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UNCLAS SECTION 01 OF 02 ASTANA 000119 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EINV EPET SOCI KZ
SUBJECT:  KAZAKHSTAN:  U.S. OIL EXECUTIVES DISCUSS CORRUPTION, 
COMPETITION, AND THE INVESTMENT CLIMATE 
 
REF:    A. 09 ASTANA 2027 
        ¶B. ASTANA 0061 
 
ASTANA 00000119  001.3 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On January 26, the outgoing and incoming CEOs of 
U.S. oil services company J. Ray McDermott conveyed to the 
Ambassador their optimism about the investment climate in 
Kazakhstan, and asserted that strong, fundamental corporate values 
and a refusal to engage in corrupt practices give U.S. companies a 
competitive advantage in the region.  END SUMMARY. 
 
¶J. RAY IN BAUTINO BAY 
 
¶3.  (U) J. Ray McDermott is a leading worldwide marine solutions 
company with fabrication facilities in the Americas, Middle East, 
Caspian, and Asia-Pacific.  McDermott specializes in the design, 
fabrication, transportation, and installation of offshore platforms, 
as well as the installation of offshore pipelines.  The company also 
operates a global fleet of vessels for the marine-construction 
industry, including combination derrick and lay barges.  Under the 
September 2008 lease agreement between McDermott and TenizService, 
the latter will reclaim 20 hectares of land from the Caspian Sea to 
build a steel fabrication yard in Bautino, north of Aktau, including 
landfill and sheet piling.  McDermott will provide engineering and 
construction of fabrication facilities, install utilities, procure 
yard equipment, and recruit and train Kazakhstani personnel to 
manage and operate the yard.  The annual production capacity is 
expected to be 12,000 metric tons, and the base is expected to be 
operational in the fourth quarter of 2010.  McDermott's Bautino 
fabrication yard would be just the second facility of this magnitude 
on Kazakhstan's Caspian shore with the capacity to build offshore 
oil platforms, drilling modules, and floating terminals that meet 
the demanding standards of the North Caspian's complex exploration 
and production projects. 
 
PROJECT IS BACK ON TRACK 
 
¶4.  (SBU) According to McDermott's outgoing CEO Robert Deason, the 
Bautino project is back on track after early delays and is 
progressing well.  He said the company restructured the contract 
after its joint-venture partner TenizService, in which national oil 
company KazMunaiGas (KMG) owns 49%, failed to meet its investment 
obligations.  Deason conceded that the new contract has yet to stand 
the test of time, but nevertheless, expressed his personal optimism 
about the company's prospects in Kazakhstan.   He expects the 
Bautino base to provide essential support services to all of the 
major offshore oil exploration projects in the Caspian, including 
Kashagan, N Block, and Pearls.  For example, Deason said that Shell 
(lead operator of the Pearls project) and ConocoPhillips (N Block) 
expressed interest in McDermott's services. 
 
"ALL ROADS LEAD TO TK" 
 
¶5.  (SBU) McDermott's Vice President for Europe and Central Asia, 
Dan Houser, said the biggest challenge McDermott faces is simply 
identifying the ownership structure of its partners and competitors. 
 "It's tough to say who owns what," Houser remarked.  Transparency 
in ownership structures is lacking, many subsidiaries and 
arms-length offshore partners exist, and "all roads lead to TK 
(Timur Kulibayev, President Nazarbayev's billionaire son-in-law)." 
Houser asserted that McDermott's regional competitors all have 
powerful political sponsors and effective lobbies.  For example, 
Italy's Saipem and The Lancaster Group, which is chaired by Nurlan 
Kapparov, former Vice Minister of Energy and Mineral Resources and 
former chairman of Kazakh Oil, KMG's predecessor, formed the 
joint-venture Ersai.  The Singapore-based Keppel, according to 
Houser, has a joint venture connected to Kulibayev. 
 
¶6.  (U) NOTE:  A January 27 Interfax report alleged that former BTA 
Bank chairman Mukhtar Ablyazov, who fled the country following 
 
ASTANA 00000119  002.3 OF 002 
 
 
accusations of embezzlement and financial fraud, claims that shares 
of AktobeMunaiGas were sold to the China National Petroleum 
Corporation illegally, and at half their market value.  According to 
Interfax, Ablyazov sent a letter to several law-enforcement agencies 
naming a senior government official (reportedly Kulibayev) allegedly 
responsible for the illegal transaction.  Interfax highlighted 
Ablyazov's allegations that the state's 25% stake in AktobeMunaiGas 
was sold "at a price far below market value."  END NOTE. 
 
CULTURE OF "COMPLIANCE" 
 
¶7. (SBU) Deason expressed concern about a culture of "compliance" 
(corruption) in Kazakhstan.  He said that when McDermott first 
entered the country, they were approached by brokers claiming they 
could help the company obtain contracts, "but that was the last 
thing we wanted to hear.  We just want to compete and win, fair and 
square," he underlined.  Deason declared that McDermott did not have 
a single corruption case worldwide during his tenure.  McDermott 
Vice President Dan Houser recalled a visit to the company by 
Kazakhstan's Financial Police, who initially charged the company 
with operating unlicensed planning software.  He stated the company 
quickly produced the license, resolving the issue.  Deason 
concluded, "If you follow the rules, cross your Ts, and stay in 
bounds, you can get things done in Kazakhstan." 
 
U.S. COMPETITIVE ADVANTAGE 
 
¶8.  (SBU) When Italy's ENI was the lead operator on the Kashagan 
project, Deason asserted, "It was hard for American contractors to 
get a fair shake."  He claimed that ENI would direct its fabrication 
services to Saipem, in which ENI owns a 40% stake.  He now expects 
McDermott to win more business in the Caspian region despite 
increasing competition, notably from Korean companies.  When asked 
to describe McDermott's competitive advantage, Deason underlined 
that it is no longer the company's capital, technology, or global 
reach, but rather its values.  "People trust Americans," he said. 
"We're not as desperate to please, not as willing to compromise. 
We're reliable, fair partners.  We keep our word, and deliver on our 
commitment," unlike competitors from other countries that attempt to 
renegotiate a deal once they realize they have made a promise they 
cannot keep. 
 
¶9.  (SBU) COMMENT:  As KMG Vice President Maksat Idenov (ref B) has 
made abundantly clear, the reputation of U.S. companies for honest, 
transparent business practices can give them a competitive advantage 
in Kazakhstan.  Although investing in Kazakhstan can present 
challenges, we are pleased to note that U.S. companies, like 
McDermott, continue to play fair and win big.  END COMMENT. 
 
SPRATLEN