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DE RUEHTA #0166/01 0281107
ZNR UUUUU ZZH
O 281107Z JAN 09 ZDK
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4466
INFO RUCNCIS/CIS COLLECTIVE 1099
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0497
RUEHKO/AMEMBASSY TOKYO 1203
RHEBAAA/DEPT OF ENERGY WASHDC
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RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0672
RUEKJCS/SECDEF WASHDC 0588
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1139

UNCLAS SECTION 01 OF 03 ASTANA 000166 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  MINISTRY OF ENERGY OFFICIAL DISCUSSES NATURAL 
GAS MARKET DYNAMICS 
 
ASTANA 00000166  001.2 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On January 21, Energy Officer discussed the 
production, marketing, and sale of Kazakhstani gas with an official 
from the Ministry of Energy and Mineral Resources.  He described the 
role of market intermediaries KazTransGas, KazRosGas, and Gazprom, 
disclosed prices Kazakhstan pays to import gas from Russia and 
Uzbekistan, announced Kazakhstan would soon increase the transit 
fees it charges Gazprom, praised Russia for being a reliable 
partner, and criticized Uzbekistan for dramatic price increases and 
unpredictable supply.  END SUMMARY. 
 
THE STRUCTURE OF KAZAKHSTAN'S GAS MARKET 
 
¶3.  (SBU) On January 21, Energy Officer met with Timur Imashev, 
Director of the Gas Industry Department in the Ministry of Energy 
and Mineral Resources, to discuss the gas market in Kazakhstan. 
After numerous attempts to explain the convoluted connections and 
overlapping owners of Kazakhstan's gas market, Imashev hurriedly 
took out a blank sheet of paper, scribbled a series of circles and 
arrows, and explained that there are two main market mechanisms for 
the transportation and sale of gas in Kazakhstan, one in the west 
and one in the south of the country. 
 
KAZROSGAS:  MORE THAN A MERE MIDDLEMAN 
 
¶4.  (SBU) Kazakhstan produces approximately 30 billion cubic meters 
(bcm) of gas annually, including liquefied natural gas, natural gas 
liquids, and dry natural gas.  The operators of large fields in 
Karachaganak in Western Kazakhstan oblast, Tolkyn in Mangistau 
oblast, and Tengiz in Atyrau oblast sell their natural gas to 
KazRosGas, a 50-50 joint venture of KazMunaiGas (KMG) and Gazprom. 
(NOTE:  KazRosGas was established during a state visit to Kazakhstan 
by Russian President Putin on November 28, 2001.  Its mandate is to 
manage Kazakhstan's gas import and export operations; treat raw gas 
at processing plants; explore, develop, and operate gas fields; 
secure natural gas transport routes; conduct gas swap operations; 
and operate joint venture projects in natural gas transportation. 
KazRosGas is registered in Astana and maintains offices in Moscow 
and Zug, a well-known tax haven in Switzerland where Ukraine's 
notorious RosUkrEnergo is also registered.  Kairat Boranbayev is 
Chairman and General Director; other senior executives include Asia 
Sirgabekova, First Deputy Director for Economic Issues; Nurlan 
Abdrasulov, First Deputy Director for Marketing; and Malik 
Kushaliev, Deputy Director for Legal Affairs.  Kushaliev is also the 
point of contact for a company called Centrex Central Asia Gas, 
which is registered in Baar, Switzerland.  END NOTE). 
 
¶5.  (SBU) According to Imashev, KazRosGas transports gas from 
Karachaganak, Tolkyn, and Tengiz to Orenburg, Russia, where it is 
processed for commercial sale.  KazRosGas then imports the processed 
gas into Kazakhstan and sells approximately 10 bcm to regional gas 
distribution companies such as KazTransGas-Aimak, a wholly-owned 
subsidiary of KMG, for domestic users in western Kazakhstan. 
KazRosGas also sells up to 1.2 billion cubic meters to Gazprom for 
Russia's domestic consumption via the Central Asia Center (CAC) gas 
pipeline, which is operated by Intergaz Central Asia (ICA).  (NOTE: 
ICA is a wholly owned subsidiary of KazTransGas and the monopoly 
operator of gas transportation pipelines in Kazakhstan.  ICA manages 
the network of gas pipelines in Kazakhstan on the basis of a 20-year 
concession agreement with the government, which is valid until 2017. 
 ICA's total (both domestic and export) gas transportation volume 
plan for 2007 was 124.8 bcm.  KazMunaiGas, not Gazprom, owns the 900 
kilometers of CAC pipeline on Kazakhstani territory.  END NOTE). 
 
