percent interest; Chevron, with a 
20 percent stake; and Russia's LUKOIL, with a 15 per cent share. 
Karachaganak provided 25% of British Gas's annual profit for 2007. 
 
 
3. (SBU) KPO's plans for Karachaganak's Phase III expansion 
anticipate increasing condensate production from 7 million tons per 
year to 10 million tons and natural gas production from 14 billion 
cubic feet to 25 billion cubic feet.  Kazakhstan's state oil and gas 
company, KazMunaiGas (KMG), has not yet approved the expansion 
plans.  Peter Flowers, Branch Director for British Gas Kazakhstan, 
told us on August 20, that KMG would prefer a smaller expansion and 
has hesitated to approve KPO's proposal. (Note: Under the current 
PSA revenue-sharing formula, the larger KPO's capital expenditures, 
the less initial revenue will accrue to the Kazakhstanis.  End 
Note.)  Flowers does not expect KMG to grant its approval before the 
end of this calendar year.  If no approval is received by January, 
the situation would become critical, as KPO must provide advance 
notification to the Orenburg gas processing facility in order to 
lock in new gas sales contracts, he explained. 
 
4. (SBU) According to Flowers and ENI's Resident Manager Claudio 
Cogliatti, KPO was also recently pressured by the government to pay 
a large environmental fine and Kazakhstan's new crude export duty, 
both of which, they contend, it should not have to pay.  An 
environmental fine for 1.8 billion KZT ($8.5 million) was levied by 
local tax officials, despite reduced emissions and the company's 
willingness to pay a smaller fee, Flowers explained. The local 
authorities, however, refused to accept KPO's proposed lower amount 
and suspended the consortium's Kazakhstan bank accounts.  KPO has 
appealed the fine and the matter is now pending with the local 
courts. 
 
5. (SBU) Flowers claimed that customs officials refused to allow KPO 
to export gas in July unless the consortium paid the new crude 
export duty. The consortium initially refused to pay, claiming that 
its PSA made it exempt and noting that KPO did not appear on the 
Ministry of Finance's initial list of companies and projects subject 
to the export duty.  (Comment:  Prime Minister Masimov relayed a 
very different story to the Ambassador.  He said that unlike 
Tengizchevroil (TCO), KPO is not exempt from the export duty 
because, in fact, its PSA does not explicitly provide for an export 
duty exemption.  He said this fact was discovered in a review of the 
contract conducted by the GOK's U.S. attorneys and came as a bit of 
a surprise. End Comment.)  Customs officials insisted that KPO pay 
the duty and, under pressure to meet contractual commitments to 
clients, KPO ultimately paid the duty for July.  Customs officials 
then reviewed KPO's exports from the previous month and insisted KPO 
pay for June as well, which they did. To date, KPO has paid $230 
million for three months (June, July, and August), Flowers reported. 
 KPO has been able to pass along the cost of the export duty through 
the net back chain, which ultimately means that the Government of 
Kazakhstan receives a lower return on KPO profits.  According to 
Flowers, KPO is pursuing various means of resolving this dispute and 
has not ruled out taking the matter to international arbitration in 
Stockholm. 
 
6. (SBU) Flowers said that as part of its broader, long-term 
strategy in Kazakhstan, British Gas has established a working group 
with KMG to develop the domestic gas market -- an idea that was 
well-received by KMG and will be presented at the December Foreign 
Investors Council meeting.  British Gas is proposing to use gas from 
Kazakhstan, compressing it for utilization in vehicles such as taxis 
and buses. The pilot phase calls for establishing a network of 6-10 
compressed natural gas (CNG) refueling stations in Almaty, where the 
local government has expressed enthusiasm about using domestic 
reserves while simultaneously reducing pollution in the city.  In 
addition, KPO itself would convert its 300 buses and vehicles to CNG 
(Karachaganak spends $600 million on diesel fuel annually).  British 
Gas
 and KMG will share a booth to showcase the project (together 
with a CNG Mercedes-Benz) at the Kazakhstan International Oil and 
Gas Exhibition (KIOGE) in October. 
 
ORDWAY

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