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O 170936Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3840
INFO RUCNCIS/CIS COLLECTIVE 0809
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0208
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RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 04 ASTANA 002259 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, EUR/CARC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV SENV KZ
SUBJECT:  KAZAKHSTAN:  AMBASSADOR TOURS TENGIZ AND KASHAGAN 
 
REF:  (A) ASTANA 01868 (B) ASTANA 02025 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The Ambassador toured the supergiant oil fields 
Tengiz and Kashagan on November 11 and 12 respectively, discovering 
in the process new facts about future production, transportation 
options, public perceptions, labor relations, and government 
pressure at these two mega-projects.  END SUMMARY. 
 
TENGIZ OIL AND GAS PRODUCTION 
 
¶3.  (SBU) According to Todd Levy, General Director of Tengizchevroil 
(TCO), the Tengiz and Korolev oil fields currently hold about 12 
billion barrels of recoverable oil; only 6 billion barrels are 
covered in the current concession agreement with TCO, which expires 
in 2032.  Levy reported that in 2008, TCO had $7 billion in 
earnings, paid $5.5 billion in taxes and royalties to the Government 
of Kazakhstan, and spent $1.2 billion on Kazakhstani goods and 
services. 
 
¶4.  (SBU) TCO's Levy estimates that, if the company's third 
generation Future Growth concept is approved, Tengiz could produce 
up to 1 million barrels per day by 2014.  He said, however, that 
national oil company KazMunaiGas (KMG) has not yet approved the 
Future Growth concept, which would require the partners to invest 
dividend payments in infrastructure improvements, reinject nearly 
all of the field's associated gas, and forego the revenue from 
natural gas sales for the time being.  TCO's other consortium 
partners, ExxonMobil and LukArco, have approved the Future Growth 
concept. 
 
¶5.  (SBU) TCO exports up to eight billion cubic meters (bcms) of 
natural gas each year, which it sends through the Central 
Asia-Center gas pipeline (majority-owned by Gazprom) from Kazakhstan 
to Russia and then to Ukraine for domestic consumption (Gazprom will 
not permit transit shipment to Europe).  TCO produces another two to 
three bcms of natural gas, which it sells at below-market rates to 
the government.  "We supply all of the gas to western Kazakhstan," 
said Levy.  In addition, according to Levy, TCO produces 25,000 
British Thermal Units (BTUs) a day of butane and propane, which it 
ships by rail through Russia to the Black Sea port of Novorossiysk. 
 
KASHAGAN INITIAL PRODUCTION LOWER THAN EXPECTED 
 
¶6.  (SBU) Richard Fritz, Public Relations Manager for AgipKCO, the 
lead operator of the Kashagan consortium, surprised us by saying 
that Kashagan will not produce 1 million barrels per day (bpd) of 
crude "before the end of the next decade."  He told the Ambassador 
that first commercial oil production will be 75,000 bpd on December 
1, 2012.  Fritz also disclosed that although AgipKCO plans to 
reinject 80-90% of the associated gas, the company will export up to 
8 bcms of natural gas per year. 
 
¶7.  (SBU) The size, complexity, and scale of the onshore and 
offshore operations at Kashagan continue to amaze even the seasoned 
observer.  For example, to construct its onshore processing 
facility, AgipKCO used six times the amount of steel used to 
construct the Eiffel Tower.  The facility has 70,000 tons of pipe in 
a pipe rack 1.2 kilometers long and six stories high.  And each of 
its three onsite storage tanks, built locally by MontazhSpetsStroi, 
holds up to 500,000 barrels of oil.  AgipKCO has also invested more 
than $250 million in local infrastructure, including water, power, 
gas, roads, and a rail line used to ferry workers to and from the 
onshore plant.  After touring the extensive onshore facilities and 
offshore drilling islands, it is almost possible to understand how 
such a project could cost upwards of $38 billion -- for the first 
phase alone. 
 
