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DE RUEHTA #2465/01 3501118
ZNR UUUUU ZZH
O 151118Z DEC 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4099
INFO RUCNCIS/CIS COLLECTIVE 0926
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0328
RUEHKO/AMEMBASSY TOKYO 1033
RHEBAAA/DEPT OF ENERGY WASHDC
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RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
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RUEKJCS/SECDEF WASHDC 0402
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 ASTANA 002465 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, EUR/CARC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  CONOCO-PHILLIPS DISCLOSES N BLOCK CONTRACT 
DETAILS 
 
REF: (A) ASTANA 1974 (B) ASTANA 2226 (C) ASTANA 1910 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On December 12, Energy Officer met with Nick 
Olds (protect throughout), Caspian Region President for 
ConocoPhillips (COP), to discuss the status of negotiations for the 
N Block, an offshore hydrocarbon-rich reservoir in the North Caspian 
estimated to contain 270 million tons (2 billion barrels) of 
recoverable oil.  Olds confirmed that a Heads of Agreement was 
reached on December 5 spelling out the basic principles for 
exploration and development of the field.  According to that 
agreement, KazMunaiGas (KMG) will own 51% of the joint operating 
company and COP and Abu Dhabi's Mubadala Development Company will 
each own 24.5%.  In addition, COP and Abu Dhabi will pay a signing 
bonus of $100 million and contribute 24.5% (each) of the staff for 
the new joint operating company.  The parties extended the deadline 
for concluding a tax and royalty contract until January 31, 2009. 
Olds anticipates that under Kazakhstan's new Tax Code and Subsoil 
Law, the government will become much more directly involved in the 
details of project staffing, subcontracting, and exploration.  He 
also said that COP will invest extensively in KMG's capacity 
development -- including assignments to development projects outside 
Kazakhstan -- to prepare KMG to become lead operator on the project. 
 On transportation, Olds expects to export N Block oil via the 
Kazakhstan Caspian Transportation System (KCTS) and the 
Baku-Tbilisi-Ceyhan (BTC) pipeline.  END SUMMARY. 
 
THE NEW DEAL 
 
¶3.  (SBU) ConocoPhilips pursued the N Block contract for several 
years and in November 2007, signed a contract to conduct a technical 
assessment of the field.  Nick Olds, (protect throughout), Caspian 
Region President for ConocoPhillips, called the N Block "one of the 
most sought-after undeveloped assets in Kazakhstan."  KMG estimates 
that the field, located 30 kilometers south of the southwestern 
Aktau shelf in the Caspian Sea and covering 8,184 square kilometers, 
contains 630 million tons of oil equivalent, with 270 million tons 
(2 billion barrels) designated as recoverable oil.  In October, COP 
signed a memorandum of understanding (MOU) granting COP exclusive 
rights to negotiate a contract to develop the asset, beating out 
other major international oil companies interested in the 
opportunity, most notably Shell (see reftel A). 
 
¶4.  (SBU) On December 5, COP, Abu Dhabi's Mubadala Development 
Company, and KMG signed a Heads of Agreement defining the basic 
principles of a deal to explore and develop the reservoir.  Under 
the terms of the agreement, Mubadala and COP will each initially 
provide 24.5% of the staffing and 50% of the financing for the 
project.  Over time, KMG staff will replace expatriate staff as KMG 
transitions to the role of lead operator.  In addition, COP and 
Mubadala will pay a $100 million signing bonus and provide KMG a 
"carry agreement" to provide financing for KMG's 51% stake in the 
new joint operating company.  Olds said negotiations are still 
ongoing over the terms of this "equity percentage uplift," but he 
insisted the final agreement would include a provision that allows 
COP to stop production without penalty if KMG defaults on loan 
repayments.  "This project requires a lot of upfront investment, but 
it is worth the risk," he said. 
 
¶5.  (SBU) Although all parties agreed to extend the deadline for 
completing a definitive agreement until January 31, 2009, Olds said 
KMG is "clearly under pressure to get the deal done.  They do not 
want to extend the deadline past January 31."  KMG President 
Kairgeldy Kabyldin said on December 9 that he expects the first well 
to be drilled in 2010 and the company to launch commercial 
production in early 2016, "if all the forecasts for raw hydrocarbons 
there are confirmed." 
 
