VZCZCXRO9476
RR RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #2408/01 3401211
ZNR UUUUU ZZH
R 051211Z DEC 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 4046
INFO RUCNCIS/CIS COLLECTIVE 0902
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0304
RUEHKO/AMEMBASSY TOKYO 1009
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0469
RUEKJCS/SECDEF WASHDC 0384
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 03 ASTANA 002408 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: EINV EPET KZ PGOV
SUBJECT: KAZAKHSTAN:  SHELL COMMITTED TO CONTINUED 
OPERATIONS THROUGHOUT CASPIAN REGION 
 
REF: 08 ASTANA 02391 
 
¶1.  (U) Sensitive but unclassified.  Not for public internet. 
 
¶2.  (SBU) SUMMARY:  Shell Kazakhstan,s Asset Manager for 
Kashagan, Devin Garrity, and County Chairman Campbell Keir 
met with CDA Kevin Milas on December 3 to provide an update 
on Shell operations in the Caspian Sea region.  Offering a 
generally positive assessment, Keir and Garrity said that 
Shell plans to maintain its interests in the Arman, Pearls 
(Zhemchuzhina), and Kashagan fields and were cautiously 
optimistic that the CPC pipeline expansion agreement would be 
signed with British Petroleum,s (BP) consent by the end of 
¶2008.  END SUMMARY. 
 
SHELL CONFIDENT IN NEW CONSORTIUM 
 
¶3.  (SBU) As Shell,s top shareholder representative for the 
North Caspian Production Sharing Agreement (PSA), which 
includes the Kashagan field, and having been directly 
involved in the renegotiation of the PSA for several months 
in 2008, Garrity noted with relief that the "Kashagan 
negotiations are now fully behind us."  He added that having 
KMG as a full partner invested at all levels should 
facilitate overall communication and transparency in the 
consortium.  Garrity also expressed confidence that the 
consortium now comprises a far more viable and equitable 
model than the previous consortium.   Both Keir and Garrity 
shared their belief that KMG has the liquidity it needs to 
honor the many financial commitments it has made, including 
its greater equity stake in the PSA.  According to the 
payment plan, KMG has an 8.4% equity buy-in, but does not 
have to pay for the shares until commercial production 
begins, which is expected in "2013 or thereabouts," said 
Keir.  (NOTE: Keir and Garrity said that Shell is staffing up 
its team and striving for first oil by 2012, although they 
introduced the caveat that unforeseen "bureaucratic 
procedures could lead to last-minute delays."  END NOTE.) 
 
ZHEMCHUZHINA EXPECTED ONLINE AS EARLY AS 2014 
 
¶4.  (SBU) In the Zhemchuzhina Field, Shell drilled its second 
exploratory well in November, which according to Keir, 
provided a clean flare and met necessary environmental 
standards.  Keir said that Shell has recently ceased activity 
in the field because of ice buildup, but Shell plans to drill 
another two wells in the area and conduct seismic tests in 
¶2009.  According to their latest forecast, Shell expects the 
field to come online between 2014 and 2016. 
 
FALLING OIL PRICES MAY IMPACT OPERATIONS 
 
¶5.  (SBU) Acknowledging the potential impact of falling oil 
prices, Keir said that there could, of course, be a 
theoretical point at which investment in Phase I of Kashagan 
becomes problematic, and therefore cause a reconsideration of 
Phase 2.  However, Garrity pointed out that the exploration 
cycles in general -- from first drilling to first oil 
reaching the market -- can be as long as 10 years.   Shell is 
well positioned to weather the greater global financial 
crisis said Keir, because it has "virtually no debt."  Given 
the long-term prospects for Kashagan, he added, Shell intends 
to avoid any proposed efforts to push out development of the 
field because of the associated increase in overall costs of 
exploration and eventual delivery of oil to the market. 
Should oil prices remain near $50 a barrel, he acknowledged, 
it will ultimately impact the financial viability of 
extraction from "less conventional" resources.  "Fundamentals 
indicate that the price of oil must remain between $80 and 
$90 per barrel," said Keir, for the long-term viability of 
these less conventional resources fields, such as those in 
the Arctic.  Kashagan, he added, is considered a less 
conventional resource because of the technical, elemental and 
 
ASTANA 00002408  002 OF 003 
 
 
environmental challenges associated with extraction and 
refinement. 
 
