VZCZCXRO1016
OO RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #1868/01 2690226
ZNR UUUUU ZZH
O 250226Z SEP 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3392
INFO RUCNCIS/CIS COLLECTIVE 0645
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 03 ASTANA 001868 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO TDA FOR DAN STEIN 
ENERGY FOR TYLER TILLER, COMMERCE FOR DANICA STARKS 
 
E.O. 12958: N/A 
TAGS: EPET EINV PGOV KZ
SUBJECT:  KAZAKHSTAN - CASPIAN OIL PRODUCTION, PLANS, AND PROSPECTS 
 
¶1. (SBU) Summary.  Oil production at Tengiz has expanded to 540,000 
barrels per day (bpd) and the Kashagan consortium is expected to 
produce at least 150,000 bpd by 2013 and up to 1.5 million bpd by 
¶2020. Tengizchevroil (TCO) could easily increase oil production to 
600,000 bpd but is constrained by a lack of rail car and pipeline 
capacity. TCO also faces ongoing issues with workforce development, 
sulfur storage, and facility security.  End summary. 
 
PRODUCTION AT KAZAKHSTAN'S SUPER-GIANT FIELDS 
------------------------------ -------------- 
 
¶2.  (SBU) Charge and Energy Officer toured Tengiz with TCO Deputy 
Manager for Government and Public Affairs Linsi Crain on September 
¶19.  Total recoverable oil at the Tengiz and Korolev fields through 
April 2033 is estimated at 750 million to 1.1 billion metric tons 
(approximately 6 to 9 billion barrels).  Current production capacity 
is 70,000 metric tons (or 540,000 barrels) of oil per day and 22 
million cubic meters (or 765 million standard cubic feet) of gas per 
day.  Crain confided that TCO could easily increase production to 
600,000 bpd but is constrained by a lack of rail car and pipeline 
capacity.  The day of our arrival, TCO was expected to start 
operation of a new sour gas injection and second generation plant, 
but they postponed the start of operations until the day after our 
visit, ostensibly for our own safety, given the large gas flares 
that initial operations would produce.  When asked how important TCO 
was to Chevron, Crain, a Chevron employee seconded to TCO, said they 
like to joke that "TCO feeds us Monday through Thursday, Gorgon 
(Australia's large natural gas field) on Friday, and the other guys 
take care of us on the weekend." 
 
¶3.  (SBU) Meanwhile, production at Kashagan, Kazakhstan's other 
super-giant Caspian shore oil field, is expected to start in 2013. 
Negotiations are ongoing to turn a January memorandum of 
understanding (MOU) on restructuring Kashagan into a more formal 
agreement, with the latest deadline set for October 25.  The 
Government of Kazakhstan and the Kashagan consortium -- Agip KCO -- 
have reportedly come to agreement on the details of a new operating 
structure, but not on the terms and timing of production.  According 
to Agip KCO Public Relations Manager Richard Fritz, if the deal 
holds up, ENI would continue to run the Experimental Program, 
including onshore, offshore, and drilling operations, and would 
produce up to 450,000 bpd by the end of that phase of the project. 
Under Phase 2, ENI would manage onshore operations, while Shell and 
ExxonMobil would lead offshore production, with ExxonMobil having 
particular responsibility for developing the Kalamkas field. A new 
joint operating company, led initially by Total, would be created 
with overall management responsibility for the consortium. 
KazMunaiGaz and Shell would also form a new company to manage 
overall production operations. 
 
