08ASTANA1977, KAZAKHSTAN: INTERNATIONAL OIL COMPANIES BRIEF AMBASSADOR

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Reference ID Created Released Classification Origin
08ASTANA1977 2008-10-06 11:33 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO9249
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHPOD RUEHPW RUEHROV RUEHSR RUEHVK
RUEHYG
DE RUEHTA #1977/01 2801133
ZNR UUUUU ZZH
O 061133Z OCT 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3522
INFO RUCNCIS/CIS COLLECTIVE 0670
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0073
RUEHKO/AMEMBASSY TOKYO 0783
RUEHBS/USEU BRUSSELS
RUEHVEN/USMISSION USOSCE 1957
RUCNDT/USMISSION USUN NEW YORK 1905
RUEHNO/USMISSION USNATO 2242
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0228
RUEKJCS/SECDEF WASHDC 0150
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 04 ASTANA 001977 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/CEN, EEB/ESC, EUR/RUS 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV ELAB TX GG RS KZ
 
SUBJECT:  KAZAKHSTAN:  INTERNATIONAL OIL COMPANIES BRIEF AMBASSADOR 
ON CURRENT OPERATIONS AND FUTURE PLANS 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (U) SUMMARY:  Several international oil companies active in 
Kazakhstan briefed the Ambassador on their current operations and 
future plans in separate meetings during September 30 to October 2. 
They reported that negotiations on the Kashagan project are in their 
final stages, new exploration opportunities abound in the north 
Caspian region, and relations with the Kazakhstani government are 
generally very good.  The companies stressed the importance of 
increasing overall crude oil transportation capacity, noted that 
there will be increased risk associated with investments in Georgia, 
and maintained that the Government of Kazakhstan is seriously 
considering increasing oil exports via Iran.  END SUMMARY. 
 
TNK-BP PURSUING "MAJOR" ACQUISTION 
 
3.  (SBU) The Ambassador met on September 30 with TNK-BP Vice 
President for International Affairs Shawn McCormick, along with the 
company's Kazakhstan Country Director, Alexandr Grabovsky, and 
Senior Manager for International Affairs Sergey Tanaschuk. 
McCormick said that TNK-BP was "satisfied" with the recent 
negotiated settlement regarding its Russian Federation operations 
and confirmed that changes in company leadership and board 
composition are forthcoming.  McCormick also mentioned that TNK-BP 
will float 20% of company stock on the Russian capital markets 
within the next two years, which he expected to improve company 
morale and retention. 
 
4.  (SBU) TNK-BP has been operational in Kazakhstan for less than 
one year and the TNK-BP representatives lamented to the Ambassador 
that their company arrived on the scene too late to join one of the 
"big three" projects (i.e., Tengiz, Kashagan, and Karachaganak). 
Nevertheless, McCormick was optimistic that TNK-BP will complete a 
major onshore, upstream acquisition in northwestern Kazakhstan 
within the "next couple of months."  The location is strategic for 
TNK-BP, since it is near their existing upstream assets in Orenburg, 
Russia.  McCormick noted that TNK-BP has been a major client for 
U.S. oil service companies operating in Russia and expects to 
increase the volume of business it conducts with U.S. suppliers as 
it expand operations into Kazakhstan and elsewhere.  According to 
McCormick, during the past two years alone, TNK-BP purchased more 
than $700 million in goods and services from U.S. suppliers to 
support operations in Russia.  McCormick also expressed frustration 
that the Government of Turkmenistan has again delayed a decision on 
awarding production rights to international companies and said the 
company does not expect a decision before 2009.  "We're in the 
hopper, along with all the other companies. We're ready when they're 
ready," said McCormick. 
 
GEORGIA CONFLICT GALVANIZES EUROPEAN SUPPORT FOR NABUCCO 
 
5.  (SBU) The Ambassador met on September 30 with Wolfgang Sporrer, 
OMV Gas and Power Country Manager for the Caspian Region, to discuss 
the Nabucco gas pipeline to Europe.  Sporrer maintained that in the 
aftermath of the conflict in Georgia, political support for Nabucco 
has greatly increased and European governments have become 
"galvanized" in favor of the project.  Of course, he said, there 
have been negative consequences as well:  the risk premium for 
construction and infrastructure investments in Georgia has 
increased, and the Government of Turkmenistan is more apprehensive 
than previously.  Sporrer reported that at the September 4-5 oil and 
gas conference in Baku, Turkmen representatives had no individual 
meetings with international oil companies (IOCs).  In fact, 
according to Sporrer, Turkmenistan's delegates to the Baku 
conference allegedly had to sign a letter to President 
Berdimukhamedov before departure, vowing not to meet with IOCs. 
(NOTE:  Another conference participant claimed to Energy Officer 
that Marathon had a meeting in Baku with the Turkmenneft Chairman, 
but this could not be independently confirmed.  END NOTE).  Despite 
all of this, Sporrer said that OMV remains "very interested" in 
 
ASTANA 00001977  002 OF 004 
 
 
doing business with Turkmenistan.  "This is no time to cut and run," 
he argued, "but we may need to go slower." 
 
