This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 ALMATY 000960 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR EB/ESC; EUR/SNEC (MANN); SCA/CEN (MUDGE) 
DEPARTMENT OF ENERGY FOR GETTO (DOE/SI); BURGESON (DOE/SI); 
WILLIAMSON (DOE/SI); HARBERT (DOE/PI) 
NSC FOR MERKEL 
 
E.O. 193056: N/A 
TAGS: OVIP PREL ECON ENRG ETRD KZ ECONOMIC
SUBJECT:  SECRETARY BODMAN'S MARCH 14 MEETINGS IN KAZAKHSTAN 
 
REF:  Almaty 886 
 
¶1.  (SBU) Summary: Secretary Bodman conducted a full day of 
meetings with Government of Kazakhstan (GOK) officials and 
energy sector representatives in Astana on March 14, on the 
eve of the Secretary's G8 energy meetings in Moscow. 
(Secretary Bodman's meeting with President Nazarbayev is 
reported Septel.)   On the topic of oil and gas pipelines, 
GOK ministers told Secretary Bodman that the GOK had 
recently approved a draft of the BTC IGA, and had submitted 
it to the Azeris with the expectation that the document 
would be signed in April or May.  Several ministers noted 
the GOK's interest in a Trans-Caspian gas pipeline, as well 
as in developing a nuclear energy program.   Kazakhstan's 
Minister of Industry and Trade appealed for the elimination 
of "WTO Plus" conditions for Kazakhstan's accession to the 
WTO. 
 
¶2.  (SBU) Summary (continued):  Secretary Bodman repeatedly 
voiced USG support for ConocoPhillips' "N Block" bid.  The 
Secretary also urged his interlocutors to assume a greater 
 
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regional leadership role, and to build stronger North-South 
ties, especially in the field of energy.  Following a brief 
by energy sector representatives on Kazakhstan's challenging 
investment climate, Secretary Bodman urged his GOK 
interlocutors to carefully balance Kazakhstan's interests 
with those of external investors when considering changes to 
the investment climate.   Despite an eleventh hour effort on 
both sides to reach consensus and sign a Second Line of 
Defense (SLD) agreement, the GOK pulled back at the last 
minute, citing an inability to gather the requisite 
ministerial signatures in time.   End Summary. 
 
¶3. (SBU)   In addition to President Nazarbayev, Secretary 
Bodman's delegation (which included DOE A/S Karen Harbert) 
met with Minister of Energy and Mineral Resources Baktykozha 
Ismukhambetov, Minister of Industry and Trade Vladimir 
Shkolnik,  Minister of Foreign Affairs Kasymzhomart Tokayev, 
Finance Minister Natalya Korzhova, Deputy Prime Minister 
Karim Masimov, and representatives from American energy 
companies operating in Kazakhstan. 
 
Pipeline Negotiations 
--------------------- 
 
¶4.  (SBU)  Secretary Bodman asked all of his GOK 
interlocutors what could be done to expedite signing of the 
Baku-Tblisi-Ceyhan (BTC) Inter-Governmental Agreement (IGA), 
and to conclude negotiations on expansion of the Caspian 
Pipeline Consortium (CPC) pipeline.   Trade and Industry 
Minister Shkolnik (the former Energy Minister) explained 
that the GOK had forwarded a draft BTC-IGA to the Azeris "a 
month ago," after having "cleaned up the draft initialed in 
September to ensure compliance with Kazakhstani 
legislation."  Energy Minister Izmukhambetov added that the 
Azeris had promised to submit proposals in the next few 
days, with the objective of finalizing the treaty in April. 
Foreign Minister Tokayev suggested that the Islamic 
Conference of Foreign Ministers, scheduled to take place in 
Baku in May, would provide a good setting for signature of 
the IGA.  He noted that either the Prime Minister or 
Izmukhambetov would be likely to sign for Kazakhstan. 
Secretary Bodman accepted these assurances of progress, but 
 
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added a cautionary note to Shkolnik:  President Nazarbayev 
had first told him the deal was done in May 2005 in Baku. 
 
¶5.  (SBU) During the Secretary's meeting with 
representatives of American energy companies, both Chevron 
and ExxonMobil singled out resolving the CPC expansion 
impasse as their companies' most critical current issue. 
Izmukhambetov later voiced optimism that the impasse could 
be resolved "in the near future," suggesting that his 
planned April meeting with Russian Energy Minister 
Khristenko might yield a solution.  At any rate, he said, 
the GOK's position was the same as that of the investors - 
"we practically negotiate together." 
 
¶6.  (SBU) Several GOK ministers acknowledged the promise of 
a potential Trans-Caspian gas pipeline.  Tokayev raised the 
subject in the context of Secretary Bodman's upcoming 
meeting with EU Energy Ministers in Budapest, underscoring 
the importance of building "a network of gas supplies" to 
the EU.  Tokayev noted that, even if the pipeline originated 
in Kazakhstan, Turkmenistan would have to play a critical 
role as a supplier of gas.  Thus, it was important that 
previous Azerbaijani-Turkmenistani problems on the issue be 
resolved.  This would take an international effort, Tokayev 
said.  "Someone must persuade them to come together." 
 