¶4. (SBU) Agreement on production volumes and schedules, however, has 
not been reached. Agip KCO's Fritz told us on September 20 that -- 
despite press reports -- the Agip KCO consortium is committed to 
producing just 150,000 bpd by the end of the experimental phase in 
2013, not 450,000 bpd, as Minister of Energy Mynbayev was quoted as 
saying after his visit to Kashagan on September 19.  Fritz confided 
to us that Agip KCO could, if necessary, produce 170,000 bpd right 
now, using existing appraisal wells. The Kashagan contract includes 
rights to offshore oil-rich reservoirs at Kalamkas, Kairan, Aktote, 
and Kashagan SW. In total, Kashagan has up to 38 billion barrels of 
oil in place, of which 13 billion are potentially recoverable with 
the use of gas re-injection. By 2020, peak production is expected to 
be 1.5 million bpd. (Note: In a private dinner with Charge and 
Energyoff on September 20, Steve Rose, General Manager for 
ExxonMobil Kazakhstan, told us that he is not fully convinced that 
Kashagan will live up to the hype.  ExxonMobil will drill an 
appraisal well at Kalamkas in 2009 "to see what we've got." End 
note). 
 
LIMITED RAIL AND PIPELINE CAPACITY CONSTRAIN TENGIZ PRODUCTION 
------------------------------ ------------------------------- 
 
¶5.  (SBU) TCO currently owns or leases more than 22,000 railroad 
cars to transport crude, liquid petroleum gas, and sulfur, making it 
one of the largest rail car operators in the world.  According to 
TCO's Crain, with 4,000 more rail cars, TCO could increase 
production to 600,000 bpd. Unfortunately, she said, there is a 
shortage of rail transportation capacity in Kazakhstan and -- in 
addition to oil and gas -- rail cars are in high demand for the 
transportation of wheat and cement.  Agip KCO's Fritz and Kairat 
Urazbaev, First Deputy General Director of the Atyrau oil refinery, 
both confirmed the lack of sufficient rail cars for oil and gas 
transportation.  Agip KCO intends to transport approximately 300,000 
bpd of the initial 450,000 bpd production from Kashagan via rail. 
 
¶6. (SBU) In addition, failure to reach agreement on the expansion of 
 
ASTANA 00001868  002 OF 003 
 
 
the Caspian Pipeline Consortium (CPC) pipeline has become a serious 
constraint to increased production for TCO.  TCO currently ships 80% 
of its oil via CPC and noted that it is already near full capacity. 
Once Kashagan starts production, demand for pipeline capacity will 
be even greater. Agip KCO's Fritz told us that they have an 
agreement with CPC to use the pipeline to transport up to 66,000 bpd 
of oil from Kashagan. Rail and pipeline constraints have encouraged 
TCO to focus on other means of transport, including tankers.  By 
mid-October, TCO is expected to ship 20,000 bpd by tanker across the 
Caspian to Baku, where Tengiz oil will flow into the 
Baku-Tbilisi-Ceyhan (BTC) pipeline for the first time. 
 
QUALITY OF LIFE AND WORKFORCE DEVELOPMENT 
----------------------------------------- 
 
¶7.  (SBU) Crain described TCO as a $20 billion operation and 
explained that the consortium has already invested $7 billion in 
drilling, injection, transportation, and processing facilities at 
Tengiz.  The company recently completed construction of new housing 
for its 3,000 employees on site.  Each of the six new housing units 
contains a fitness center, swimming pool, and community center. 
Kazakhstani citizens hold 83% of TCO positions and represent 77% of 
TCO's managerial workforce.  For example, Kazakhstanis hold the 
company's top positions in the legal, human resources, and public 
relations departments.  Crain said that TCO has made a concerted 
effort to develop local engineering expertise, particularly among 
female employees, but has had difficulty.  For example, Kazakhstani 
law prohibits pregnant women from working with or near heavy 
machinery, which means in practice that as soon as a female engineer 
discloses her pregnancy (or is found to be pregnant in a routine 
medical checkup), she must be reassigned to another part of the 
company. Agip KCO's Fritz also told us that they have had difficulty 
developing a skilled local workforce, particularly welders and pipe 
fitters.  During the past three years, Agip KCO has trained more 
than 700 workers for these positions at its Atyrau Training Center, 
but once the workers find employment, turnover is extremely high. 
"They don't want to work these long hours or under these difficult 
conditions," according to Fritz. 
 
