09ASTANA317, KAZAKHSTAN: THE UPWARD TRENDS OF TENGIZCHEVROIL

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Reference ID Created Released Classification Origin
09ASTANA317 2009-02-24 10:07 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO0808
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0317/01 0551007
ZNR UUUUU ZZH
O 241007Z FEB 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4690
INFO RUCNCIS/CIS COLLECTIVE 1236
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0619
RUEHKO/AMEMBASSY TOKYO 1325
RUEHUL/AMEMBASSY SEOUL 0320
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0798
RUEKJCS/SECDEF WASHDC 0714
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1244

UNCLAS SECTION 01 OF 03 ASTANA 000317 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  THE UPWARD TRENDS OF TENGIZCHEVROIL 
 
REF:  ASTANA 0131 
 
ASTANA 00000317  001.2 OF 003 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  On February 20, Jay Johnson, Chevron's Managing 
Director for Eurasia (protect), briefed the Ambassador on the latest 
plans and projects of Tengizchevroil (TCO), in which Chevron owns 50 
percent, ExxonMobil 25 percent, KazMunaiGas (KMG) 20 percent, and 
LukArco 5 percent.  Johnson said that oil production at Tengiz, the 
largest producing oil field in Kazakhstan, is expected to increase 
from 17 million tons in 2008 to 25 million tons in 2009, due to the 
installation of a $3 billion sour gas injection plant.  Johnson 
provided an update on TCO's export transportation options, local 
content investments, atmospheric emissions, and sulfur storage and 
sales.  He also disclosed that if the price of Brent crude drops 
below $40 a barrel, Chevron "will have real cash flow problems" and 
may have to defer capital investments.  END SUMMARY. 
 
TCO HAS PAID $30 BILLION TO KAZAKHSTAN SINCE 1993 
 
3.  (SBU) Johnson delivered a comprehensive, end-of-year briefing to 
the Ambassador, which he said he also delivered the day before to 
Deputy Prime Minister Umirzak Shukeyev and Minister of Energy Sauat 
Mynbayev.  He said he normally begins presentations with a 
discussion of safety issues, but Kazakhstani government officials 
prefer him instead to begin with TCO's contribution to the state 
budget.  In 2008, TCO paid $7 billion to the government of 
Kazakhstan in taxes and royalties, shareholder distributions, and 
rail and pipeline tariffs, a significant increase over the $4 
billion paid in 2007.  In addition, TCO paid another $1 billion in 
2008 for employee salaries and goods and services procured in 
Kazakhstan.  Overall, since 1993, TCO has paid more than $30 billion 
to Kazakhstan, approximately 90 percent of which has gone to the 
central government, according to Johnson. 
 
PRODUCTION JUMPS DUE TO SOUR GAS INJECTION 
 
4.  (SBU) Following a seven-year period of steady output averaging 
12 million tons of crude production per year, Johnson reported that 
TCO dramatically increased production in 2008, when its the sour gas 
injection plant became operational.  (NOTE:  Re-injecting associated 
gas into the well has a dual benefit:  it maintains the pressure 
necessary to push oil up and out, and it keeps the high-sulfur gas 
in the ground, thereby reducing the need to store and transport as 
much dry sulfur.  On February 17, TCO shut down operations at the 
sour gas injection plant "due to a hydrocarbon leak through flange 
DHS-F-10-10, which is a closed drain vessel in the hydrocarbon 
system."  Normal production resumed the next day.  END NOTE).  In 
2008, TCO produced approximately 17 million tons, but Johnson said 
he expects production in 2009 to reach 25 million tons. 
 
CRUDE EXPORT ROUTES AT MAXIMUM CAPACITY 
 
5.  (SBU) According to Johnson, all westward export routes from 
Tengiz will be at maximum capacity by this summer.  As previously 
reported (reftel), TCO currently ships most of its crude via the 
Caspian Pipeline Consortium (CPC) pipeline and is eager to expand 
its capacity from 33 million tons to 67 million tons.  TCO also 
swaps up to 2 million tons per year via the Atyrau-Samara pipeline, 
but as Johnson explained, "we lose in two ways when we go that 
route.  First," he said, "there is no quality bank, which means we 
ship high-quality Tengiz crude and pick up lower-quality Urals blend 
on the other side.  Second, our crude is actually lighter than the 
Urals blend, so we get less total volume than we put in." 
 
