VZCZCXRO0530
OO RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #0970/01 1430645
ZNR UUUUU ZZH
O 220645Z MAY 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2461
INFO RUCNCIS/CIS COLLECTIVE 0510
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 03 ASTANA 000970 
 
SENSITIVE 
SIPDIS 
 
H PLEASE PASS TO CODEL RAHALL 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET OVIP OTRA KZ
 
SUBJECT: SCENESETTER FOR CODEL RAHALL'S MAY 25-27 VISIT TO 
KAZAKHSTAN 
 
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Summary 
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¶1. (SBU) Summary:  Your visit to Kazakhstan comes at a particularly 
opportune time.  With its thriving energy sector and recent 
selection as 2010 chairman of the Organization for Security and 
Cooperation in Europe (OSCE), Kazakhstan is showing increasing 
confidence on the international stage.  The country is rightly proud 
of its achievements:  a booming economy, rapidly expanding national 
capital, and largely harmonious multi-ethnic society.  Kazakhstan 
has proven to be a reliable security partner and a steady influence 
in a turbulent region.  The pace of democratic reform, however, has 
been slow, with political institutions, civil society, and the 
independent media still underdeveloped.  Our fundamental strategic 
objective is a secure, democratic, and prosperous Kazakhstan that 
embraces market competition and the rule of law; continues 
partnering with us on the global threats of terrorism, WMD 
proliferation, and narco-trafficking; and develops its energy 
resources in a manner that bolsters global energy security.  We 
would welcome your assistance in underlining to your Kazakhstani 
interlocutors the importance of maintaining a good investment 
climate, diversifying energy transport routes, and following through 
on the democratic reform commitments Kazakhstan made when selected 
to be 2010 OSCE chair.  End Summary. 
 
--------------------------------------------- ----- 
Strong Growth, But Short- and Long-Term Challenges 
--------------------------------------------- ----- 
 
¶2. (SBU) Kazakhstan is the region's economic powerhouse, with an 
economy larger than that of all the other Central Asian states 
combined.  Economic growth averaged 9.2% a year during 2005-07, and 
the percentage of the population living below the subsistence level 
dropped from 28% in 2001 to under 10% at present.  The energy sector 
is the dominant earner, with oil exports accounting for roughly a 
third of GDP.  In the long term, Kazakhstan must focus on 
diversifying its economy, building up non-extractive industries, 
agriculture, and the service sector.  In the short term, Kazakhstan 
is facing duel challenges of rising inflation, propelled by soaring 
international prices on food and agricultural commodities, and 
reduced economic growth, a reflection of the domestic impact of the 
global financial crisis -- which has caused a significant 
contraction in Kazakhstan's construction and real estate sectors. 
In April, the government imposed a temporary ban on the export of 
wheat in order to ensure adequate domestic supply and to keep 
domestic prices down on bread. (Note: Kazakhstan produces much more 
wheat than it consumes.  We thus expect the export ban to be lifted 
once the next harvest comes in.  End Note.)  At the end of 2007, the 
government announced a $4 billion assistance program for 
construction and real estate. 
 
------------------------ 
An Emerging Energy Power 
------------------------ 
 
¶3. (SBU) Kazakhstan exported just over 60 million tons of crude oil 
in 2007 and is expected to be one of the world's top ten oil 
producers soon after 2015.  The country also has significant natural 
gas reserves -- 1.8 trillion cubic meters is a low-end estimate -- 
but for now, natural gas exports are relatively small, just 10.2 
billion cubic meters in 2007, in part because gas is being 
reinjected to maximize crude output.  U.S. companies have 
significant ownership stakes in Kazakhstan's three largest oil and 
gas projects:  Kashagan, Tengiz, and Karachaganak. 
 
¶4. (SBU) Kashagan -- the largest oil field discovery since Alaska's 
North Slope and perhaps the world's most technically complex oil 
development project -- is expected to commence production in 2012. 
In January, the Kazakhstani government and the Kashagan consortium's 
international partners agreed on revised terms for the Kashagan 
contract which resulted in a new operatorship model, financial 
compensation to Kazakhstan for several years of production delays 
and significant cost overruns, and an increased ownership stake and 
management role for Kazakhstan's state oil and gas company, 
KazMunaiGas (KMG).  Kashagan's current equity stakeholders are as 
follows:  ExxonMobil (16.8%), Shell (16.8%), Total (16.8%), Eni 
(16.8%), KMG (16.8%), ConocoPhilips (8.4%), and Inpex (7.6%). 
 