¶8. (SBU) TCO has a modern medical center on site, with several 
doctors on staff. Crain told us that local residents in and around 
Tengiz come to TCO when they have a medical emergency and women have 
been known to come to TCO to have their babies delivered.  The 
dining hall at TCO serves 3,000 people and offers Indian, Asian, and 
Tex-Mex cuisine. The company prides itself on its safety record 
There have been no TCO "days away from work" (DAFW) cases since 
April 2007, which totaled to more than 12 million cumulative man 
hours without a DAFW injury through July 2008.  To promote traffic 
safety, TCO plans to bring U.S. traffic safety engineers to Atyrau 
and Almaty in October to conduct training seminars and evaluate 
local traffic conditions. Crain welcomed the participation of 
Embassy staff in those activities. 
 
SULFUR STORAGE AND DISPOSAL STILL AN ISSUE 
------------------------------------------ 
 
¶9.  (SBU) TCO continues to grapple with legal, financial, and public 
relations issues stemming from the enormous production of sulfur 
associated with Tengiz oil production.  Sagyn Lukpanov, director of 
the social entrepreneurial corporation Caspiy, reminded us on 
September 18 that there are 9 million tons of sulfur stored above 
ground at Tengiz.  He acknowledged that for the past year, TCO has 
been able to sell more sulfur than it produces, particularly to 
China for agricultural purposes, but claims that the company has not 
sufficiently addressed the long-term storage and health issues of 
its sulfur production. (Note:  TCO denies that there is any 
environmental or health impact whatsoever from its on-site 
above-ground sulfur storage.  End Note.)  Caspiy, which was created 
with financial and material support from the local government and 
remains 49% government-owned, established a working group with TCO, 
Agip KCO, the Ministry of Energy and Mineral Resources, and the 
Ministry of the Environment to draft a national strategy for sulfur 
storage, transportation, and sales.  According to Lukpanov, TCO 
agreed in a meeting this summer with Minister of Energy Mynbayev to 
eliminate all of the sulfur stored above-ground by 2013.  Deputy 
Akim Nurman Nurbekov told us on September 18 that TCO had agreed to 
remove all sulfur by 2012.  TCO's Crain insisted, however, that TCO 
had made no firm commitments and that there was no agreement in 
writing to remove all Tengiz sulfur by a certain date. She said that 
Chevron's senior leadership is working directly with Deputy Prime 
Minister Shukayev to resolve this issue. Crain reminded us that TCO 
paid a fine of $370 million to the oblast government for alleged 
violations of environmental regulations associated with its sulfur 
production and storage, but maintained that the central authorities 
have quietly agreed that TCO may deduct this amount from future 
royalty payments to Kazakhstan.  When asked whether Kashagan will 
 
ASTANA 00001868  003 OF 003 
 
 
produce the same levels of sulfur as TCO, Agip KCO's Fritz said, 
"No, because we will re-inject 80% of the sulfur gas back into the 
well from a very early stage. In case we do have to store sulfur 
above ground, we will construct a temporary storage facility where 
the sulfur blocks will be fully sealed and will have no contact with 
the air." 
 
SECURITY ISSUES AT TCO 
---------------------- 
 
¶10. (SBU) Security at TCO is tight, although there are areas of 
vulnerability.  The company strictly enforces a 100% id check policy 
on site, even for VIP visitors touring the facility in a TCO vehicle 
together with senior management.  Nevertheless, TCO reports minor 
problems such as the theft of scrap metals and other materials.  A 
public highway runs directly parallel to TCO's main production 
facility and private vehicles can approach up to 200 meters of the 
facility without encountering a roadblock. Steve Witham, TCO's 
Security Manager, told us that they successfully relocated two local 
villages before the facility was built and noted that the highway is 
infrequently traveled. Nevertheless, he acknowledged that the 
highway posed a security risk and Crain deliberately avoided taking 
our party down that road for traffic safety reasons.  Witham said 
that cooperation with the local Kazakhstani law enforcement and 
security forces was generally good, although he characterized them 
as "inefficient" and "opportunistic." 
 
MILAS