VZCZCXRO7376
PP RUEHDBU
DE RUEHTA #0738/01 3400704
ZNY CCCCC ZZH
P 060704Z DEC 06
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 7847
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000738 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EB/ESC; SCA/CEN (O'MARA) 
COMMERCE FOR ADVOCACY CENTER: BLOPP AND DBLOOM 
 
E.O. 12958: DECL: 12/05/2015 
TAGS: BTIO ENRG EPET KZ
SUBJECT: KAZAKHSTAN: CONOCOPHILLIPS UPDATES AMBASSADOR ON 
"N" BLOCK, KASHAGAN 
 
REF: A. ASTANA 204 
     ¶B. ALMATY 2157 
     ¶C. ALMATY 1085 
 
Classified By: Ambassador John Ordway; Reasons 1.5(b) and (d). 
 
¶1. (C) Summary:  ConocoPhillips (CP) Executive Vice President 
Bill Berry told the Ambassador on the morning of December 1 
that rival Shell had recently approached CP with a proposal 
to split the offshore "N" Block.  CP had declined the offer, 
Berry said, pending an anticipated meeting with Kazakhstani 
Deputy Prime Minister Karim Masimov, whom President 
Nazarbayev had chosen to broker a final "N" Block deal. 
Following a meeting later that afternoon in which Berry 
received unspecified "bad news" from Energy Minister 
Izmukhambetov and KazMunaiGaz President Karabalin, CP 
urgently requested Ambassador's assistance in contacting 
Masimov in the U.S.  Masimov and CP Chairman Jim Mulva spoke 
later in the day, but as of December 2 CP reported no 
progress in clarifying the status of their bid. 
 
¶2. (C) Summary (continued):  Speaking of Kashagan, Berry 
reported that project partners had recently selected a new 
design for an offshore platform judged to pose safety risks; 
the corresponding first-stage infrastructure will accommodate 
production of 300,000 barrels/day (b/d), rather than the 
450,000 b/d initially planned.  Berry confirmed reports (Ref 
A) that Chevron was seeking a role in the ongoing Kazakhstan 
Caspian Transportation System (KCTS) discussions, with an eye 
toward using the planned Eskene-Kurik pipeline to ship 
"second-generation" Tengiz oil.  End summary. 
 
 
"N" Block: CP's Status Unclear 
------------------------------ 
 
¶3. (C) The Ambassador opened the meeting by briefing Berry on 
his recent conversation with Masimov on the status of CP's 
bid to participate in the development of the offshore "N" 
Block. Masimov he explained, had confirmed that President 
Nazarbayev had assigned him to sort out Shell and CP's 
competing offers.  Masimov had noted that Shell had recently 
improved its offer, making the two companies' bids virtually 
equal.  The best outcome, Masimov had concluded, would be a 
shared deal. The Ambassador suggested that Masimov was 
probably hoping that Shell and CP would reach agreement on a 
joint proposal, thus sparing Masimov and the GOK a difficult 
decision. Speculating that Shell had likely received the same 
message from Masimov Berry informed the Ambassador that Shell 
had approached CP "two weeks ago" with a proposal to split 
the block.  CP had declined, Berry said, pending an 
anticipated meeting with Masimov which he had hoped to hold 
that day, but which had been rescheduled for December 15. 
 
¶4. (C) Berry told the Ambassador that, during an afternoon 
meeting with Izmukhambetov, he expected to be pressured to 
build a petrochemical facility as part of the "N" Block deal, 
as Mulva had been pressured in June (Ref B).  However, he 
added, "no one," including Shell, would commit to building a 
petrochemical facility in Kazakhstan, least of all before the 
quantity and quality of available gas was determined.  Not 
only was the Caspian 3,000 miles away from prospective 
markets -- China and Europe -- but the end products would 
compete with higher-value crude for limited railway capacity. 
 Kazakhstan would do better to liquefy the feedstocks for 
shipment by pipeline, Berry concluded, rather than add 
transport costs by transforming them into solids such as 
polyethelene.  (Note: Post will report septel on GOK efforts 
to gain TengizChevrOil's cooperation in a petrochemical 
project.  End note.) 
 
¶5. (C) CP called back after the meeting with Izmukhambetov 
and Karabalin, reporting that Izmukhambetov had delivered 
"bad news" on the "N" Block.  CP asked for the Ambassador's 
assistance in urgently reaching Masimov who was visiting the 
U.S.  Ambassador reached Masimov shortly thereafter, and 
Masimov called Mulva later on December 1, but as of the 
morning of December 2 CP had not received a clear sense 
whether Izmukhambetov's "bad news" had been authoritative. 
(Note: Due to concerns about cell phone security, CP did not 
elaborate on what the "bad news" was.  A journalist told 
Energy Officer on December 2 that Izmukhambetov had told a 
colleague on December 1 that Shell would be given 35% of "N", 
and CP 15%, but his rumor is unconfirmed.  End note.) 
 
 
ASTANA 00000738  002 OF 002 
 
 
Kashagan:  Coping with the Design Flaw 
-------------------------------------- 
 
¶6. (C) Berry reported that Kashagan partners had recently 
selected a new design and development plan to correct flaws 
discovered a year ago in the design of an offshore platform 
(Ref C).  The new plan, he said, called for the construction 
of an initial 300,000 barrel/day production train, rather 
than the 450,000 barrel/day train initially planned.  (Berry 
did not specify when "first oil" was expected.  On November 
29, however, an ExxonMobil representative told Energy Officer 
that the new plan entailed a delay in "first oil" "at least 
until 2011 -- and maybe longer.")  Berry told the Ambassador 
that he expected the GOK to launch a fierce battle to recoup 
revenues lost due to the delays and cost overruns.  While the 
Kashagan partners were "okay" from a contract perspective, no 
oil company can win "going toe-to-toe with a sovereign 
nation," and a pay-off of some magnitude seemed inevitable. 
 
¶7. (C) Berry told the Ambassador that the other project 
partners had largely succeeded in diluting operator AGIP's 
management responsibilities, in response to partner 
perception that AGIP was to blame, at least in part, for the 
delays and cost overruns. The other companies had seconded 
"thirty to forty" additional managers to the project, he 
said, and now occupied not only the "Project Director" 
position but four "key" Deputy Director slots. 
 
KCTS Process: Chevron Wants In 
------------------------------ 
 
¶8. (C) CP's Country Manager, Nick Olds, confirmed 
ExxonMobil's earlier report (Ref C) that Chevron was seeking 
to join the ongoing Kazakhstan Caspian Transportation System 
(KCTS) discussions, with an eye toward shipping 
second-generation Tengiz volumes through a planned 
Eskene-Kurik pipeline in the years before CPC expansion. 
Project investors were hoping to finalize an MOU with the GOK 
before year's end, Olds said, in order to pave the way for 
Host Government Agreement (HGA) negotiations during 2007. 
 
¶9. (C) Berry told the Ambassador that at least some of 
Kashagan's European partners appeared inclined to ship their 
Kashagan volumes through Iran, while ExxonMobil and CP were 
still focused on the Baku-Tblisi-Ceyhan (BTC) pipeline.  With 
production from Azerbaijan's Azeri-Chirac-Guneshli (ACG) oil 
field now expected to prolong Azerbaijan's production 
plateau, he said, BTC shareholders (including CP) were 
already talking about BTC expansion.  Berry expressed 
interest in the USTDA-financed Trans-Caspian pipeline 
feasibility study, commenting that, with its projected 
"sizable" gas reserves, the "N" block might "be the starting 
point" for discussions about Kazakhstan's available gas 
supplies. 
ORDWAY