VZCZCXRO6523
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #3178/01 2540848
ZNR UUUUU ZZH
R 110848Z SEP 06
FM AMEMBASSY ALMATY
TO RUEHC/SECSTATE WASHDC 6865
INFO RUEHAST/USOFFICE ASTANA
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 ALMATY 003178 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: PGOV PHUM PREL KDEM KZ
SUBJECT: KAZAKHSTAN: KAZMUNAIGAS ANNOUNCES OFFERING OF 
SHARES IN ONSHORE PRODUCTION SUBSIDIARY 
 
ALMATY 00003178  001.2 OF 002 
 
 
¶1. (SBU) Summary: On September 4, KazMunaiGas Exploration 
and Production company (KMG E&P), the onshore production 
subsidiary of Kazakhstan's state-owned oil company, 
formally announced its intention to issue shares on both 
Kazakhstan's stock exchange (KASE) and the London Stock 
Exchange.  According to KMG insiders and press reports, 
the IPO -- which will cover up to 40% of the company's 
shares, and is expected to raise as much as $2 billion -- 
will occur before year-end.  The company simultaneously 
announced the appointment of three Western executives to 
its Board, and may be preparing other moves designed -- or 
timed -- to peak investor interest in the IPO.  End 
summary. 
 
LONG-AWAITED IPO IMMINENT 
------------------------- 
 
¶2. (SBU) KMG E&P issued a September 4 press release 
confirming its long-rumored intention to offer shares on 
KASE and global depositary receipts (GDRs) on the London 
Stock Exchange.  KMG insiders have generally refused to 
talk about the IPO, citing non-disclosure agreements, but 
Galiausat Keshubayev, Director of the Samruk Holding 
Company's Office for Management of KMG, recently confirmed 
to Econoff that the offering would occur in 2006.  KMG E&P 
will likely float approximately 40% of its shares, leaving 
a majority share in the hands of its KMG parent company. 
 
¶3. (SBU) According to a recent (January 2006) law, adopted 
in part to strengthen Kazakhstan's weak domestic stock 
market, KMG E&P must float at least 20% of its total offer 
on the KASE.  The remainder will be issued, to 
institutional investors only, on the London Stock Exchange 
in the form of Global Depository Receipts.  This type of 
offering requires relatively little disclosure on the part 
of the issuer. 
 
RAISING CASH FOR OFFSHORE ACTIVITY 
---------------------------------- 
 
¶4. (SBU) According to industry analysis, KMG E&P may raise 
as much as $2 billion from the IPO.  Asked the reasons for 
the IPO, our KMG and GOK interlocutors most often cite 
KMG's need for cash to maintain - and even increase - its 
offshore presence.  (Note: A 2005 law granted KMG the 
right to at least 50% in future offshore projects. KMG is 
rumored to already be under fiscal strain due to delays 
and cost overruns at the offshore Kashagan project, in 
which it is an 8.33% participant.  End note.) 
 
E&P SPRUCES UP FOR THE SALE 
--------------------------- 
 
¶5. (SBU) KMG E&P is Kazakhstan's third-largest oil 
producer (behind TengizChevrOil and the Karachaganak 
Petroleum Operating company) at 186,000 barrels/day. 
Analysts often speculate that, with its "easy" oil already 
tapped, KMG E&P may have reached its production peak - a 
fact which, if true, would likely dampen investor interest 
in the IPO. However, ExxonMobil's local E&P 
representative, Peter Claypoole, recently told Econoff 
that his company is nearing final agreement with KMG E&P 
to conduct joint "deep seismic" studies of a large portion 
of the onshore North Caspian - a development which shows 
clear investor confidence in onshore growth potential. 
(The agreement would give ExxonMobil certain "first 
rights" to purchase and develop promising blocks, in 
partnership with KMG.) 
 
¶6. (SBU) Claypoole told Econoff that the KMG E&P 
negotiators have drastically accelerated the pace of 
negotiations of late, a move he interprets as a sign that 
KMG wants to announce the news of a deal - "with a big 
American major" -- prior to the IPO. In another move 
presumably aimed to bolster investor confidence, KMG E&P 
announced the appointment of three new outside, Western 
board members on September 4. 
 
¶7. (SBU) KMG E&P has also moved quietly to remove a 
potential political obstacle to its IPO.  In August 2005 
the Asar political party - led, at the time, by Dariga 
Nazerbaeva, the President's eldest daughter and 
parliamentarian - publicly criticized the idea of a KMG 
E&P IPO, arguing that the sale of the "only state-owned 
oil production and refining enterprise" would "undermine 
the President's efforts to develop a strong and 
economically independent state."  In December 2005, 
following lively debate in Kazakhstan's Lower House, KMG 
 
ALMATY 00003178  002.2 OF 002 
 
 
E&P sold its shares in the Atyrau refinery - one of only 
three in Kazakhstan - to its parent, KMG, thus shielding 
the refinery from the planned privatization and defusing 
potential criticism of the IPO on "national security" 
grounds. 
 
¶8. (SBU) Comment:  While this IPO has been in the works 
for a long time, Kazakhstan's decision-makers were likely 
encouraged to move forward by the relative success of 
Rosneft's July 2006 IPO.  As the only state-owned onshore 
producer, KMG E&P has clear advantages that will appeal to 
investors, including a "pre-emptive right" to buy existing 
onshore contracts and preferential access to new onshore 
licenses.  End comment. 
 
ORDWAY