US embassy cable - 05ALMATY953

UNCLAS  ALMATY 000953 
 
SIPDIS 
 
 
DEPT FOR EUR/SNEC AMBASSADOR MANN, EUR/CACEN JMUDGE, ALSO 
FOR EB/IPC/IEC/EPC CGREEN 
ENERGY FOR LCOBURN 
COMMERCE FOR CENTRAL ASIA DESK OFFICER DSTARKS 
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER 
 
SENSITIVE 
 
E.O. 12958: NA 
TAGS: ECON, ENRG, EPET, PREL, PGOV, KZ, ECONOMIC, Energy 
SUBJECT: AMB ORDWAY MEETS WITH SHKOLNIK AND KULIBAYEV; 
DISCUSSES BTC, CPC AND KASHAGAN 
 
 
1. (SBU) Summary: Ambassador Ordway met with Minister of 
Energy and Mineral Resources Vladimir Shkolnik March 4 
in Astana.  They discussed developments in the 
negotiations between Kazakhstan and Azerbaijan on the 
provision of Kazakhstani oil to the Baku-Tbilisi 
Ceyhan (BTC) pipeline, expansion of the Caspian 
Pipeline Consortium (CPC) line and prospects for 
conclusion of the negotiations for Kazakhstan's 
purchase of a stake in the Kashagan field.  President 
Nazarbayev's son-in-law and first vice-president of 
KazMunayGas (KMG) Timur Kulibayev also participated.  End 
Summary. 
 
----------------------- 
Aktau-BTC Developments 
----------------------- 
2. (SBU) Concerning BTC, the Minister informed the 
Ambassador that the next round of meetings with the Azeri 
side will take place March 18 in Baku.  While in principle 
progress appears to be taking place, serious discussions 
still need to be had on the issue of taxation.  In Shkolnik 
and Kulibayev's opinion, the taxation scheme for BTC should 
proceed from the notion that the Kazakhstani port of Kuryk 
(south of Aktau) is the point of origin for the Kazakhstani 
oil in the BTC line.  They perceive that Azerbaijan wishes 
to consider the lines from the production facilities to the 
terminal as part of the system for taxation purposes, and 
find this concept unreasonable.  [Comment: According to both 
Kazakhstani working-level sources and an AGIP-KCO consortium 
partner, the GOK and the consortium partners radically 
differ on oil transport from Kashagan to Aktau. The 
consortium believes the Kashagan PSA gives them the right to 
build or not to build the pipeline from the field to Aktau. 
The GOK believes they have this right and want to control 
it. It does not like the BTC model, which gives the pipeline 
consortium control from wellhead to Ceyhan in Turkey. A U.S. 
member of the Kashagan consortium said getting the oil to 
Aktau worries him more than getting it across the Caspian. 
End Comment]. 
 
3. (SBU)Shkolnik seemed slightly pessimistic about the 
process and criticized the Azeris for a lack of flexibility. 
For his part, Kulibayev appeared more sanguine about the 
prospects for an agreement. 
 
------------- 
CPC Expansion 
------------- 
 
4. (SBU) The Ambassador and Shkolnik also discussed the next 
steps to be taken since the decision was reached by the CPC 
partners to expand the system.  Shkolnik expressed his 
satisfaction that the parties had agreed on expansion, but 
judged that rather little time, perhaps a month, remains to 
get an advantageous settlement of the remaining issues, 
particularly the commercial terms.  Shkolnik's urgency is 
based on a belief that the Russian participant in CPC will 
change - that Rosneft will become the Russian operator 
rather than the Ministry of Energy and Industry, which 
Shkolnik views as a negative development.  Shkolnik 
criticized U.S. companies for inflexibility, which he thinks 
may prevent agreement before Rosneft becomes a player. 
 
---------------------- 
Kashagan State of Play 
---------------------- 
 
5. (SBU) Shkolnik also told the Ambassador that the GOK was 
meeting with the Kashagan consortium partners March 4 in 
London.  The Ambassador asked Shkolnik which issues were 
still being negotiated, and the Minister replied, "(a)ll of 
them."  Shkolnik reported that the Kazakhstani side is now 
offering about $1 billion for half of British Gas (BG's) 
stake in the consortium, or 8.33% of the whole.  Shkolnik 
maintained that while Kazakhstan was only bidding on 8.33% 
now, he considers that it still has and would continue to 
have a priority right to buy the other half of the 
stake.[Note: The Chinese were to purchase a 16.67% for 
$1.23bn. The elevated price reflects Capex investments made 
 
. End Note] 
 
6. (SBU) Shkolnik said that he still sees two main issues: 
the purchase itself, and the changes that would be made to 
the consortium arrangements (e.g. the size of a blocking 
share) after Kazakhstan becomes a partner.  He made it clear 
that Kazakhstan expects to have considerable influence in 
the consortium even if it is only to be a second-tier 
investor. [Note: Governance issues also worry the 
consortium; namely, how to create a firewall between the GOK 
as regulator and the GOK as partner. End Note]. 
 
7. (SBU) The Ambassador also asked Kulibayev what KMG's 
plans were for financing the purchase.  Kulibayev did not 
indicate that KMG viewed the escalating price of the stake, 
or the approaching March deadline as a problem.  He seemed 
to think that KMG would be able to use its own cash, 
although he did not exclude the idea of borrowing some part 
of the money needed, particularly for subsequent cash calls. 
 
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Comment 
------- 
 
8. (SBU) As usual, Shkolnik was voluble and gregarious in 
this meeting.  However, he displayed some frustration, 
saying that virtually every party he mentioned (Azerbaijan, 
ExxonMobil, ChevronTexaco, Russia, the Kashagan consortium) 
needed to show more flexibility and appreciate the 
advantages of working with Kazakhstan.  In particular, he 
seems to view the prospect of Rosneft becoming Russia's 
agent on CPC with trepidation; and he clearly wants the 
Russian side locked into commitments on the remaining 
expansion issues before that happens.  We did not have 
advance notice that Kulibayev would attend the meeting.  His 
interjections were brief but he gave every impression of 
confidence that the issues with Azerbaijan would work 
themselves out and particularly that KMG could finance the 
Kashagan deal without difficulty.  End comment. 
 
ORDWAY 
 
 
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