EXPLORING ALTERNATIVE TRANSPORTATION 
 
¶8.  (SBU) TCO's Levy said that the delays in expanding the capacity 
 
ASTANA 00002259  002 OF 004 
 
 
of the Caspian Pipeline Consortium (CPC) pipeline to Novorossiysk 
have led TCO to pursue other transportation options for new 
production, such as increased rail shipments through Russia and 
through the Caucasus.  Currently, TCO ships two-thirds of its 
expanded crude production (approximately 210,000 barrels per day) 
through Russia to Odessa by rail and one-third (100,000 bpd) via 
12,000 deadweight-ton, double-hull tankers to Baku, then by rail 
through Azerbaijan and Georgia to Batumi or Kulevi.  TCO currently 
uses 8,200 rail cars to transport its crude, but negotiations are 
underway to increase the number to 11,000. 
 
¶9.  (SBU) When asked about the importance of the Baku-Supsa 
pipeline, Levy said that TCO has no need for it at the moment. 
"We're fine with the current arrangement," he said.  He did confirm 
that TCO is moving Tengiz crude through the Baku-Tbilisi-Ceyhan 
(BTC) pipeline, but due to its mercaptan content and concerns about 
blending Tengiz with Azeri crude, TCO will restrict itself to less 
than 10% (100,000 bpd) of the total volume of BTC. 
 
ENVIRONMENTAL PROBLEMS AND PERCEPTIONS 
 
¶10.  (SBU) Although TCO's environmental standards and performance 
have been "terrific," according to Levy, the local media have 
created the misperception that the company is a major polluter and 
contributes to the environmental degradation of the Caspian Sea's 
fragile ecosystem.  "It's been our biggest battle," he said. "The 
local press bashes us and we have no recourse, because they're 
controlled by the local government.  Let's face it," he said, "they 
view environmental issues as an opportunity" to extract rent.  For 
example, according to Levy, TCO has been well within its annual 
permit for gas flaring, despite a recent increase due to the launch 
of its sour gas injection plant.  Nevertheless, the local government 
has accused TCO of exceeding its authorized amount and TCO must 
fight the charges in court. 
 
¶11.  (SBU) Levy also said that TCO has invested significantly in 
scientific studies, monitoring technology, and expert advisors to 
monitor air, soil, and water quality, but that has not alleviated 
the pressure from the local press or the local government, even when 
the environmental protection work is carried out together with the 
Ministry of Environment.  TCO Operations Manager Tim West said that 
local NGOs invited to tour Tengiz have subsequently written 
"inflammatory" letters accusing the company of unsafe practices.  He 
also claimed that local media routinely ignore positive 
environmental reports, such as the World Health Organization's 2008 
World Health Report, which notes improvements in longevity, health, 
and diet for Kazakhstanis. 
 
¶12.  (SBU) TCO's Levy does not suspect the involvement of other 
governments in spreading negative information about TCO's 
environmental impact, but he did note that environmental fines 
collected from TCO go to the local government, and he suggested that 
it therefore has a vested interest in promoting popular 
misperceptions. 
 
¶13.  (SBU) AgipKCO's Fritz echoed the comments of TCO's Levy on the 
environment, noting that Agip has invested heavily in technology and 
expertise to monitor and sample air, soil, and water quality since 
the project began.  Nevertheless, AgipKCO receives complaints from 
the local government and negative press attention on a regular 
basis. 
 
SULFUR STORAGE AND SALES 
 
¶14.  (SBU) TCO continues to produce, store, and sell significant 
quantities of sulfur, a by-product of the associated gas in the 
Tengiz and Korolev reservoirs.  In fact, Levy estimates that TCO 
will supply 10% of the world's export market for sulfur by 2017. 
TCO currently stores eight million tons of sulfur in the open air 
and will produce 2.4 million tons in 2008.  They have sold 1.1 
million tons in 2006-2007 and will sell 3.5 million tons in 2008 (or 
145% of production).  Levy said TCO is committed to moving the 
 
ASTANA 00002259  003 OF 004 
 
 
sulfur.  "Don't tell the markets this, but we'll sell regardless of 
price," he said. 
 