CHEVRON BELIEVES KCTS WILL HELP CPC EXPANSION 
 
6.  (SBU) Johnson said he is concerned about the complexity of the 
Kazakhstan Caspian Transportation System (KCTS), but confirmed that 
Chevron supports the project, "if only to help us negotiate with the 
Russians to expand CPC.  That's still not a done deal," he 
cautioned, "and every little bit of leverage helps."  Johnson said 
 
ASTANA 00000317  002.2 OF 003 
 
 
that TCO currently ships small volumes of Tengiz crude from Baku to 
Tbilisi via the Baku-Tbilisi-Ceyhan (BTC) pipeline.  TCO only uses 
about five percent of BTC's capacity -- approximately 50,000 barrels 
per day -- due to the high mercaptan content of Tengiz crude. 
According to Johnson, higher volumes w
ould "pass the tipping point 
and corrupt" the rest of the crude in the pipeline.  Johnson also 
said that when TCO ships crude from Azerbaijan to Georgia's Black 
Sea ports by rail, it is required to deliver 50 percent to Batumi, 
which is owned and operated by KMG, and 50 percent to Kulevi, owned 
and operated by SOCAR.  "Unfortunately," Johnson said, "there is a 
sunken barge blocking access to the port of Kulevi, so that terminal 
is not currently operational."  Johnson said he did not know if the 
barge was a casualty of Georgia's conflict with Russia, or if it 
sank for other reasons. 
 
TCO TOUTS LOCAL CONTENT 
 
7.  (SBU) Johnson proudly described TCO's investments in local 
capacity and local contractors, telling the Ambassador that more 
than 82 percent of TCO staff are Kazakhstani, including 73 percent 
of TCO's managers and supervisors.  Johnson complained mildly that 
many of their most promising managers are hired by KMG directly, but 
he said Minister of Energy Mynbayev and other senior officials 
consider this a normal part of building local capacity.  Johnson 
also noted that TCO currently employs virtually no ethnic Uzbeks or 
Kyrgyz and the company has replaced nearly all of its Turkish 
workers with Kazakhstanis.  He said that since 1995, TCO has 
purchased more than $7 billion of goods and services from 
Kazakhstani suppliers, including $1.3 billion to 515 "legitimate 
local companies" in 2008.  "Unlike some of our competitors, we don't 
create artificial companies to meet local content requirements.  We 
only count procurement as local content if the item was manufactured 
or assembled in Kazakhstan," he said. 
 
FINES GO UP AS EMISSIONS GO DOWN 
 
8.  (SBU) Johnson said that in 2008, TCO paid more than $90 million 
in fines and penalties for atmospheric emissions, a 55 percent 
increase over the previous year.  According to Johnson, TCO's 
emissions decreased from 70,000 tons in 2003 to 50,000 tons in 2007, 
while fines and penalties increased from $10 million to $50 million 
over that same period, as a result of changes to the government's 
formula.  Of the $90 million TCO paid in 2008, Johnson said that $30 
million covers the company's normative (i.e., expected) emissions, 
and as such will go to the regional (oblast) government.  The 
balance comprises a $30 million fee for emissions above TCO's 
"normative" level and a $30 million penalty; both payments will be 
made to the central government. 
 
TCO INCREASES SULFUR SALES TO KAZAKHSTANI CUSTOMERS 
 
9.  (SBU) According to Johnson, in 2008, TCO sold 2.23 million 
metric tons of sulfur, or 131 percent of total 2008 production, 
despite the collapse of the global sulfur market and a drop in price 
from more than $700 per ton to less than $60 per ton.  He told the 
Ambassador that TCO has signed protocols of intent for long-term 
sulfur sales to four projects in Kazakhstan: 
 
-- 60,000 tons to Kazatomprom (KAP)'s operations in Stepnogorsk 
(start up date, 2010) 
-- 180,000 tons to KAP's subsidiary, the Stepnogorsk Mining Chemical 
Plant (2011) 
 
-- 160,000 tons to KAP's joint venture with Inkai (2012) 
 
-- 900,000 tons to Sunkar Resources Aktobe (2010) 
 
In addition, Johnson said that TCO is in discussions with 
KazPhosphat and its potential industrial partners for a long-term 
sulfur sales supply agreement of 170,000 tons per year. 
 
10.  (SBU) COMMENT:  Jay Johnson is a former general director of 
 
ASTANA 00000317  003.2 OF 003 
 
 
Tengizchevroil and one of the most knowledgeable and experienced oil 
men working in Kazakhstan.  He is the first representative of a 
major oil company to say that future project expansion may be 
jeopardized if oil falls below $40 a barrel.  Given the extreme 
expense of oil exploration in Kazakhstan, the steady fall in the 
price of oil, and the global economic environment, one has to wonder 
how deep the pockets of the majors really are.  At some point, 
perhaps soon, projects that require massive capital investment such 
as Kashagan, Tengiz, and Karachaganak may suffer a slowdown.  Even 
ExxonMobil, which reported a record profit of more than $40 billion 
in 2008, last week withdrew its resident manager for new business 
development, several months before his scheduled departure, and does 
not plan to name a replacement.  END COMMENT. 
 
HOAGLAND

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