A WHOLE NEW BALLGAME 
 
¶6.  (SBU) The N Block contract will likely be the first exploration 
and production contract negotiated in accordance with the provisions 
of Kazakhstan's new Tax Code and Subsoil Law.  Among other things, 
the Tax Code introduces a new mineral extraction tax and a new rent 
 
ASTANA 00002465  002 OF 003 
 
 
tax (reftel B), while the Subsoil Law discontinues production 
sharing agreements (PSAs) and requires separate contracts for 
exploration and production (reftel C).  Olds acknowledged that the N 
Block deal will break new ground and said, "the whole nature of the 
game has changed."  For example, Olds said it is unclear how the new 
rent tax will be applied and whether or not it will replace the 
crude export duty.  In general, however, he said COP is not overly 
concerned about the new legislation, noting that certain provisions 
of their existing PSA will be grandfathered into the new tax and 
royalty agreement, such as the right to explore and develop the 
resource under a single contract. 
 
GOVERNMENT MORE DIRECTLY INVOLVED IN OPERATIONS 
 
¶7.  (SBU) Olds said that several issues remain to be negotiated 
before the final contract can be signed, including agreement on the 
composition, role, and authorities of the new joint operating 
company's management committee and review board.  Under the previous 
subsoil law, a joint operating company would establish a management 
committee with one vote for the consortium and one vote for the 
government of Kazakhstan.  The new subsoil law grants the government 
more authority in project management and oversight. 
 
¶8.  (SBU) Olds said that KMG First Vice President Maksat Idenov and 
Minister of Energy and Mineral Resources Sauat Mynbayev have already 
indicated they will be more involved in operational decision-making 
as the government's "competent authority" for the new project.  For 
example, Olds said Idenov will approve the company's annual work 
plan and budget, as well as procurement decisions and contract 
terms.  "Idenov and Mynbayev want to play a direct role in the N 
Block project," said Olds.  For example, he said Idenov has asked to 
review each contract action, averaging 10-12 a week, for more than 
40 contracts covering seismic acquisition, seismic processing, 
seismic interpretation, geochemical assessment, environmental impact 
assessment, drilling, etc.  Olds noted that the management committee 
structure and voting rights and procedures for the N Block project 
are still under negotiation. 
 
KMG TO BECOME LEAD OPERATOR "IN TIME" 
 
¶9.  (SBU) The main theme of the December 5 meeting of the Foreign 
Investors Council, a biannual summit with President Nazarbayev and 
corporate CEOs doing business in Kazakhstan, was the government's 
desire to boost local content and develop local capacity.  Olds said 
ConocoPhillips got the message and has proposed a three-tiered 
program for KMG's development that will lead "in time" to KMG 
assuming the role of lead operator on the N Block project.  "This is 
well beyond what anyone else has ever done in Kazakhstan," he 
asserted.  The development program would include enhanced technical 
training for KMG personnel, secondment of select KMG staff to COP 
projects outside Kazakhstan, and a gradual shift in project staffing 
over time, so that by the end of the 40-year contract in 2047, KMG 
will be the lead operator. 
 
PLANS TO EXPORT VIA TANKER TO BTC PIPELINE 
 
¶10.  (SBU) When asked how COP plans to export crude from the N 
Block, Olds said they would likely leverage the Kazakhstan Caspian 
Transportation System (KCTS) now under development and ship oil by 
tanker to Baku and onward to European markets via the 
Baku-Tbilisi-Ceyhan (BTC) pipeline.  He did not mention other 
options.  Olds suggested that, rather than transporting oil by 
pipeline from an offshore platform to the port terminal of Kuryk on 
Kazakhstan's Caspian coast, COP would explore the use of 
single-point mooring buoys that could load oil directly onto tankers 
for shipment to Baku.  He also said that BTC would likely need to be 
expanded from 1.2 million barrels per day to 1.6 million barrels per 
day to accommodate increased volumes. 
 
¶11.  (SBU) COMMENT:  The N Block is a big deal.  In fact, it is so 
important to ConocoPhillips that CEO Jim Mulva visited Kazakhstan at 
least six times in the 12 months leading up to the signing of the 
October MOU granting COP exclusive negotiating rights.  COP is well 
aware that they are taking a big risk and breaking new ground with 
the N Block, but they also know there are not many large, 
 
ASTANA 00002465  003 OF 003 
 
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