TENGIZCHEVROIL GAS PRODUCTION, MARKETING AND SALES 
 
¶6.  (SBU) In 2008, Tengizchevroil (TCO) produced approximately 6.8 
billion cubic meters (bcm) of gas.  According to TCO's Commercial 
Manager for Products, Marketing and Transportation, Mark Heinemann 
(protect), in 2008, TCO sold 1.84 bcm to more than 16 domestic 
customers -- including industrial enterprises and regional 
 
ASTANA 00000166  002.2 OF 003 
 
 
governments in Atyrau, Mangistau, and Western Kazakhstan -- and 1.92 
bcm to KazRosGas for export.  TCO used the balance of production 
(more than 3 bcm) for re-injection and operational purposes.  TCO's 
domestic sales were concluded directly with end-users and the gas 
was transported via pipeline between Tengiz and Kulsary and via the 
CAC. 
 
¶7.  (SBU) Heinemann said that TCO's export sales were handled by 
KazRosGas and one other, unnamed buyer and transported via the CAC. 
Heinemann noted that Gazprom controls all of the gas pipelines in 
Russia and does not allow other parties such as TCO to make direct 
sales to customers in Russia.  He confirmed that TCO sells gas for 
export to KazRosGas, which sells it to RosUkrEnergo, the only 
company authorized by Gazprom to bundle gas from Central Asia and 
package it for onward shipment and sale.  RosUkrEnergo then sells 
the bundled gas to UkrNaftoHaz, which sells it directly to customers 
in Ukraine.  Heinemann said that Gazprom has strictly prohibited any 
gas from Central Asia to be sold to markets or customers in Western 
Europe and he expects that arrangement to continue. 
 
¶8.  (SBU) TCO also produces butane and propane liquid petroleum gas 
(LPG), which it sells to domestic buyers in Kazakhstan.  According 
to Heinemann, in 2008, TCO produced approximately 851,000 metric 
tons of LPG.  TCO sold 58,000 metric tons of LPG to customers in 
Kazakhstan and 801,000 metric tons to customers in Europe and 
Turkey.  The difference of 7,000 metric tons came from inventory. 
All deliveries of LPG were made by LPG rail tank car. 
 
UZBEKISTAN GAS SUPPLIES KAZAKHSTAN'S SOUTHERN REGION 
 
¶9.  (SBU) KazTransGas buys natural gas from Uzbekistan and 
transports it to customers in the south-eastern region of 
Kazakhstan.  Imashev said that Kazakhstan typically buys more gas 
than it needs from Uzbekistan and swaps a certain percentage with 
Russia (he said 100 million cubic meters, but that may have been 
merely for illustrative purposes).  KazTransGas sends the swap 
amount northward to Alexandrov Gai in Russia via the CAC, where 
Gazprom provides an equivalent amount to KazTransGas for domestic 
use in the western region.  Imashev had high praise for Russia's 
role in these transactions, saying, "They meet us more than half way 
and handle all of the customs paperwork to import and export the 
gas." 
 
WHAT PRICE DOES KAZAKHSTAN PAY FOR GAS? 
 