WTO Accession 
------------- 
 
¶7.  (SBU) Minister Shkolnik asked Secretary Bodman for his 
help in eliminating "WTO Plus" conditions for Kazakhstan's 
accession to the WTO.   Lead WTO negotiator Zhanar 
Aitzhanova argued that, in many cases, Kazakhstan was being 
asked to do things that recently-acceded countries had not 
been asked to do.  For example, she said, Saudi Arabia had 
not been asked to unify its pipeline tariffs, but Kazakhstan 
was.  Shkolnik asserted that the strict "WTO Plus" 
conditions actually worked contrary to the interests of 
prospective U.S. investors in Kazakhstan.   Secretary Bodman 
promised to raise the issue in Washington.  Shkolnik 
concluded the topic by emphasizing that it was important to 
Kazakhstan to finalize the WTO negotiation process "this 
year - sooner than our neighbors." 
 
Energy Minister:  Help Us with Chevron 
-------------------------------------- 
 
¶8.  (SBU) Secretary Bodman opened his meeting with 
Izmukhambetov by commenting that, based on his earlier 
conversation with President Nazarbayev (septel), Kazakhstan 
appeared ready to expand the U.S. - Kazakhstani Energy 
Partnership.  Secretary Bodman singled out three areas of 
possible cooperation:  nuclear energy, coal, and renewable 
energy.  Izmukhambetov accepted the offer of expanded 
cooperation, above all in the area of nuclear energy.  One 
of Kazakhstan's immediate objectives, he said, was to reduce 
its electricity deficit in Southern Kazakhstan by 
constructing an atomic power plant.  The GOK also placed a 
high priority on developing a petrochemical industry, 
Izmukhambetov noted. 
 
¶9.  (SBU) Following on his earlier meeting with energy 
company representatives (paragraph 11), Bodman urged 
Izmukhambetov to carefully balance the interests of 
investors with the interests of the country when 
contemplating changes in the investment climate. 
Izmukhambetov responded that a key feature of the investment 
climate was contract stability; he asked for Secretary 
Bodman's help in holding Chevron to its contractual 
obligations to pay its Tengiz royalty obligations "in kind." 
Chevron was resisting a recent GOK request to be paid in oil 
rather than dollars, he said, for fear that the GOK would 
then sell the oil to Iran.  (Note:  See reftel for Chevron's 
resolve to strictly abide by OFAC requirements, and company 
concerns about GOK's intentions regarding Tengiz royalty 
oil.  End note.)    The GOK, Izmukhambetov said, intended to 
use the oil for domestic consumption, and was willing to 
meet Chevron's condition that the oil not be sold to Iran. 
(Note:  KazMunaiGaz President Uzakbay Karabalin told A/S 
Harbert that the GOK had written a formal letter to Chevron 
guaranteeing that the royalty oil would not be resold to 
Iran.  End Note.)   However, Izmukhambetov continued, 
despite GOK assurances that the oil would be used 
domestically, Chevron intended to seek USG permission to 
deliver royalty oil to the GOK - a process which he hoped 
Bodman would involve himself with.  (Comment:  Chevron 
appears to be taking a careful, legal approach to this 
issue, creating legal cover for the company in the event 
some of its royalty oil does end up in Iran.  End Comment.) 
 
¶10. (SBU) Izmukhambetov then complained about the large 
quantities of sulfur stockpiled at Tengiz, telling Secretary 
Bodman that the area's high winds were blowing the sulfur 
into the Caspian and neighboring regions.    Izmukhambetov 
urged Secretary Bodman to persuade Chevron to sell the 
sulfur.   Ambassador Ordway replied that Chevron management 
also wanted to market the sulfur as rapidly as possible, and 
had a plan in place to do so.  Furthermore, he said, Chevron 
management believed they were now selling more sulfur than 
they were producing, thus gradually reducing the stockpile. 
Secretary Bodman declined to get involved in either issue, 
 
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suggesting to Izmukhambetov that he raise the issue with 
Chevron's leadership. 
 