¶15.  (SBU) Unfortunately, Levy said, it has not been easy to market, 
sell, or transport TCO's sulfur, particularly because they insist on 
transparency in the supply chain and sell only to end users.  He 
also confided that the local government regularly pressures TCO to 
sell the sulfur, and if TCO cannot find its own buyers, the Akimat 
will provide a list of companies willing to buy, some of them 
connected to government officials such as Minister of Industry and 
Trade Shkolnik or KMG President Kabyldin. 
 
¶16.  (SBU) AgipKCO's Fritz said they will avoid TCO's sulfur storage 
troubles by reinjecting 80-90% of the associated gas back into the 
well and selling the remainder.  Any sulfur that must be stored will 
be palletized and sealed, not crushed, to avoid sulfur dust coming 
into contact with the atmosphere. 
 
LOCAL LABOR RELATIONS 
 
¶17.  (SBU) More than 80% of TCO's 3,500 employees are Kazakhstani 
citizens, including 77% of all managers and supervisors.  Of the 
approximately 700 expatriate staff, 300 are from Russia or other CIS 
countries and 400 are U.S. citizens, with another 100 American 
family members living off-site in Atyrau. 
 
¶18.  (SBU) Following a violent clash in 2006 between Kazakh laborers 
and Turkish supervisors, TCO strengthened the monitoring and 
oversight of project managers and adjusted the ethnic mix of its 
workforce, replacing Turkish supervisors with Indian and Filipino 
managers. 
 
¶19.  (SBU) TCO has also promoted local employees to management 
positions, including three Kazakhstanis who joined the Ambassador 
for lunch.  Two of them have been with the company for 16 years and 
one, a female health, environment and safety supervisor, has been 
with TCO for eight years.  "We set a standard and an example for 
other companies to follow," she told the Ambassador. 
 
¶20.  (SBU) AgipKCO's Fritz expressed concern about the shortage of 
skilled local labor and said this issue would become more acute as 
Kashagan moved closer to commercial production.  He was also very 
skeptical of KMG's ability and capacity to become the lead operator 
of the Kashagan project as the new agreement signed on October 31 
anticipates, saying, "They're like school kids starting out with a 
Ph.D. program."  AgipKCO currently employs 12,000 workers. 
 
GOVERNMENT PRESSURE 
 
¶21.  (SBU) Without going into detail, TCO's Levy made clear that the 
company is besieged by letters, phone calls, and subpoenas from the 
Atyrau Akimat.  He said they employ 15 lawyers to handle corporate 
cases, and "they are the busiest people in the company," appearing 
in court every day of the week.  "It's killing us to answer these 
thousands of inquiries," he said. 
 
¶22.  (SBU) TCO is less concerned about national legislation and 
regulations, such as the new tax code and crude export duty.  When 
asked if he thought TCO's contract would have to be approved by a 
separate act of parliament in order to preserve its tax stability 
clause, Levy said the draft tax code was modified so that TCO's 
contract, which was approved by a presidential decree, would not 
require a separate parliamentary review.  As for the export duty, 
Levy said simply, "We haven't been asked to pay it." 
 
¶23.  (SBU) AgipKCO's Fritz was much less cautious in his criticism 
of the local government.  He said the government at all levels 
considers Kashagan as "a milk cow" and suggested that there is an 
expectation that government officials involved in the project will 
"get something out of it for themselves."  He said AgipKCO receives 
50-60 letters a week from the local government about environmental 
and other issues.  He estimated that 5-10 of the letters require 
 
ASTANA 00002259  004 OF 004 
 
 
company lawyers to appear in court.  AgipKCO employs two expatriate 
lawyers and six Kazakhstani lawyers.  Surprisingly, Fritz said that 
having the national oil company KMG as a major equity partner does 
not help reduce the pressure from the government.  "We get no 
support or assistance from KMG on any of these issues," he said. 
 
HOAGLAND