¶10.  (SBU) Karachaganak Petroleum Operating B.V. representatives 
said they sell sour (unprocessed) gas to KazRosGas for approximately 
$20 per thousand cubic meters (tcm).  Imashev confided that 
KazTransGas pays approximately $80/tcm for clean, dry gas from 
Orenburg.  He said that KazTransGas pays approximately $300/tcm for 
the Uzbek gas delivered to Kazakhstan's southern domestic market, 
nearly twice the amount it paid in 2008.  Imashev conceded that 
Uzbekistan has every right to charge what the market will bear, but 
he complained that since there is no firm contract in place, 
Uzbekistan is free to change the terms and delay or cut supplies at 
will, without penalty.  He said Uzbekistan will even "cut of the tap 
from time to time.  They're playing games with us."  (NOTE: 
KazTransGas is building a west-south gas pipeline from Beineu to 
Bozoi to Akbulak to avoid importing gas from Uzbekistan. 
Construction has been delayed because of the financial crisis, but 
this remains a high priority project for KMG.  END NOTE).  Minister 
of Energy and Mineral Resources Sauat Mynbayev would not disclose 
the price Kazakhstan will pay to import gas from Russia, but he did 
tell journalists on January 21 that KMG signed a deal with Gazprom 
on December 31, 2008, to supply 4.6 bcm to the Kazakhstani domestic 
market. 
 
EUROPEAN PRICES COME TO CENTRAL ASIA 
 
¶11.  (U) On January 21, Prime Minister Karim Masimov ordered the 
Ministry of Energy and Mineral Resources to calculate the impact of 
Russia's anticipated shift to European pricing for gas.  "There is 
 
ASTANA 00000166  003.2 OF 003 
 
 
no way out of this situation," he said.  "We need to be very well 
prepared for this transition.  We need to know what it will cost 
us."  Masimov then added, "I took part in the gas dispute between 
Russia and Ukraine and there is one very important conclusion we 
must draw:  Russia will move to European prices at home and with 
exports to Ukraine and other countries in 2011."  (NOTE:  In 
January, Gazprom signed contracts with Uzbekistan and Turkmenistan 
to purchase natural gas at approximately $301/tcm in the first 
quarter of 2009, more than double what it paid in 2008.  END NOTE). 
 
KAZAKHSTAN RAISES TRANSIT TARIFFS 
 
¶12.  (U) Perhaps in anticipation of paying higher prices for Uzbek 
and Russian gas, on January 22, KMG increased the transit fee it 
charges Gazprom by 21%, from $1.40/tcm per 100 km to $1.70/tcm per 
100 km in 2009.  (COMMENT:  This rate is below European market 
rates, but is approximately the same amount that Ukraine charges 
Gazprom to transit gas to Europe.  END COMMENT). 
 
GOVERNMENT ANNOUNCES BAN ON GAS FLARING 
 
¶13.  (U) On January 16, the Minister of Environmental Protection, 
Nurlan Iskakov, announced that the Ministry would stop issuing 
mineral resources licenses to oil companies if they fail to comply 
with gas utilization standards.  "There will be no licenses issued 
to any of the 30 oil companies after 2010 unless they cease all gas 
flaring," he said at a meeting of the environment protection 
committee.  In 2008, Iskakov claimed companies in Kazakhstan flared 
6.9 billion cubic meters of natural gas.  He said that China's 
National Petroleum Corporation already incurs a fine of $80,000 per 
day for excessive flaring. 
 
¶14.  (SBU) The Ministry of Energy's Imashev said the government is 
serious about reducing emissions, but he admitted that zero 
emissions is an "impossible standard."  Imashev said that gas 
flaring is necessary for safety reasons to provide an emergency 
outlet to relieve pressure in the well.  He said that the Ministry 
of Energy has made this point to the Cabinet and will continue to 
discuss and debate the Ministry of Environmental Protection's new 
measure. 
 
¶15.  (SBU) COMMENT:  Tracing the steps and stages of the gas market 
in Kazakhstan is not easy to do.  In particular, precious little 
information is publicly available about the trading companies that 
market and transport Kazakhstan's natural gas, both domestically and 
to export markets.  Even privately, foreign companies and government 
officials are loath to disclose proprietary information about price, 
volume, and fees.  Nevertheless, from the information we have 
gathered to date, it is clear that intermediaries such as Gazprom 
and KazRosGas play a critical, and lucrative, role getting 
Kazakhstan's gas to market and have significant influence over who 
gets what, when, and how much they pay.  END COMMENT. 
 
HOAGLAND