¶5. (SBU) Tengiz -- with a 50% Chevron stake, 25% ExxonMobil, 20% 
KMG, and 5% LukArco - is the world's deepest operating "super-giant" 
oil field, with the top of the reservoir at about 12,000 feet deep. 
Crude production at Tengiz is expected to increase later this year 
from 400,000 barrels per day to 540,000, once the project's second 
generation expansion comes on line.  Karachaganak (with a 32.5% BP 
Group stake, 32.5% Eni, 20% Chevron, and 15% Lukoil) is one of the 
world's largest oil and gas condensate fields.  Karachaganak 
 
ASTANA 00000970  002 OF 003 
 
 
produced 10.4 million tons of oil and 12 billion cubic meters of gas 
in 2007. 
 
¶6. (SBU) The Kazakhstanis recognize they do not have the capability 
to exploit their oil and gas resources on their own, especially 
given the complexity of Kazakhstan's oil and gas projects. 
Kazakhstan thus continues to welcome foreign investment in energy 
exploration and production, and both the Kazakhstani government and 
the international companies are committed to an enduring 
relationship.  That said, Kazakhstan has grown increasingly 
assertive in its energy sector in recent years, reexamining the 
terms of existing contracts, driving a harder bargain with 
prospective investors, and aggressively pursuing environmental and 
tax claims against international oil companies.  (For example, the 
Tengiz consortium is currently fighting a $300 million environmental 
fine for on-site storage of several million tons of sulfur.  The 
consortium received all the proper permits for sulfur production, 
and maintains that no permits are necessary -- or available -- for 
sulfur storage.)  In October 2007, President Nazarbayev signed 
legislation which gives the government the right to terminate a 
subsoil use contact if it determines that a company's actions 
violate Kazakhstan's national economic security interests. 
Nazarbayev has stressed publicly that the legislation would be not 
be applied retroactively, against contracts that already existed 
when the legislation went into effect. 
 
------------------------- 
Bringing Energy to Market 
------------------------- 
 
¶7. (SBU) With major production increases on the horizon, Kazakhstan 
must develop additional transport routes to bring its oil and gas to 
market.  Our policy is to encourage Kazakhstan to seek diverse 
routes, which will ensure the country's independence from transport 
monopolists.  Currently, the bulk of Kazakhstan's crude oil is 
exported via Russia, including through the Transneft system and the 
independently-owned Caspian Pipeline Consortium (CPC) pipeline, in 
which Chevron holds a 15% interest.  Near-term crude production 
increases are likely to flow by rail through Russia, by tanker 
across the Caspian Sea to Baku, and through the CPC pipeline, should 
an agreement be reached with Russia on CPC expansion.  We believe 
that a trans-Caspian oil pipeline must be built to handle later 
production growth; however, Kazakhstan is reluctant to openly pursue 
this option in the absence of an agreement on delimitation of the 
Caspian Sea among the five Caspian littoral states.  Moving 
increased volumes of Kazakhstani oil from Baku onward is also a 
challenge, and will likely require expansion of existing pipelines 
or construction of new ones that run through Georgia, such as 
Baku-Tbilisi-Ceyhan.  Over 90% of Kazakhstan's limited gas exports 
currently flow through Russia.  Kazakhstan hopes to export 5 billion 
cubic meters of gas annually to China by 2009. 
 
--------------------------- 
Democratic Development Lags 
--------------------------- 
 
¶8. (SBU) While the Kazakhstani government articulates a strategic 
vision of democracy, it has lagged on the implementation front. 
This in part reflects the political reality that President 
Nazarbayev remains extraordinarily popular, while the opposition is 
weak and fractured.  It also is a result of the government's 
resistance to fully competitive political processes.  In May 2007, 
significant amendments were adopted to Kazakhstan's constitution 
which were touted as strengthening parliament, but also removed 
terms limits on Nazarbayev.  In parliamentary elections held in 
August 2007, Nazarbayev's Nur Otan party received 88 percent of the 
vote and took all the seats in parliament.  The OSCE election 
observation mission concluded that the elections did not meet OSCE 
standards. 
 
¶9. (SBU) While Kazakhstan's diverse print media includes a plethora 
of opposition papers sharply critical of the government and of 
Nazarbayev personally, the broadcast media is almost exclusively in 
government hands and maintains a pro-government line.  Several 
opposition web-sites were temporarily shut down by the government in 
late 2007 for uploading recordings of embarrassing conversations 
between senior government officials that were apparently made by 
Nazarbayev's former son-in-law, Rakhat Aliyev, who was recently 
convicted in absentia of plotting to overthrow Nazarbayev.  Since 
mid-April, the Kazakh- and English-language websites of Radio Free 
Europe/Radio Liberty (RFE/RL) have been inaccessible in Kazakhstan. 
On May 20, RFE/RL issued a press release which maintained that the 
Kazakhstani government likely blocked the sites deliberately.  We 
have raised the issue with senior Kazakhstani officials, but it 
remains unresolved. 
 
