US embassy cable - 05ALMATY4264

C O N F I D E N T I A L  ALMATY 004264 
 
SIPDIS 
 
 
DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 11/30/2015 
TAGS: ENRG, EPET, KZ, ECONOMIC, Energy 
SUBJECT: KAZAKHSTAN: TENGIZ CONSORTIUM SOLIDIFYING 
SHORT-TERM EXPORT OPTIONS 
 
REF: ALMATY 3075 
 
Classified By: POEC CHIEF DEBORAH MENNUTI FOR REASONS 1.4(B) and (D) 
 
1. (C)  Summary.  Tengizchevroil (TCO) recently finalized a 
series of contracts which  pave the way for the temporary 
export of up to 5 million tons of TCO oil per year, beginning 
in 2007, through the Georgian port of Batumi.  This "Southern 
export route" is one means (along with rail transport of 5 
million tons from Tengiz to Odessa) by which TCO hopes to 
cope with increased TCO "second generation" production, 
expected in late 2006 or early 2007, until CPC pipeline 
expansion is completed.  While shipping oil by rail from Baku 
to Batumi constitutes an acceptable option for TCO, the 
consortium is currently pursuing one or two-year access to 
the BTC pipeline -- a more economical "last leg" to market. 
End Summary. 
 
TCO Finds Short-Term Export Solution 
------------------------------------ 
 
2. (C) In November 29 conversation with Econoff, Colin 
Nesbeth, Chevron's Commercial Manager of Marketing and 
Transportation (based in London and Aktau), confirmed 
November 23 press reports that TCO had concluded a series of 
contracts facilitating the future export of Tengiz oil 
through the Georgian port of Batumi.  Nesbeth (strictly 
protect) described the "Southern Export Route" as one-half of 
TCO's strategy for exporting increased Tengiz production 
(expected to grow from the current 280K b/d to approximately 
480K b/d in late 2006 or early 2007) until CPC expansion is 
completed. The other half of TCO's export solution, Nesbeth 
indicated, consisted of shipping 5 million tons per year 
(100K b/d) from Tengiz to the port of Odessa by rail. 
 
Expansion of Kazakhstani Infrastructure Needed 
--------------------------------------------- - 
 
3. (C) According to Nesbeth, TCO's search for alternative 
export routes, dubbed the "Crude Export Project," was 
launched January 2004, with serious negotiations with various 
Kazakhstani, Azeri, and Georgian entities beginning in June 
2004.  On the Kazakhstani side, TCO struck deals with 
Kazakhstan's national railroad company (Kazakhstan Temir 
Zholy), which will expand and upgrade its crude carrying 
capacity; the national shipping company (Kazmortransflot), 
which, along with Azerbaijan's Caspar, will provide the 
estimated half-dozen 12-13,000 ton vessels needed to carry 
the crude across the Caspian; and KazTransOil (KTO), whose 
Aktau terminal will be used for shipment. 
 
4. (C) Interestingly, Nesbeth credited PetroKazakhstan's (PK) 
recent sale to CNPC (reftel) with easing two difficult 
aspects of the negotiations.  First, with much of PK's Kumkol 
oil now expected to flow East, into the Atasu-Alashankou 
pipeline, rather than West, Kazakhstani railway capacity was 
freed up to carry larger volumes of TCO oil to Aktau. Second, 
TCO gained access to KTO's Aktau terminal (with its "much 
better, and more transparent rates" than competitor Mobilex) 
only after PK withdrew its long-standing application to use 
the terminal. 
 
Announcement Meant to Pressure Russians on CPC 
--------------------------------------------- - 
 
5. (C) Nesbeth explained that, while the Southern Route deals 
had been finalized "a while ago," the public announcement had 
been delayed until November 23 in order to influence Russian 
behavior during  next week's CPC expansion meetings.  While 
CPC remains TCO's preferred export route, Nesbeth said, even 
an immediate settlement of the expansion terms would push 
project completion to "mid or late 2008," necessitating the 
new short-term export routes.  (Comment: Others have offered 
a shorter estimation of the project construction phase. End 
comment.) 
 
BTC Pipeline: Short-Term Export Solution of Choice 
--------------------------------------------- ----- 
 
6. (C) Nesbeth emphasized that, notwithstanding the 
newly-negotiated contracts to ship TCO's oil from Baku to 
Batumi by rail, TCO would prefer to ship its oil from Baku to 
market via the BTC.  The BTC pipeline was a good short-term 
fit for TCO oil, Nesbeth explained, because it would be 
underutilized until Kashagan production began in 2009 or 
2010.  TCO had already entered into negotiations with BTC 
 
 
Co., Nesbeth said, and -- with the Baku-Batumi rail option in 
pocket as leverage -- hoped to secure favorable commercial 
terms. Nesbeth noted that TCO is contractually obligated to 
specify the volumes it will ship from Baku to Batumi (up to 5 
million tons) by March 2006, and thus that date would likely 
drive the pace negotiations with BTC Co. (Nesbeth suggested 
that, even if the BTC negotiations were successful, TCO was 
likely to ship "at least a half million tons" of oil by rail 
from Baku to Batumi in order to keep the option open.) 
 
7. (C) Comment:  TCO and BTC Co. would seem likely to reach a 
short-term deal for shipping TCO oil, given their apparent 
coincidence of economic interests.  While brokering this 
complicated, multi-party transportation deal was quite an 
accomplishment for TCO, significant infrastructure 
improvements must be realized before TCO oil can be delivered 
-- at least in the quantities discussed here -- to Batumi or 
Ceyhan.  End Comment. 
ORDWAY 
 
 
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