Investment Climate 
------------------ 
 
¶11.   (SBU) Secretary Bodman discussed Kazakhstan's 
investment climate over breakfast on March 14 with 
representatives from American energy companies operating in 
Kazakhstan.  The company representatives voiced several 
concerns, beginning with the GOK's tendency to "criminalize 
civil issues."  "You can't make a mistake here," lawyer 
Marla Valdez said, noting that criminal actions against 
expatriates were on the rise and that at times the GOK 
appeared to be using criminal suits - and the threat of them 
- to leverage company behavior.  A second issue was 
Kazakhstan's strict fiscal code.  Terms were sufficiently 
harsh, Deloitte & Touche's Michael Sturdivant said, that few 
companies were pursuing new contracts, preferring to acquire 
companies and fields which were "grandfathered" under 
earlier, more favorable, fiscal terms.  (Comment:  In fact 
major foreign companies are vigorously competing for new 
blocks, suggesting that interest remains high despite the 
tough terms on offer.  End Comment.)  Finally, there was the 
issue of sanctity of contracts.  American Chamber of 
Commerce President Ken Mack described the process by which 
the GOK used indirect pressure, such as environmental fines 
or passage of a retroactive tax law, to coerce a company 
into "voluntarily" renegotiating an existing contract which 
the GOK perceived as unfavorable.  Ambassador Ordway 
concluded the conversation by suggesting that the GOK's 
attempt to "claw back" revenue from early subsoil contracts 
could be seen as operating according to market principles, 
in which the GOK and investors searched for the fiscal 
regime which would balance GOK and investor interests. 
 
ConocoPhillips Advocacy 
----------------------- 
 
¶12.  (SBU) Secretary Bodman voiced USG support for 
ConocoPhillips' "N Block" bid in each of his meetings. 
Deputy Prime Minister Masimov put Secretary Bodman's efforts 
in context, noting that President Nazarbayev had already 
received letters on the subject from Secretaries Gutierrez 
and Rice.  Masimov remarked that American companies had been 
the first to invest in Kazakhstan after independence - "a 
fact that is important to us."  Nazarbayev, he said, has 
"given the green light for U.S. investment."  In conclusion, 
he said, "we will consider the ConocoPhillips issue very 
carefully."   Izmukhambetov also implied that 
ConocoPhillips' bid was still in contention; he informed 
Bodman that while negotiations were underway with Shell, a 
decision had not yet been made.  If we do not reach 
agreement with Shell, he said, we will surely work with 
ConocoPhillips. 
 
GOK Initiatives 
--------------- 
 
¶13.   (SBU) Both Shkolnik and Masimov raised several GOK 
economic priorities and initiatives in discussion with 
Secretary Bodman.  Shkolnik highlighted the GOK's desire to 
 
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diversify the economy and attract investment in the non- 
extractive industries.  Shkolnik cited the development of a 
nuclear energy program as a priority, as well as enhancing 
the competitiveness of Kazakhstan's tradable goods by 
reducing their energy intensiveness.  Shkolnik proposed that 
the latter issue would make a good joint program with the 
DOE, with the objective of increasing the number of 
competitive products Kazakhstan could export to the region. 
Masimov noted several GOK economic initiatives, including 
the transformation of Almaty into a regional financial 
center; the GOK's desire to establish a "world-class" 
university in Astana; and GOK plans to diversify its economy 
by buying U.S. companies operating in fields such as 
information technology, then using the companies' experience 
to further build the sector within Kazakhstan.  For that, 
Masimov said, "we want the USG's blessing." 
 
Encouraging Kazakhstan's Regional Ties 
-------------------------------------- 
 
¶14.  (SBU) Secretary Bodman encouraged all his interlocutors 
to build on Kazakhstan's economic success and political 
stability by playing a larger role in the region. 
Kazakhstan already had well-developed economic ties to the 
North, East, and West; the U.S. would be pleased to see 
Kazakhstan increase its ties with its Central and South 
Asian neighbors, and develop a true "North-South energy 
relationship."  Bodman remarked that he had traveled to 
Kazakhstan from Pakistan, where he had found the Pakistanis 
eager to expand their cooperation with Kazakhstan.   The GOK 
ministers welcomed the idea.   Masimov told Secretary Bodman 
that, while Kazakhstan was accustomed to interacting with 
the Central Asian states, intensifying relations with 
Afghanistan and Pakistan was "a new, but welcome idea for 
us." 
 
SLD Agreement:  Last-Minute Letdown 
------------------------------------ 
 
¶15.  (SBU)  In the weeks leading up to Secretary Bodman's 
trip to Kazakhstan, both the DOE and Embassy intensified 
efforts to reach agreement with the GOK on the text of a 
Second Line of Defense Agreement implementing arrangement, 
using the Secretary's arrival as an inducement to conclude 
the lengthy negotiation process.   Days before the 
Secretary's arrival, the MFA signaled that agreement would 
 
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not be reached in time for Secretary Bodman's signature, 
only to reverse itself on March 13, provoking a flurry of 
last-minute negotiations over the text.  In a 4:00 pm 
meeting, Masimov told the Secretary that the agreement would 
be ready in time for signature over dinner.  However, at the 
last moment, Minister of Finance Korzhova declined to sign 
the document on the grounds that all the requisite 
ministerial approvals had not been obtained.  We will 
vigorously pursue signature as soon as possible. 
 
¶16. (U) Secretary Bodman's delegation did not have the 
opportunity to clear this cable. 
 
ORDWAY