6.  (SBU) Sporrer was in Kazakhstan at the invitation of the 
state-owned oil company, KazMunaiGas (KMG).  He said the 
Kazakhstanis complained to him that "no one ever talks to us about 
Nabucco."  Sporrer raised the issue of Kazakhstan supplying gas to 
Europe in 2014-15, after the start-up of production at Kashagan, 
when "they will not re-inject as much gas and will have more 
available for export."  Sporrer said he told Askar Batalov, 
Executive Secretary of the Ministry of Energy and Mineral Resources, 
that it is in Kazakhstan's interests to participate in Nabucco -- at 
the very least, in order to ensure that Russia pays competitive 
market prices for gas from Kazakhstan.  However, according to 
Sporrer, his meetings were inconclusive, and it is too early to tell 
whether the Kazakhstani government is favorably disposed to 
participating in Nabucco.  (NOTE:  During an Economist Business 
Roundtable held in Astana on September 30, Batalov said that the 
Government of Kazakhstan remains committed to the agreement it 
signed with the European Union to transport Turkmen gas to Europe, 
is exploring large gas fields near the Aral Sea, will build 
additional gas processing plants to meet domestic gas demand, and is 
seriously considering building a new gas pipeline via the Aral Sea 
with the capacity to transport up to 1.5 billion cubic meters 
annually.  END NOTE.) 
 
KASHAGAN NEGOTIATIONS IN FINAL STAGES 
 
7.  (SBU) On October 1, the Ambassador met with Shell Kazakhstan 
Country Chair Campbell Keir and Corporate Affairs Manager Daniel 
Worrall.  Keir noted that Shell and other Kashagan consortium 
members were involved in negotiations that day with KMG on taxation, 
transportation, and equity allocation issues.  The Government of 
Kazakhstan had set a deadline of October 25 to conclude negotiations 
on Kashagan, but Shell hopes to conclude talks by October 15. 
Production operations at Kashagan are expected to be extremely 
expensive -- "more than the first lunar landing and five times the 
cost of the Beijing Olympics," according to Keir, with the initial 
"Experimental Phase" managed by Eni expected to cost more than $30 
billion.  Keir said that they used to refer to the initial phase as 
"EP 450" because production was supposed to reach 450,000 barrels 
per day, but out of an abundance of caution, consortium members now 
simply refer to the "Experimental Phase."  Keir said first oil is 
expected in the fourth quarter of 2013. 
 
KMG FINANCES A MYSTERY 
 
8.  (SBU) When asked how KMG plans to pay for its increased share in 
Kashagan, Keir called KMG's finances "a mystery."  He claimed that 
KMG could not tell Sir Richard Evans, Chairman of the state-owned 
Samruk holding company which owns 100% of KMG, the company's current 
cash position.  Instead, KMG told Evans that it would "get back to 
him in about three months with an answer."  (NOTE:  KMG released a 
press statement on October 2 announcing that the company had paid 
off a bridge loan of $1.05 billion ahead of schedule.  The funds 
were raised to finance KMG's purchase of an additional 8.48% stake 
in the Kashagan consortium.  A syndicate of eight banks extended the 
15-month loan in September 2007.  BNP Paribas, Societe Generale, and 
Citibank N.A. Bahrain acted as lead managers.  END NOTE.) 
 
