US embassy cable - 05ALMATY1433

C O N F I D E N T I A L  ALMATY 001433 
 
SIPDIS 
 
 
DEPT FOR EB/ESC (JONES), EUR/SNEC, EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 04/06/2015 
TAGS: ENRG, CH, KZ, ECONOMIC, Energy 
SUBJECT: KAZAKHSTAN: CHINESE PIPELINE UPDATE 
 
REF: A. BEIJING 3909 
 
     B. ALMATY 58 
     C. 04 ALMATY 4688 
 
Classified By: DCM Mark Asquino for reasons 1.4 b and d. 
 
1. (C) Summary: Construction of the stalled Atasu-Alashankou 
oil pipeline is moving forward after a harsh winter and the 
late delivery of pipe, according to KMG contacts. However,the 
Kazakhstanis are unhappy with the Chinese over perceived 
lower netbacks and lack of control -- Beijing has 
responsibility for both financing and filling the pipeline. 
The Chinese are still searching for the 10m tons annual 
needed to fill initial capacity. End Summary. 
 
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Atasu-Alashankou construction back on track 
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2. (C) Construction of the 960 km pipeline is in full swing 
after an unusually harsh winter and the late delivery of pipe 
upset plans for a November 2004 start. According to a 
KazMunaiGas (KMG) engineer who worked on the site one-and-a 
half months this winter, pipe only started to arrive in 
February. Serik Burkitbayev, the President of the Kazakhstani 
Oil and Gas Institute, a main project contractor, blamed the 
late pipe on a Chinese desire to control the project, 
including choosing suppliers. The Chinese are financing the 
50-50% joint venture, which is the second leg in a 
cross-Kazakhstan pipeline. Only the third and final leg, 
between Kenkiyak and Atasu, will link oil-rich Western 
Kazakhstan with China. 
 
3 (C) The KMG engineer was confident, however, that the 
pipeline - at least pipes in place welded under the ground - 
would be ready for the promised delivery date of December 
2006.  The Chinese director of the first leg of the pipeline 
(Kenkiyak-Atyrau), Dzhan Chengwu, did not share the same 
degree of certainty as his Kazakhstani colleague but thought 
completion was possible. 
 
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...Though filling it harder 
--------------------------- 
 
4. (C) Burkitbayev and the KMG engineer differed on the ease 
of finding shippers. The engineer sheepishly admitted that it 
could take six months to fill the pipeline; the norm is 
usually one-and-a half for a project of this size. 
Burkitbayev, however, said that the pipeline would be easily 
filled in a fifty-fifty split between Kazakhstani and Russian 
producers. Negotiations, he added, were already under way 
with Rosneft to ship 5 million tons of former Yukos crude 
south. The rest would come from the Atasu hub of the second 
stage, the Turgai basin. 
 
5. (C) PetroKazakhstan, the main Turgai basin producer, is 
leery of a Chinese monopsony. Marketing Director Robert 
Goldsmith said the company is still exploring options, but 
needs at least two buyers. (Comment: The Atasu-Alashankou 
second leg needs Russian oil since the Turgai basin produces 
a total of 12 m tons a year. Even if all that crude were to 
be sent to China - unlikely since some is refined in 
Kazakhstan - it would barely fill the initial capacity of 10 
m tons a year. Russian crude becomes less of a factor once 
the third leg is completed and Western Kazakhstani product - 
such as Tengiz or Kashagan - can be shipped. End Comment.) 
 
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Kazakh-Chinese Honeymoon Over? 
------------------------------ 
 
6. (C) Burkitbayev griped that it was "difficult" to work 
with the Chinese. He added that, "the government is not 
happy, the oil companies are not happy." He hinted that the 
GOK lost a large degree of control when it agreed to let the 
Chinese finance and fill the pipeline. He also said that 
other export routes - CPC, BTC, and even the Russian pipeline 
system - might be better options financially: "It (the 
Chinese pipeline) is not a good deal for us." 
 
7. (C) Comment: Despite grumbling and mutual suspicions, the 
Chinese and the Kazakhstanis will expand energy links. 
Geography - a growing producer next to a hungry consumer - 
 
should more than match distrust and keep the relationship 
from derailing. Moscow, however, may meddle if too much West 
Siberian crude goes south. According to an oil trader here, 
only 36% of West Siberian crude reaches world markets, the 
rest is refined locally at a deep discount. Every barrel 
shipped to China via Kazakhstan cuts into vested Russian 
interests. Transneft President Semyon Vainshtok's April 12 
comments to the press that Russia would not deliver oil to 
the Kazakhstani-Chinese pipeline appear to be the first 
indication of push-back from Moscow.  End Comment. 
 ORDWAY 
 
 
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