09ASTANA748, KAZAKHSTAN: A KCTS SCORECARD OF RISKS AND REWARDS

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Reference ID Created Released Classification Origin
09ASTANA748 2009-04-30 05:21 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO2833
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RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0748/01 1200521
ZNR UUUUU ZZH
O 300521Z APR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5298
INFO RUCNCIS/CIS COLLECTIVE 1550
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0927
RUEHKO/AMEMBASSY TOKYO 1630
RUEHUL/AMEMBASSY SEOUL 0614
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1112
RUEKJCS/SECDEF WASHDC 1026
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1467

UNCLAS SECTION 01 OF 03 ASTANA 000748 
 
SIPDIS 
 
STATE FOR SCA/CEN, EAP/CM, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET EINV RS KZ
SUBJECT:  KAZAKHSTAN:  A KCTS SCORECARD OF RISKS AND REWARDS 
 
REF:  ASTANA 0675 
 
ASTANA 00000748  001.2 OF 003 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  From April 7-17, Energy Officer accompanied a 
definitional mission from the U.S. Trade and Development Agency to 
identify potential technical assistance projects in support of the 
Kazakhstan Caspian Transportation System (KCTS).  During the course 
of that mission, Energy Officer traveled to Atyrau, Aktau, Kuryk, 
and Bautino on the Kazakhstani shores of the Caspian, discussing the 
cross-Caspian transportation of oil with international oil company 
(IOC) executives, port authorities, shipping companies, local 
government officials, and Western diplomats.  Reftel reports on 
current and future infrastructure investments associated with the 
development of KCTS.  This cable draws upon those conversations and 
observations to provide an updated scorecard of the players, and 
their positions, in KCTS.  Negotiations among KMG, SOCAR, and the 
IOCs have intensified in recent weeks and major decisions must be 
made soon if the system is to be ready in time for first oil from 
Kashagan in 2013.  The most critical issues to be resolved are the 
construction of tankers to transport Tengiz and Kashagan crude 
volumes across the Caspian and the nature of IOC participation in 
the project.  It also remains to be seen whether Russia will 
influence the development of KCTS, perhaps by building the large 
tankers called for by the IOCs, or shipping vessel modules through 
the Volga-Don canal.  END SUMMARY. 
 
KCTS IS IN THE EYE OF THE BEHOLDER 
 
3.  (SBU) KCTS is a simple concept, but an incredibly complex 
project.  Its success requires billions of dollars of investment, 
concerted diplomatic effort, new institutions and infrastructure, 
and a level of trust and cooperation among national oil companies, 
government ministries, local officials, and international oil 
companies not seen since the early days of the Baku-Tbilisi-Ceyhan 
(BTC) pipeline.  In its fullest form, KCTS will transport more than 
one million barrels of crude each day by pipeline from Eskene near 
the oilfields to Kuryk on Kazakhstan's Caspian coast, load it onto 
large tankers, ship it to Baku, and pump it into the BTC pipeline, 
where the crude will be sold on the world market.  But KCTS means 
different things to different people.  Some argue, for example, that 
existing infrastructure -- such as oil loading terminals at Aktau 
and Baku -- should be excluded.  Others say that smaller tankers 
should continue to be used, at least in the beginning.  There are 
many permutations of the project, and the definition of KCTS depends 
on who is talking, and what they have at stake. 
 
INTERNATIONAL OIL COMPANIES 
 
4.  (SBU) The IOCs know that they need an outlet for future oil 
production from Tengiz and Kashagan, even if pipelines via Russia 
and China are expanded as planned.  But the companies say they will 
not commit crude volumes to KCTS unless they have equity in the 
Eskene-Kuryk pipeline and the trans-Caspian project (the marine 
portion from terminal to ship to terminal).  Although the IOCs are 
not in the shipping business, they insist that partial ownership of 
vessels, buoys, and docks will help control risk, cost, and safety. 
They are clearly wary of Azerbaijani assurances that fees and 
tariffs will be transparent, fixed, and reasonable.  Furthermore, if 
there is an oil spill in the Caspian, they know that the media 
spotlight will be on the Western majors, not the parastatal 
bystanders.  IOCs insist on using large, 63,000 deadweight ton 
tankers with trained crews operating according to international 
standards in order to increase safety and reduce risk.  They will 
likely end up financing the majority of the project, which could 
cost as much as $9 billion, including the Eskene-Kuryk pipeline. 
 
KAZMUNAIGAS 
 
5.  (SBU) KMG needs KCTS as much as the international companies do, 
if not more so.  As an equal partner in the Kashagan consortium, KMG 
must export its production volumes as safely and efficiently as 
possible.  In addition, as a national oil company, KMG has a larger 
 
ASTANA 00000748  002.3 OF 003 
 
 
strategic interest in ensuring the development of an alternative 
export route that is not controlled by any one country.  KCTS, from 
KM
G's perspective, will provide that flexibility by theoretically 
enabling Kashagan crude to be shipped in three directions:  Baku, 
Makhachkala (Russia), and Neka (Iran).  The risk to KMG is that 
SOCAR, its joint venture partner in the project, will squeeze 
tariffs and extract rent from KCTS at every turn, severely reducing 
the netback price for crude shipments from Kazakhstan.  KMG is also 
concerned about ceding control or majority ownership of KCTS 
infrastructure assets that will be built in Kazakhstan, such as 
ports and terminals. 
 
THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN 
 
6.  (SBU) Azerbaijan is absolutely essential to the success of KCTS 
and SOCAR knows it.  SOCAR will hold out as long as it can, enjoying 
the advantage of geography, comforted by the thought that 
Kazakhstan's producers will become more willing to negotiate tariff 
terms and service fees as the date of early oil from Kashagan 
approaches.  The risk for SOCAR is that if they wait too long, they 
will own and operate a large -- and largely empty -- pipeline from 
Baku to Ceyhan, as oil production from Shah Deniz and 
Azeri-Chirag-Gunashli declines.  In addition, KMG and Kashagan's 
European partners Eni and Total have spoken openly about shipping 
crude to Neka instead of Baku, although the MOU between Azerbaijan 
and Kazakhstan requires "mutual agreement" on shipping destinations 
other than Baku.  Finally, it is worth noting that a number of 
influential Azerbaijani shipping companies have a vested interest in 
maintaining the status quo of a smaller, older tanker fleet.  These 
stakeholders will not be eager to go out of business and will want a 
piece of the action even if new, large tankers are used. 
 
MINISTRY OF ENERGY AND MINERAL RESOURCES 
 
7.  (SBU) Recent comments from Minister of Energy Mynbayev and Vice 
Minister Kiinov indicate that Kazakhstan's Ministry of Energy (MEMR) 
takes a more conservative, if not skeptical, view of KCTS.  As a 
government agency, it is keenly aware of the political implications 
of developing an oil export route that circumvents Russia.  The 
Ministry is no doubt wary of needlessly annoying their neighbors to 
the north with public statements extolling the virtues of 
trans-Caspian shipping.  MEMR is likely also concerned about the 
fiscal and political wisdom of embarking on a multi-billion dollar 
project during a severe economic crisis.  Mynbayev struck a populist 
pose when he insisted that the government will retain a majority (51 
percent) stake in the pipeline portion of the project (i.e., the 
Eskene-Kuryk pipeline).  Nevertheless, if MEMR were to be convinced 
of both the urgency and benefits of the project -- and if the IOCs 
said they would pay for it -- MEMR could become an ardent champion. 
Certainly, the Ministry understands the importance of finding an 
outlet for oil from Kashagan, upon which so much of Kazakhstan's 
future development depends.  Unlike the 30-somethings who run KMG 
and KazMorTransFlot, MEMR is managed by a trusted old guard of 
veteran oilmen who will undoubtedly weigh in with President 
Nazarbayev when he makes the final decision about when, where, and 
whether to move forward with KCTS. 
 
LOCAL GOVERNMENTS 
 
8.  (SBU) For the regional government of Mangistau oblast and local 
officials there, KCTS is a gold mine waiting to be discovered -- and 
divided.  In their eyes, the project has the power to modernize 
infrastructure, triple the population, create thousands of jobs, and 
transform sleepy towns into bustling port cities.  It will quite 
literally put Kuryk on the map.  The risk for local governments is 
that the project will not go forward for political, financial, 
technical, or other reasons -- a risk only increased by recent 
reports of infighting among authorities.  On April 24, Kazakhstan's 
Procurator General annulled a decision by the mayor of Kuryk to 
lease 16.77 hectares of coastal land to Ersai Caspian Contractors, a 
50-50 joint venture of Italy's Saipem and Kazakhstan's ERC Holdings, 
for 48.2 million tenge ($321,333).  The head of the local 
administration of neighboring Karakiyanski raion protested the 
 
ASTANA 00000748  003.3 OF 003 
 
 
decision and appealed to the Procurator General, who ruled that the 
land is legally considered part of Kazakhstan's territorial waters 
and therefore the rights to its use and disposition may be decided 
only by the central government. 
 
THE RUSSIAN TRUMP CARD 
 
9.  (SBU) Would Russia support a project that is designed to 
circumvent its territory and reduce its control over energy exports 
from the region?  Russian sensitivities about alternative energy 
export routes from Central Asia are indeed high.  In a meeting with 
the Ambassador on April 29, Russian Ambassador Mikhail Bocharnikov 
alleged that the United States has urged that no oil should flow 
from Kazakhstan through Russia and should instead be sent to China. 
Yet Russian opposition to KCTS has been surprisingly muted, perhaps 
because the project is largely undefined and unfunded.  It is still 
not clear, for example, what size tankers will be used, where they 
will be built and assembled, and who will pay for them.  The Russian 
government would clearly prefer Kazakhstani crude to transit Russian 
territory, which explains its support for the expansion of Caspian 
Pipeline Consortium (CPC) pipeline, expansion of the Atyrau-Samara 
pipeline, and establishment of a quality bank system for exports 
from the Black Sea port of Novorossiysk.  These measures will ensure 
that, even once KCTS becomes a reality, the majority of Kazakhstan's 
oil will continue to go through Russia.  Nevertheless, there are 
several ways in which Russia could participate in (and have leverage 
over) KCTS.  For example, Russian shipyards in Astrakhan, Nizhny 
Novgorod, or St. Petersburg could be contracted to build the 63,000 
dwt tankers.  Alternatively, if the ships are built outside the 
Caspian, for example in South Korea, the modules would have to be 
delivered to the Caspian through the Volga-Don canal.  No shipyard 
on the Caspian currently has the capability to build the large 
tankers that the IOCs insist are necessary to make the project safe 
and commercially viable.  Russia therefore holds a tanker trump card 
that could determine the ultimate success of the project.  It 
remains to be seen how and when they will play that card, but it is 
clear that the stakes will rise as Kashagan's production deadlines 
near. 
 
MILAS

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