US embassy cable - 05ALMATY3232

C O N F I D E N T I A L  ALMATY 003232 
 
SIPDIS 
 
 
FOR SECRETARY BODMAN FROM CDA ASQUINO 
DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 09/05/2015 
TAGS: EPET, ENRG, AJ, GZ, KZ, ECONOMIC, Energy 
SUBJECT: KAZAKHSTAN: ENERGY SCENESETTER FOR SECRETARY 
BODMAN'S MEETING WITH FOREIGN MINISTER SHKOLNIK AT 
US-KAZAKHSTANI ENERGY PARTNERSHIP, SEPTEMBER 8 
 
REF: ALMATY 1944 
 
Classified By: CHARGE MARK ASQUINO FOR REASONS 1.4(B) and (D) 
 
1. (C) SUMMARY: In advance of your planned meeting with 
Energy Minister Shkolnik, Embassy Almaty wanted to offer 
background on the most pressing issues in the US-Kazakhstani 
energy dialogue and suggest key issues where your engagement 
could be crucial. They include the following: 
 
Achieving a GOK-GOA IGA on transporting Kazakhstani oil into 
BTC (Kazakhstani Caspian Transport System-KCTS) that is fair 
to both government partners and private investors alike; 
Finalizing CPC expansion at terms advantageous to private and 
government consortium partners; 
Making the tender process, both for sub-contracts and new 
offshore blocs, as fair and as transparent as possible. 
 
For a broader outline of hydrocarbon development in 
Kazakhstan, please see reftel. END SUMMARY. 
 
-------------- 
Talking Points 
-------------- 
 
2. (C) During your meeting with Energy Minister Shkolnik, you 
may 
wish to raise some of the following points in priority order: 
 
-- We understand that Kazakhstan and Azerbaijan would like to 
sign an IGA to move oil through BTC, the so-called 
Kazakhstani Caspian Transport System (KCTS), at the October 
4-7 KIOGE Oil and Gas Show in Almaty. We support this effort. 
However, the IGA must respect investor interests and be 
similar in spirit to the BTC agreement. It must include tax 
stability, international maritime standards, and 
parliamentary ratification. A follow-on Host Government 
Agreement (HGA) is no less important and must also respect 
investor rights. 
 
-- We understand that progress has been made on CPC 
expansion, though important issues still remain. As with 
KCTS, any expansion agreement must respect the interests of 
private investors and state actors alike and prevent any one 
group from gaining dominance. The USG supports a timely 
resolution respecting the interests of all parties, both 
private and state shareholders. 
 
-- We hope that any new tender process, whether for new 
acreage or for subcontracts on existing projects, will be 
transparent and give all capable companies fair access. We 
understand that ConocoPhillips would like to participation a 
tender for the North Sultan offshore Caspian field. 
ConocoPhillips is a first-rate, integrated oil company with 
expertise in developing offshore gas fields. In another 
matter, American oil services company McDermott, in coalition 
with Kazakhstani (Kazstroyservis) and British partners 
(AMEC), is competing for a "hook-up and completion tender" at 
the Kashagan off-shore field. While the ultimate decision 
lies with Kashagan operator AGIP-KCO, we hope the GOK will 
use its dual role as consortium partner (via state oil 
producer's Kazmunaigas' 8.33%) and regulator to ensure a 
fair, transparent process. 
 
---- 
KCTS 
---- 
 
3. (C) Our KTCS private sector energy contacts here are 
worried that the GOK is trying to walk back the IGA that was 
nearly signed during the BTC opening in Baku in May. They 
claim, with good reason, that the GOK does not merely want 
clarification. Instead, it is trying to abandon two important 
concessions to the North Caspian Shippers: tax stability and 
ratification of the agreement by the Kazahstani parliament. 
The shippers, which include US companies ExxonMobil and 
ConocoPhillips, are members of the AGIP-KCO (Kashagan) 
consortium, which will be the main customer for KCTS. One 
AGIP-KCO partner says that he has lost faith in the ability 
of KMG Transport Chief Kairgeldy Kabyldin to deliver and win 
interagency battles against the Ministry of Finance, the main 
enemy of tax stability. Our KMG working-level transport 
 
contacts confirm that they lost the battle over taxes in the 
days just before the planned KCTS IGA signing in Baku in May. 
 Tax stability is important not only to safeguard the 
commercial terms of the agreement from future legislation, 
but also to attract international financing to the project. 
 
