09ASTANA131, KAZAKHSTAN: CHEVRON CAUTIONS CPC EXPANSION NOT YET A DONE

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Reference ID Created Released Classification Origin
09ASTANA131 2009-01-22 11:10 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO2459
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 #0131/01 0221110
ZNR UUUUU ZZH
O 221110Z JAN 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4421
INFO RUCNCIS/CIS COLLECTIVE 1076
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0474
RUEHKO/AMEMBASSY TOKYO 1180
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0649
RUEKJCS/SECDEF WASHDC 0563
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1113

UNCLAS SECTION 01 OF 02 ASTANA 000131 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  CHEVRON CAUTIONS CPC EXPANSION NOT YET A DONE 
DEAL 
 
REF:  (A) 08 ASTANA 2144 (B) 08 ASTANA 1910 (C) 08 ASTANA 2226 
 
ASTANA 00000131  001.2 OF 002 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  Chevron is pleased with the December 17, 2008, 
agreement to expand the capacity of the Caspian Pipeline Consortium 
(CPC) pipeline, but is concerned that the deal could still fall 
through before the project is sanctioned.  Although there are no 
technical obstacles to the Kazakhstan Caspian Transportation System 
(KCTS), critical details still needed to be negotiated, particularly 
on Caspian maritime logistics and safety.  Since Tengizchevroil 
(TCO) more than doubled its production in 2008, it needs greater 
transportation capacity and is in talks with the State Oil Company 
of the Azerbaijan Republic (SOCAR) to use the Baku-Supsa pipeline. 
Chevron said recent changes to the investment climate in Kazakhstan 
jeopardize the principles of tax stability and the sanctity of 
contracts.  END SUMMARY. 
 
CHEVRON PLEASED WITH AGREEMENT TO EXPAND CPC... 
 
3.  (SBU) Jay Johnson, Managing Director of Chevron's Eurasia 
Business Unit, told Energy Officer on January 15 that he was pleased 
with the agreement reached on December 17, 2008, to expand the 
capacity of the Caspian Pipeline Consortium pipeline from 32 million 
tons (approximately 700,000 barrels per day, or bpd) to 67 million 
tons (1.34 million bpd).  Johnson said he was pleasantly surprised 
that BP, the only consortium member that did not sign the expansion 
agreement, nevertheless signed a series of technical agreements that 
allowed the project to move forward, including one that reserves 
cash for the requisite engineering studies.  He confirmed that BP 
requested, and was denied, permission to negotiate the sale of its 
6.6% share in CPC with investors outside the consortium. 
 
BUT "IT'S NOT A DONE DEAL YET" 
 
4.  (SBU) Despite BP's acquiescence, Johnson cautioned that "CPC 
expansion is not a done deal."  He said the consortium has one year 
- until December 2009 - to sanction the project, by which time BP 
plans to sell its shares and exit the consortium.  BP does not own 
sufficient upstream assets to justify further investment in CPC and 
its business operations in Kazakhstan are fundamentally misaligned 
with the expansion endeavor (reftel A).  Johnson does not believe 
that BP will deliberately drag out negotiations over the sale of its 
shares until the last minute.  On the contrary, he said Lukoil, 
which has a right of first refusal as BP's main joint venture 
partner, "will squeeze BP hard on this deal."  In fact, Johnson said 
his biggest fear is if "BP gets burned, then they'll refuse to 
sanction the expansion." 
 
KCTS FUNDAMENTALS ALREADY AT WORK... 
 
5.  (SBU) Commenting on the Kazakhstan Caspian Transportation 
System, Johnson said there are no technical obstacles to building 
the first segment of the project, a pipeline from Eskene (near the 
supergiant Tengiz oil field in Atyrau oblast) to Kuryk (south of the 
port of Aktau).  He confirmed that Chevron is representing 
Tengizchevroil (TCO) in the negotiations, while ExxonMobil is 
representing the so-called G-6, or Kashagan consortium.  Johnson 
said the pipeline could be built in 18 months "if we just quit 
screwing around."  In fact, Johnson said that an embryonic KCTS is 
already operational:  TCO currently ships Tengiz crude by rail to 
the port of Aktau, where it is loaded onto 12,000 deadweight ton 
tankers, shipped to Baku, and loaded onto rail cars to the Georgian 
port of Batumi or pumped directly into the Baku-Tbilisi-Ceyhan (BTC) 
pipeline. 
 
KCTS COMPLEXITY COULD CREATE DIFFICULTIES AND DELAYS 
 
6.  (SBU) Johnson cautioned, however, that this is an extremely 
complex, multifaceted project with many potential bottlenecks.  For 
example, TCO has voluntarily limited exports via BTC to 5% of that 
pipeline's capacity, due to the high mercaptan content of Tengiz 
 
ASTANA 00000131  002.2 OF 002 
 
 
crude.  (NOTE:  Higher volumes of Tengiz crude would impact the 
quality of the blend and restrict refining options and the product 
mix.  For example, jet fuel cannot contain mercaptans.  END NOTE). 
In addition, Johnson said the small tankers currently in use would 
be insufficient to accommodate the increased volumes expected from 
TCO and Kashagan by 2013.  "We've done a logistical study," he said,
 
"and determined that you cannot run enough smaller ships to carry 
all the crude.  It just would not be safe.  We definitely need the 
bigger ships with safety features like inert gas systems and double 
hulls." According to Johnson, other potential problems for KCTS 
include the capital costs of dredging and modernizing the port of 
Kuryk, the training and accreditation of crews, legislation to 
govern the administration of ports, and the amount of paperwork 
required to move ships across the Caspian.  Johnson said it would be 
a mistake to underestimate the importance of the latter, noting that 
the current procedures are paper-based and can take several days to 
process a single ship. 
 
NEGOTIATING WITH SOCAR TO USE BAKU-SUPSA 
 
7.  (SBU) Johnson said that TCO doubled production at the end of 
2008 - from 270,000 bpd to more than 540,000 bpd - and confirmed 
that TCO is in talks with Azerbaijan's national oil company SOCAR to 
ship up to 100,000 barrels per day of Tengiz crude via the "westward 
route", or Baku-Supsa pipeline.  He said that TCO plans to expand 
even further in the next five years.  Although TCO's Future Growth 
(Phase III) expansion has not yet received final approval from the 
Board - "the government of Kazakhstan wants to take a close look at 
it" - Johnson called it "an active project currently under 
development."  Future Growth would expand TCO's production to more 
than 1 million barrels per day. 
 
INVESTMENT CLIMATE CONCERNS 
 
8.  (SBU) When asked if Chevron is pursing new development 
opportunities in Kazakhstan, Johnson shook his head no and said, 
"There are some areas we are interested in, but we are not actively 
exploring anything, not in this business environment."  He said it 
is very expensive to explore in Kazakhstan's unforgiving climate - 
"it costs $50 million to drill a well in the Caspian" - but 
emphasized that legal and regulatory changes were more of a 
deterrent than cost.  For example, Johnson noted that the draft 
Subsoil Law no longer grants investors the right to go to 
international arbitration in case of a dispute with the government 
(reftel B) and said the new Tax Code raises real questions about the 
government's respect for the sanctity of contracts, particularly the 
tax stability clauses of existing agreements with international oil 
companies (reftel C).  Finally, Johnson said that the Karachaganak 
consortium - in which Chevron owns 20% -- has paid under duress more 
than $760 million in crude export duties in the last nine months 
alone.  (NOTE:  Although the government recently cancelled the crude 
export duty effective January 26, it is not clear if this is a 
permanent or temporary suspension.  END NOTE). 
 
HOAGLAND

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