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OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
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DE RUEHTA #2176/01 3091124
ZNR UUUUU ZZH
O 041124Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3730
INFO RUCNCIS/CIS COLLECTIVE 0768
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0167
RUEHKO/AMEMBASSY TOKYO 0877
RUEHIT/AMCONSUL ISTANBUL 0081
RUCNDT/USMISSION USUN NEW YORK 2001
RUEHNO/USMISSION USNATO 2335
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RUEAIIA/CIA WASHDC
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RHEHNSC/NSC WASHDC 0330
RUEKJCS/SECDEF WASHDC 0247
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 02 ASTANA 002176 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  KASHAGAN AMENDMENT FINALLY SIGNED 
 
REF:  ASTANA 2025 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY.  On October 31, Minister of Energy Mynbayev and 
Kashagan consortium partners KazMunayGas, ExxonMobil, Total, 
ConocoPhillips, Shell, and INPEX signed four documents amending the 
Kashagan production sharing agreement (PSA) to increase 
KazMunaiGas's (KMG) stake from 8.33% to 16.81% and restructure the 
management and operator leads for the project.  Several of the 
companies were represented at the signing ceremony by their CEOs, 
some of whom expressed disappointment that they were unable to meet 
with President Nazarbayev.  Under the Kashagan PSA, the licensed 
exploration and production area also includes the oil-bearing 
structures Kalamkas, Aktoty, and Kairan, in addition to Kashagan 
itself.  According to current operator Agip KCO, recoverable oil 
reserves at Kashagan are estimated at 7-9 billion barrels and total 
oil in-place at 38 billion barrels.  First oil production will be 
150,000 barrels per day (bpd) in 2013, followed by 370,000 bpd in 
2014, 450,000 bpd in 2015, and 1.5 million bpd under full field 
development.  END SUMMARY. 
 
NEW OPERATORSHIP 
 
¶3.  (SBU) The October 31 agreement established a new joint venture, 
the North Caspian Operating Company (NCOC BV), to assume the 
Kashagan operator responsibilities currently carried out by Agip 
KCO.  The operatorship will transfer from Agip KCO to NCOC in 
January 2009.  NCOC will provide monitoring and oversight, project 
planning, partner coordination, reservoir modeling, conceptual 
studies, early development plans, and government affairs and public 
relations services for the Kashagan venture.  The Managing Director 
of NCOC will initially be provided by Total and will rotate among 
the partners every two to three years.  The Deputy Managing Director 
will always be a KMG executive.  The NCOC will be staffed by 
representatives of all partner companies and will be run according 
to Total's corporate management system.  (NOTE:  The agreement calls 
for the Managing Director to employ 350 staff, none of whom have yet 
been recruited or hired.  In addition, Shell and KMG will require 
another 100 management staff by the end of 2009 and 1100 by first 
oil in 2013.  Privately, Shell executives told us that they are 
concerned about the consortium's ability to attract, develop, and 
retain enough qualified staff to fill these positions.  END NOTE.) 
 
INCREASED KMG EQUITY 
 
¶4.  (SBU) KMG increased its equity in the Kashagan project from 
8.33% to 16.81%, using finance provided by the consortium at LIBOR 
plus 3%.  The new shareholder structure is as follows:  Eni 16.81%, 
ExxonMobil 16.81%, KMG 16.81%, Shell 16.81%, Total 16.81%, 
ConocoPhillips 8.40%, INPEX 7.56%.  Eni will retain responsibility 
for the delivery of first oil under the Experimental Program (Phase 
1) of the Kashagan Project.  In Phase 2, Shell will lead offshore 
development, Eni will run the onshore plant, and ExxonMobil will 
manage drilling operations.  In addition, Shell will manage 
production operations after the start up of Phase 1, with KMG 
progressively assuming greater responsibility.  ConocoPhillips will 
assume audit responsibilities for the new operatorship company 
throughout the life of project.  To carry out their respective 
responsibilities, Eni, Shell, and ExxonMobil will have appropriate 
authority on matters such as staffing, procurement, and operating 
procedures, and will apply their own companies' management systems. 
 
PRIORITY PAYMENTS TO KAZAKHSTAN 
 
¶5.  (SBU) Bonus payments and schedules were not altered by the PSA 
amendment, although a new priority payment was introduced according 
to a Memorandum of Understanding signed in July.  According to 
Minister of Energy and Mineral Resources Sauat Mynbayev, "As soon as 
oil from Kashagan is sold, a priority payment will immediately go to 
the state budget."  The priority payment is calculated as a 
 
ASTANA 00002176  002 OF 002 
 
 
percentage of the average global price of oil.  If the price of oil 
is less than or equal to $45 a barrel, the priority payment will be 
3.5%.  If the price of oil is higher than $45 but less than $85 a 
barrel, the priority payment will be 5%; if the price is greater 
than $85 a barrel, the priority payment will be 12%. 
 
FIRM DEADLINE ON COMMERCIAL PRODUCTION 
 
¶6.  (SBU) Agip KCO initially promised to start commercial production 
at Kashagan in 2005, but was forced to postpone that date several 
times as the project encountered logistical and technical 
difficulties and the cost of Phase I increased from an initial 
estimate of $57 billion to the current estimate of $136 billion. 
KMG vice President Maksat Idenov, who played a leading role in the 
negotiations, announced that December 31, 2013 is the new deadline 
for the beginning of commercial production.  He said that first oil 
will be produced on December 1, 2012, under the Experimental 
Program.  Idenov added that "if the consortium partners go beyond 
that date, Kazakhstan will not reimburse their capital 
expenditures." 
 
¶7.  (SBU) COMMENT. According to several of the companies which are 
parties to the agreement, the terms and conditions of the deal were 
agreed more than a week ago, but the Government refused to sign 
unless their CEOs came to Astana for a signing ceremony.  The oil 
companies initially resisted this demand, with one calling it a 
"blatant power play," but ultimately all the CEOs except 
ExxonMobil's attended the signing ceremony and photo session with 
Prime Minister Masimov.  They were chagrined, however, when a 
promised meeting with President Nazarbayev failed to materialize, 
due to his attendance at a meeting of Shanghai Cooperation 
Organization prime ministers taking place simultaneously in Astana. 
Neil Carmichael, Shell's General Manager for Central Asian Business 
Development, described the deal this way:  "We gave them a loan at a 
great rate in the middle of a financial crisis to buy an attractive 
asset at a price well below its market value.  And to top it all 
off, we have to lower our equity share and increase the amount of 
staff and management time we put in."  Nevertheless, after months of 
intense negotiations, the companies and the government were equally 
eager to sign the documents that they hope will put Kashagan back on 
track.  END COMMENT. 
 
HOAGLAND