08ASTANA2479, KAZAKHSTAN: SOCAR DISCUSSES TRANS-CASPIAN OIL

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Reference ID Created Released Classification Origin
08ASTANA2479 2008-12-18 17:17 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO9962
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #2479/01 3531717
ZNR UUUUU ZZH
O 181717Z DEC 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4123
INFO RUCNCIS/CIS COLLECTIVE 0942
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0344
RUEHKO/AMEMBASSY TOKYO 1049
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0509
RUEKJCS/SECDEF WASHDC 0418
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 0998

UNCLAS SECTION 01 OF 02 ASTANA 002479 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, EUR/CARC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV AJ KZ
SUBJECT:  KAZAKHSTAN:  SOCAR DISCUSSES TRANS-CASPIAN OIL 
TRANSPORTATION SYSTEM 
 
REF: (A) ASTANA 2266 (B) ASTANA 2317 
 
ASTANA 00002479  001.2 OF 002 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  On December 12, Energy Officer met with Vurgun 
Jafarov, State Oil Company of the Azerbaijan Republic (SOCAR) 
Country Director for Kazakhstan, and Fuad Khodjayev, SOCAR Country 
Manager, to discuss the November 14 agreement between SOCAR and 
KazMunaiGas (KMG) to develop a trans-Caspian oil transportation 
system.  The proposed system would ship crude from Eskene (near 
Atyrau on Kazakhstan's northwestern Caspian coast) to Baku via 
pipeline and tanker.  Jafarov said SOCAR and KMG will establish a 
50-50 joint venture and are capable of carrying out the project 
independently, although he acknowledged that certain details -- such 
as who will build and upgrade port infrastructure in Kazakhstan, who 
will build and own the tankers, and what transit tariffs the joint 
venture will charge -- have yet to be negotiated.  Also on December 
12, SOCAR and KMG officials delivered a presentation in Baku to the 
regional vice presidents of international oil companies with major 
upstream assets in Kazakhstan and stressed to them that the project 
will need guaranteed delivery of oil from Tengiz, Karachaganak, and 
Kashagan in order to move forward.  END SUMMARY. 
 
3.  (SBU) Aspects of the November 14 agreement have been reported 
previously (reftel A), but this was the first opportunity to discuss 
specifics with SOCAR representatives in Kazakhstan, who arrived in 
September and are still renovating their new office.  The proposed 
trans-Caspian oil transportation system would ship Kazakhstani crude 
westward via pipeline from Eskene to Kuryk, then via tanker from 
Kuryk to Baku, and from there to global markets via the 
Baku-Tbilisi-Ceyhan (BTC) pipeline, Baku-Supsa pipeline, or 
trans-Caucasus railway to Batumi or Kulevi on Georgia's Black Sea 
coast. 
 
SOCAR DOES NOT NEED INTERNATIONAL PARTNERS 
 
4.  (SBU) Jafarov confidently claimed that SOCAR and KMG could 
complete this three-year, $3.5 billion project without outside 
assistance.  Specifically, he asserted that KazTransOil, a 
wholly-owned subsidiary of KMG, has the expertise and capital 
required to build the 840-kilometer Eskene-Kuryk pipeline without an 
international partner and that KazMorTransFlot can independently 
handle the necessary upgrades to port infrastructure and facilities 
at Kuryk.  The 50-50 joint venture between SOCAR and KMG "does not 
need other partners," he said and added jokingly, "we will divide 
the Sea between us."  (NOTE:  Arman Darbayev, Executive Director for 
Oil Transportation at KMG, told Energy Officer that KMG would prefer 
to invite international companies to take an equity stake in the 
project, but SOCAR has resisted this and KMG is reluctant to reduce 
its share below that of SOCAR.  Furthermore, KazMorTransFlot 
officials told Embassy Political Officer on November 6 (reftel B) 
that they have had difficulty recruiting qualified personnel and 
acquiring tankers of sufficient size to meet demand.  END NOTE). 
 