KAZAKHSTAN CONSIDERING SOUTHERN ROUTE VIA IRAN 
 
9.  (SBU) Keir also informed the Ambassador that Shell's joint 
venture with KMG in Mangistau oblast drilled an appraisal well and 
"encountered some hydrocarbons."  Shell will do further drilling and 
conduct seismic tests in 2008-09 to determine the extent of the 
reservoir.  According to Keir, the real problem with exploration in 
the Caspian is the lack of drilling rigs and other necessary 
infrastructure.  "There simply are not enough rigs available," 
argued Keir.  He said that Shell strongly supports the Kazakhstani 
 
ASTANA 00001977  003 OF 004 
 
 
government's "multi-vector" transportation policy and informed the 
Ambassador that the Kazakhstanis are also seriously considering "the 
southern route," via Iran.  Worrall maintained that Iran has been 
active lately in the Caspian.  Under a contract from the Iranian 
government, China Oilfield Services Ltd. completed construction of 
the Alborz offshore drilling rig and, according to Worrall, Iran 
intends to deploy the rig and three tankers to drill two appraisal 
wells in "disputed territory" in the deep water of the southern 
Caspian. 
 
10.  (SBU) When asked about the Georgia conflict, Keir called it a 
"wake-up call" and said "people in government will be more 
cautious," but he downplayed its impact, calling it a political 
issue that is unlikely to detract from doing business.   Worrall 
pointed out that Sandra Roelofs, the wife of Georgian President 
Saakashvili, had arrived in Kazakhstan on September 28 for several 
high-profile meetings, which Worrall speculated would send a message 
of support and sympathy for Georgia.  (NOTE:  In fact, Roelofs 
visited Kazakhstan in her capacity as a humanitarian ambassador for 
the global "Stop TB" partnership.  END NOTE.)  Keir also announced 
that Shell will close its office in Almaty within two weeks and move 
its country headquarters to Astana. 
 
EXXONMOBIL INTERESTED IN BUYING BP'S STAKE IN KASHAGAN 
 
11.  (SBU) The Ambassador met on October 2 with Patty Graham, 
Government Relations and Public Affairs Director for ExxonMobil 
Kazakhstan.  She confirmed reports that Kashagan negotiations are in 
their final stages, with transportation and taxation issues yet to 
be resolved.  Graham also confirmed that BP is the only CPC partner 
that has yet to sign a memorandum on CPC expansion.  She said that 
BP is interested in selling both its 6% stake in CPC and its 5% 
stake (held jointly with Lukoil) in Tengizchevroil (TCO).  According 
to Graham, ExxonMobil would be interested in purchasing the TCO 
share, but BP is already in talks to sell it to KMG.  Graham claimed 
that KMG is "extremely over-extended" financially as it pursues a 
number of multi-billion dollar projects simultaneously, including 
the acquisition of 51% of MangistauMunaiGas, the increase in its 
Kashagan stake, the expansion of CPC, a $3 billion investment in 
Romanian oil company Rompetrol, and ongoing projects to construct 
oil and gas pipelines to China.  Graham said KMG had already 
withdrawn $4 billion from its $17 billion "rainy day" fund and may 
have to withdraw an additional $4 billion. 
 
TRANSPORTATION CAPACITY SEVERELY CONSTRAINED 
 
12.  (SBU) Graham stressed the importance of moving forward on the 
the Kazakhstan Caspian Transportation System (KCTS), explaining that 
up to 50% of Kashagan oil could ultimately be delivered via that 
route.  She said that oil transportation capacity is already 
constrained -- CPC is at its full capacity of 690,000 b/d -- and new 
capacity will be essential when Kashagan begins production in 2013. 
For ExxonMobil, shipment from Baku onward to European markets is the 
$64,000 question, particularly in the wake of event
s in Georgia. 
 
13.  (SBU) The Georgia conflict, Graham explained, has led 
ExxonMobil to take a "wait and see" attitude regarding future rail 
or pipeline projects through Georgia.  At a minimum, she said the 
company will expand its feasibility studies in light of what Graham 
called "additional risk."   Graham claimed that the conflict has 
also had an impact on Kazakhstan's business plans in Georgia. 
"They're worried," she said. "I do believe that they have concerns, 
because they are heavily invested in Georgia, but their number one 
priority is maintaining good relations with Russia."  Partly as a 
consequence of the conflict in Georgia and partly as a result of 
transportation capacity constraints, Graham maintained that KMG is 
seriously exploring the possibility of shipping Kashagan oil south 
via Iran.  "The French and Italians are supportive of the idea," she 
said.  (NOTE:  Italy's Eni will manage the Experimental Phase of 
Kashagan production and France's Total will provide the managing 
 
ASTANA 00001977  004 OF 004 
 
 
director for the new joint operating company that will manage the 
Kashagan production sharing agreement going forward.  END NOTE.) 
Graham also said that ExxonMobil expects significant oil production 
from fields other than Tengiz, Kashagan, and Karachaganak, saying 
"there's a lot out there" in the Caspian basin. 
 
HOAGLAND

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