4. (C) The North Caspian Shippers also worry that getting the 
oil to the port of Aktau or to the planned port of Kuryk from 
Kashagan will cost them dearly. Consequently, it is important 
that a follow-on HGA provide adequate protection and protect 
investors. Our KMG contacts hinted at serious differences 
between them and the shippers over getting the oil from the 
wellhead at Kashagan to the Caspian. 
 
------------- 
CPC Expansion 
------------- 
 
5. (C) Shell's Kazakhstan country representative Martin 
Ferstl reported that the next CPC shareholders meeting, to 
include Minister Shkolnik and his Russian counterpart, 
Khristenko, is planned for mid-September. Battle lines are 
largely drawn between private shareholders, including US 
companies ExxonMobil and Chevron, and the GOR. Kazakhstan 
has, in the view of some, supported Russia, though others 
hope that President Nazarbayev will ultimately seek a 
compromise or support private shareholders. 
 
6. (C) Issues over managerial control still prevent inking an 
expansion deal. Namely, the GOR still has not agreed to a 
proposal to appoint management secondees in line with equity 
in return for giving up its demand to create a CPC-Russia 
board of directors. Such a board  would be open to 
manipulation and take over by Russia, Kazakhstan, Oman and 
one other partner, and is a redline for the private 
shareholders. While agreement seems to have been reached on 
tariffs for capital expenditures, the private shareholders, 
according to Ferstl, rejected GOR demands for variable 
tariffs on operating expenses.  Chevron Eurasia Business 
Chief Guy Hollingsworth told us that expansion approval 
should come no later than December 2005, otherwise the 
project will seriously fall off schedule. 
 
----------- 
New Tenders 
----------- 
 
7. (C) US companies may face challenges in obtaining fair 
access to offshore Caspian tenders and related subcontracts. 
New legislation gives KMG a 50% share in all new tenders plus 
the option to pick a "strategic partner" to develop blocs. 
Lawyers here report that the law leaves it unclear whether a 
"strategic partner" will be chosen competitively or through 
sweetheart deals. 
 
8. (C) ConocoPhillips earlier voiced fears to us that it will 
lose out on competing for the North Sultan offshore Caspian 
bloc, which may hold 4-5 bn. barrels in proven or probable 
reserves, to a combination of Shell and Nelson Resources.  We 
have also observed increasing contact between Shell and 
Nelson since late 2004. Nelson Resources is believed by most 
oil analysts here to be linked to Timur Kulibayev, 
presidential son-in-law and KMG First Vice-President. 
Kulibayev, in fact, is the real power at KMG, not the nominal 
president. 
 
9. (C) In another tender, US oil services giant McDermott is 
competing with its Kazakhstani and British partners for a 
Kashagan hook-up and finishing project, whose first stage is 
estimated at $70 million. Although AGIP-KCO, the Kashagan 
operator, will make the ultimate decision, we believe that 
KMG, both as regulator and consortium partner, will exercise 
its unique influence in picking a winner. In the past 
AGIP-KCO has favored fellow Italian companies; as a result, 
27% of all subcontracts have gone to Italians, with US 
companies a distant second with 16%. McDermott has sought our 
advocacy. We see your meeting with Minister Shkolnik as a 
perfect opportunity to emphasize not only our expectations of 
a fair tender process, but also the top-notch reputation of 
McDermott in the oil services industry. 
ASQUINO 
 
 
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