CRUDE SHIPMENT COMMITMENTS KEY TO PROJECT SUCCESS 
 
5.  (SBU) Jafarov confirmed media reports that SOCAR and KMG plan to 
launch the project in 2009 and complete activities by 2012.  He did 
not say whether or not feasibilities studies -- for example, to 
deepen the port at Kuryk or construct single-point mooring buoys -- 
had been commissioned or conducted.  Although he claims SOCAR and 
KMG can manage the infrastructure investments independently, Jafarov 
emphasized that international companies with major upstream assets 
in Kazakhstan must commit to shipping their crude through the system 
if the project is to move forward.  Consequently, on December 12 in 
Baku, senior officials from SOCAR and KMG presented their business 
case to regional vice presidents from companies invested in Tengiz, 
Kashagan, and Karachaganak. 
 
TANKER FLEET QUESTIONS REMAIN 
 
6.  (SBU) Jafarov insisted that "there are no outstanding issues 
that could delay the start of the project," but he acknowledged that 
 
ASTANA 00002479  002.2 OF 002 
 
 
agreement has not been reached on the size, location, or ownership 
of the proposed trans-Caspian tanker fleet.  For logistical reasons, 
according to Jafarov, the tankers would have to be built in the 
Caspian Sea, most likely the Russian port of Astrakhan.  The &#x0
00A;preference would be to build 60,000 deadweight-ton (dwt) double-hull 
tankers, but if there are delays or disputes that prevent 
construction of these vessels, Jafarov said the project could still 
work, using existing Azeri and Kazakhstani tankers already in the 
Caspian.  He noted, for example, that Azerbaijan and Kazakhstan each 
own five 13,000 dwt tankers and several smaller vessels that already 
transport oil from Aktau to Baku, including shipments of up to 
100,000 barrels per day from Tengizchevroil.  In a sense, he 
asserted, the trans-Caspian oil transportation project is already up 
and running. 
 
BAKU-SUPSA PIPELINE A CONVENIENT BACK-UP 
 
7.  (SBU) When asked whether the Baku-Supsa pipeline would be 
available to Kazakhstani exporters, Jafarov said the pipeline is 
operated by the Azerbaijan International Operating Company (AIOC) 
and access rights would have to be negotiated with AIOC, not SOCAR 
or the Government of Azerbaijan.  He called Baku-Supsa a "convenient 
little pipeline" that was recently modernized and said it has been a 
useful backup to the much larger BTC transport route.  Jafarov also 
expressed some concern that large volumes of Tengiz crude, which is 
high in sulfur, would adversely affect the quality of Azeri crude in 
either the Baku-Supsa or BTC pipelines. (NOTE:  The capacity of the 
pipeline is 145,000 bpd.  After an explosion and fire closed BTC on 
August 6, the Baku-Supsa pipeline was used to re-route Azeri oil 
deliveries.  END NOTE). 
 
8.  (SBU) COMMENT:  Although the November 14 agreement between KMG 
and SOCAR represents real progress toward the development of a 
trans-Caspian oil transportation system, it is still unclear who 
will do what, and when, to make that system a reality.  For example, 
both Chevron and ExxonMobil have said they will take the lead on 
building the pipeline from Eskene to Kuryk, which is the first 
component of the proposed system, but no final decision has been 
made and a new consortium will likely be established to conduct a 
feasibility study and build this segment.  In addition, reftel B 
raises questions about KazMorTransFlot's expertise and capacity to 
upgrade the port and terminal facilities on its own, while 
international oil companies remain very concerned about unresolved 
maritime safety and tanker transportation issues.  Clearly, KMG 
would prefer to invite external partners to contribute their 
financial and technical assistance, while SOCAR insists the two 
national oil companies do not need outside help.  These questions 
are complicated and serious and suggest that the negotiations 
between KMG and SOCAR are just beginning.  END COMMENT. 
 
HOAGLAND

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