¶10. (SBU) When Kazakhstan was selected as 2010 OSCE chairman at the 
 
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OSCE ministerial in Madrid in November 2007, Kazakhstan publicly 
committed to undertake several democratic reforms:  specifically, 
that by the end of 2008, it would amend its election and media 
legislation to better meet international standards and liberalize 
registration procedures for political parties and media outlets. 
Kazakhstan also promised to support the OSCE's "human dimension" and 
preserve the mandate of the OSCE's Office of Democratic Institutions 
and Human Rights (ODIHR), including its critical role in election 
observation.  The government has recently initiated working groups 
with participation from the political opposition and NGOs to discuss 
amendments to the election and media legislation.  Ensuring that 
Kazakhstan follows through on its so-called "Madrid commitments" is 
one of our bilateral priorities for 2008. 
 
-------------------- 
Iraq and Afghanistan 
-------------------- 
 
¶11. (SBU) Kazakhstan is the sole Central Asian country participating 
in Operation Iraqi Freedom (OIF).  Since August 2003, the 
Kazakhstanis have maintained a military engineering unit at FOB 
Delta in Al-Kut (Wasit province) which has disposed of over 4.5 
million pieces of unexploded ordnance.  The unit also provides 
training to Iraqis in ordnance destruction.  Kazakhstan is an 
important partner for Afghanistan's Operation Enduring Freedom 
(OEF).  To date, Kazakhstan has facilitated over 4000 cost-free 
overflights for U.S. military aircraft supporting OEF.  Kazakhstan 
is also providing Afghanistan with $2.88 million in assistance in 
2008, which is being used for food and seed aid and to construct a 
hospital, school, and road.  The Kazakhstanis are encouraging their 
private sector to seek out investment opportunities in Afghanistan, 
and have indicated that they want to make Afghanistan a focal point 
for their OSCE chairmanship. 
 
----------------------------- 
Non-Proliferation Cooperation 
----------------------------- 
 
¶12. (SBU) Non-proliferation cooperation has been a hallmark of our 
bilateral relationship since Kazakhstan became independent and 
agreed to give up the nuclear arsenal it inherited from the USSR. 
Our bilateral Cooperative Threat Reduction (CTR) program has 
facilitated the dismantlement of Kazakhstan's intercontinental 
ballistic missile launchers, closure of test tunnels and boreholes 
at the former Soviet nuclear test site in Semipalatinsk, and 
elimination of an anthrax weapons production facility.  Several 
critical CTR programs are ongoing, including the effort to secure 
and store spent fuel from a closed plutonium production reactor, as 
well as a biological threat reduction program aimed at ensuring 
effective Kazakhstani control of dangerous pathogens.  In December 
2007, the U.S. and Kazakhstan agreed to extend our bilateral 
umbrella agreement for the CTR program for an additional seven 
years.  However, the Kazakhstanis still have to ratify the 
extension.  In the interim, we have faced difficulties in receiving 
the tax and customs exemptions necessary for us to continue 
uninterrupted implementation of the CTR program. 
 
------------------------------- 
Relations With Russia and China 
------------------------------- 
 
¶13. (SBU) The Kazakhstanis continue to deftly balance relations with 
Russia, China, and the U.S., and view the U.S. as a critical 
counterweight to their two very powerful neighbors.  Social, 
cultural, and personal links help provide Russia with unmatched 
influence in Kazakhstan.  Kazakhstan's population is approximately 
one-third ethnic Russian, and Russian remains the dominant language 
of the country.   The most popular TV stations provide a heavy diet 
of programming from Russia, and the most widely-read newspapers 
cover events in Russia closely (and rarely unfavorably).  Nazarbayev 
and Putin met more than 15 times over the last two years.  New 
Russian President Medvedev is visiting Kazakhstan during May 22-23, 
his first trip abroad as president -- a clear signal of the 
importance Russia attaches to its relationship with Kazakhstan. 
Relations with China have strengthened as fears of Chinese 
encroachment have largely receded.  Kazakhstan-China trade grew by 
66% in 2007.  China is also a major player in Kazakhstan's energy 
sector.  A Kazakhstan-China oil pipeline has an annual capacity of 
ten million tons of crude, with capacity to double when its 
expansion is completed. 
 
ORDWAY