US embassy cable - 05ALMATY1774

C O N F I D E N T I A L  ALMATY 001774 
 
SIPDIS 
 
 
DEPT FOR EB/ESC (JONES), EUR/SNEC, EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 05/04/2007 
TAGS: EPET, KZ, ECONOMIC, Energy 
SUBJECT: CASPIAN PIPELINE CONSORTIUM: STATE OF PLAY 
KAZAKHSTAN 
 
 
Classified By: CLASSIFIED BY CDA MARK ASQUINO FOR REASONS 1.4 (B) AND ( 
D) 
 
 
1. (C)  Summary:  The April 26th Caspian Pipeline Consortium 
(CPC) shareholders meeting in Almaty ended in an impasse. 
Russian intransigence on forming a Russian board of directors 
 (CPC-R), combined with a demand for a variable tariff on 
operating expenses (OPEX), created the logjam.  In earlier 
meetings with Ambassador Ordway,  ChevronTexaco Eurasian 
Business Chief Guy Hollingsworth and ExxonMobil Kazakhstan 
Country Representative David Willis were vexed over Moscow,s 
hard-line.  Both were united in opposition to a CPC-R board 
of directors. The companies split, however, over an OPEX 
variable tariff, with ExxonMobil bitterly opposed and 
ChevronTexaco flexible.  Corporate shareholders will not, 
barring some Russian concession, attend a May 16th meeting 
with Russian Energy Minister Khristenko. End Summary. 
 
No Movement at CPC Shareholders Meeting 
 
2. (C) Guests at an April 26th  gala dinner for CPC 
shareholders were, in the words of one participant, &down in 
the mouth.8 Shell Kazakhstan Country Manager Martin Ferstl, 
host of the event, told DCM Mark Asquino that the 
shareholders came out of the meeting &at sword points8 
because the Russians &had taken a hard-line.8 
 
3. (C) The Russians pushed hard on creating a board of 
directors for CPC-R and gaining a variable tariff for both 
CAPEX and OPEX.  Oleg Gordiyev, Deputy Director of Energy, 
complained that CPC was in debt $5bn and needed to recoup 
this loss. He added that the oil companies &did not 
understand this.8 When queried as to a middle ground between 
Russia and other consortium members, Gordiyev fell silent. 
 
4. (C) ChevronTexaco Eurasia Business Chief Guy Hollingsworth 
vowed that his company &would not give into the charter 
(with board of directors).8 Some of the other oilies posited 
that if the consortium could not come to terms on a charter 
for CPC-R,  Nazarbayev and Putin would have to personally 
engage. Ferstl of Shell, however,  doubted the extent to 
which Nazarbayev could push Putin. 
 
5. (C) According Ferstl, Western CPC shareholders 
unofficially decided not to attend a May 16th meeting with 
Russian Energy Minister Khristenko barring some Russian 
concession. GOK Energy Minister Vladimir Shkolnik announced 
the May 16th Moscow talks in Astana on May 4. 
 
ExxonMobil: &At the Walk-Away Point8 
 
6. (C) ExxonMobil Kazakhstan Country Chairman David Willis 
told Ambassador Ordway in an April 15th meeting that 
ExxonMobil was at its &walk-away point8 on CPC expansion. 
He added that, &We have offered about all that we can 
give.8 Willis said ExxonMobil was amenable to an immediate 
tariff increase as well as to a variable tariff to capture 
CAPEX cost overruns, but was adamantly opposed to a variable 
tariff on OPEX.  It would, according to him, create a further 
divide between shippers and non-shippers and be liable to 
machinations. 
 
7. (C) Russia,s drive to create a board of directors for 
CPC-R, however, is the ultimate redline for ExxonMobil. 
Willis noted that under the Russian joint stock law, the 
composition of a board of directors could be changed by a 51% 
vote. Given that Russia, Kazakhstan, and Oman control 50% 
already, they, according to Willis, would just need to bribe 
one minor shareholder to surpass 51%. They then could create 
a docile board of directors and seize control of CPC. Willis 
dubbed CPC expansion a &small issue8 compared with the 
threat a board of directors poses. 
 
8. (C) Willis also sought a new GOR presidential decree 
confirming the non-natural monopoly status of an expanded 
CPC.  A Yeltsin-era decree affords such protection to the 
existing pipeline. 
 
ChevronTexaco: Situation Not Yet Critical 
 
9. (C) Guy Hollingsworth, ChevronTexaco Eurasia Business 
Chief, was more upbeat over CPC expansion than his ExxonMobil 
partner.  In an April 22nd lunch with Ambassador Ordway, 
 
 
Hollingsworth joked that the Russians would &close at the 
last minute8. He added that as long as CPC received project 
sanction by the end of 2005, the situation was ? 
critical.8 
 
10. (C) While opposed to a board of directors for CPC-R, 
Hollingsworth was resigned to a variable tariff on OPEX. He 
said that ChevronTexaco &could go for it8 because it would 
not be &catastrophic8 and would add only about $1-2 per 
barrel cost (Note: When it comes on line in mid-2006, 
TengizChevroil,s (TCO)  &Second Generation8 project will 
add about 250,000 bpd of production. TCO,  operated with a 
50% stake by ChevronTexaco, will scramble to find export 
routes for the added crude until CPC expansion becomes 
operational. At minimum, there will be an 18 month lag. End 
Note). 
 
11. (C) Hollingsworth hinted that President Nazarbayev, who 
calls CPC &my pipeline8, would intervene against Russia. 
&The President likes us. We perform.8 (Comment: 
ChevronTexaco prides itself on its &special relationship8 
with the Kazakhstanis given its status as the first major 
Western investor. This relationship extends to presidential 
son-in-law and hydrocarbon Richelieu, Timur Kulibayev. End 
Comment) 
 
12.  (C) Comment:  Real issues separate CPC private sector 
shareholders. None unites them as much, however,  as their 
opposition to a Russian-controlled puppet board of directors. 
If Russia wants to kill expansion, that demand will be more 
than a mere bargaining chip for a variable tariff on OPEX. 
The three-year*and counting*CPC expansion process should 
serve as  wake-up call for both the GOK and private producers 
to get serious on other pipeline options. Three million 
barrel a day production is not far off*most experts point to 
2015. It could ramp up to four to five million barrels a day 
by 2020-25 given the right tax regime. According to 
Hollingsworth, Kazakhstan will need four additional pipelines 
to bring that amount of oil to world markets. 
ASQUINO 
 
 
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