¶6.  (SBU) On a positive note, Keir mentioned that the current 
economic situation may foster an opportune atmosphere for the 
for equipment purchases.  Noting that the drop in oil prices 
had greatly reduced Russian exploratory operations, he added 
that the crisis will likely improve the availability and 
price of necessary hardware, including much-needed drilling 
rigs. 
 
MANGYSTAU AND ATYRAU PRESS FOR MORE LOCAL HIRING 
 
¶7.  (SBU) Regarding operations on the Caspian, Keir concurred 
with the CDA that working with authorities in Mangystau is 
easier than in Atyrau.  Specifically, conditions for gaining 
work permits are significantly easier, giving the impression 
that Mangystau authorities are trying to compete for business 
with wealthier Atyrau oblast.  Keir said that in response to 
growing rates of regional unemployment, authorities in both 
oblasts are increasingly pressuring Shell to hire local 
workers.  However, officials in Atyrau often tell Shell whom 
they must interview for available positions, most recently 
informing Shell that it must hire an additional 1,500 
workers.  According to Keir, this makes it "an entirely 
different game" and therefore "much, much tougher" than 
operating in Almaty or Astana. (NOTE:  Despite the implied 
relative ease of hiring in Astana, many western businesses in 
the capital area including General Electric, continue to cite 
difficulties in hiring and obtaining work permits as an 
ongoing barrier to trade. See Reftel.  END NOTE.)  Keir added 
that as Shell staffs the operational portion of the PSA, they 
expect growing pressure to meet increased local staffing 
requirements.  Keir noted that finding qualified local hires 
is "not a trivial matter," but that the relationship with 
local authorities can be "managed" to a certain degree.  Keir 
concluded that Shell must now decide whether or not to take 
over the "administrative machine" created by AGIP to manage 
hiring relations with local authorities, or develop a new 
approach entirely. 
 
CPC EXPANSION AGREEMENT EXPECTED BY YEAR,S END 
 
¶8.  (SBU) According to Keir and Garrity, Shell expects the 
Caspian Pipeline Consortium (CPC) to sign an agreement on CPC 
pipeline expansion by the end of 2008.  With regards to 
British Petroleum (BP), Keir believes that BP has two 
options:  BP will either collapse under the pressure of the 
Russian government or sign the expansion agreement. 
According to Keir, "BP wants out, which is understandable," 
but added that BP cannot expect the other consortium members 
to break existing shareholder agreements on preemptive 
rights.  Shell and the other shareholders, said Keir, are in 
agreement they the pipeline consortium should not be opened 
to someone without an equity interest in the shipping process 
as well. 
 
SHELL LOOKING AT RAILWAY TRANSIT 
 
¶9.  (SBU) Lacking an interest in the BTC pipeline, Shell is 
employing a multivector approach in its search for 
alternative routes for future oil exports.  Currently, Shell 
is closely considering the possibility of using rail lines, 
specifically the Bolashak rail system being built near 
Atyrau.  While this seems promising, Shell admitted that 
funding the project will likely be a problem for the 
Government of Kazakhstan.  According to Keir, the Kazakhstani 
government wants to own what it considers key infrastructure, 
but also wants foreign financing for the projects.  Keir 
believes that Kazakhstani authorities do not understand the 
current financial environment, noting that "the foreign 
investment is simply not there."  According to Keir, "they 
think they can still just go to the markets and everyone will 
 
ASTANA 00002408  003 OF 003 
 
 
love Kazakhstan."  He did, however, concede that for some 
officials, the "unfortunate truth" about the foreseeable lack 
of foreign financing "is sinking in."  Reflecting on doing 
business in Kazakhstan, Keir noted that the Kazakhstanis tend 
to start business negotiations from very extreme positions, 
but can often can be convinced to back down to more a 
reasonable stance. 
 
¶10.  (SBU) COMMENT:  Stress caused by the financial crisis in 
Kazakhstan is not expected to significantly impact Shell,s 
operations in the Caspian Sea region.  A continued reduction 
in commodity prices may in fact prove financially beneficial 
to Shell as it accumulates necessary supplies and inputs for 
ongoing operations.  Rising levels of unemployment in western 
Kazakhstan may, however, lead to intensified pressure from 
regional authorities to increase the number of locally hired 
staff.  But in as much as Shell remains committed to 
development and has the necessary financial reserves to 
maintain its momentum, continued operations in the Caspian 
Sea may provide a convenient buffer to the region, thereby 
shielding it from some of the harsher effects of the 
financial crisis likely to be felt in other parts of 
Kazakhstan.  END COMMENT. 
MILAS