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DE RUEHTA #0283/01 0490642
ZNR UUUUU ZZH
O 180642Z FEB 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4647
INFO RUCNCIS/CIS COLLECTIVE 1211
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0594
RUEHKO/AMEMBASSY TOKYO 1300
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RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0773
RUEKJCS/SECDEF WASHDC 0689
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1222

UNCLAS SECTION 01 OF 03 ASTANA 000283 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PINR ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN CASPIAN TRANSPORTATION SYSTEM UPDATE 
 
REF:  (A) 08 ASTANA 2266 (B) ASTANA 0131 
 
ASTANA 00000283  001.2 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  Representatives from the national oil companies 
of Azerbaijan and Kazakhstan met with international oil companies in 
Astana on February 10-11 to negotiate terms and conditions for the 
transportation of oil westward across the Caspian Sea.  The director 
of oil transportation for KazMunaiGas was clearly frustrated by 
SOCAR's refusal to grant equity interest in the project to 
international oil companies, and by demands from those same 
companies for tax stability clauses that contradict current 
Kazakhstani law.  END SUMMARY. 
 
KMG AND SOCAR SET UP "KMG TRANS-CASPIY" JOINT VENTURE 
 
¶3.  (SBU) On February 17, Arman Darbayev, Executive Director for Oil 
Transportation and Service Projects at KazMunaiGas (KMG), told 
Energy Officer that KMG and the State Oil Company of the Azerbaijan 
Republic (SOCAR) met with Chevron (representing Tengizchevroil) and 
ExxonMobil (representing the Kashagan consortium) in Astana on 
February 10-11 to discuss implementation of the Kazakhstan Caspian 
Transportation System (KCTS).  KCTS would transport Kazakhstani oil 
from the supergiant oil fields of Tengiz and Kashagan across the 
Caspian Sea to Baku and onward to world markets, without transiting 
Russian territory (reftel A).  Darbayev said that on January 12, the 
new KMG-SOCAR joint venture, called "KMG Trans-Caspiy", appointed 
Mukhit Mazhenov as general director and Bolat Zakirov as deputy 
director.  Both are Kazakhstanis.  He also said that, although the 
parties were unable to reach agreement on project financing and 
equity structure, they did agree to begin the technical assessment 
necessary to sanction the 3-year, $3 billion project. 
 
BIONOTES FOR MAZHENOV AND ZAKIROV 
 
¶4.  (SBU) Mukhit Mazhenov was born on October 2, 1971, in Almaty, 
graduated with a degree in mathematics from Kazakhstan State 
University in 1992, and obtained a Master's degree from the 
Kazakhstan Institute of Management and Entrepreneurship in 1998. 
From 1998 to 2002, he headed the department of economic analysis at 
KazTransOil, the transportation arm of KMG; from 2002 to 2003, he 
directed the department for budget and planning at KMG; in 2003 he 
was advisor to the governor of Mangistau Oblast; from 2003 to 2004, 
he was director of the free trade zone "Aktau Sea Port"; from 2004 
to 2005, he was deputy director general for development of 
TenizService, the oil services branch of KMG; from 2005 to 2007, he 
was deputy director for economics and finance at the Atyrau branch 
of Intergas Central Asia, which operates the Central Asia Center gas 
pipeline; from 2007 to 2008, he was first deputy chairman of the 
board of KazTransGas-Almaty, KMG's gas transportation and marketing 
company; and from February 2008 until his recent appointment as 
general director for KMG Trans-Caspiy, he served as deputy director 
general for economics and finance at KazTransOil. 
 
¶5.  (SBU) Bulat Zakirov was born on July 16, 1976, graduated from 
the Kazakhstan State Academy of Management in 1997, and obtained a 
Master's degree from the University of Dandy (UK) in 1998.  From 
1999 to 2006, he worked for KazTransOil in a variety of positions, 
including director of transport logistics in 2003; director of new 
business development in 2006; deputy director for corporate 
development from 2006 to 2009. 
 
KMG AND SOCAR DISAGREE ON ROLE OF INTERNATIONAL COMPANIES 
 
¶6.  (SBU) Darbayev said that KMG is convinced that international oil 
companies (IOCs) should participate in the KCTS trans-Caspian 
project and is willing to offer them from 33 to 49 percent equity in 
the consortium.  He cautioned, however, that the offer was 
 
ASTANA 00000283  002.2 OF 003 
 
 
contingent upon guaranteed volume commitments from the companies and 
the willingness of SOCAR to reduce its equity share in the venture. 
In other words, KMG would not agree to be the only partner to reduce 
its shareholding in order to attract IOCs to the project.  "That 
would mean that SOCAR would own 50 percent of the new oil terminal 
at Kuryk -- on our territory.  That, we cannot allow," Darbayev 
said.  He added that KMG has "already compromised" with SOCAR on oil 
shipments from Baku onward.  According to Darbayev, the two national 
oil companies reached a "gentlemen's agreement" to ship 50 percent 
of Kazakhstani crude from Baku to SOCAR's terminal at the Georgian 
port of Kulevi, and 50 percent to KMG's terminal at the Georgian 
port of Batumi. 
 
¶7.  (SBU) Darbayev said that during the negotiations in Astana this 
week, SOCAR could not understand why the IOCs representing Tengiz 
and Kashagan insisted on an equity stake in the new venture.  He 
said SOCAR offered to guarantee tariff stability, crude quality, and 
pipeline access, if the IOCs would commit to a minimum supply of 
oil.  The companies, however, insisted that equity will provide the 
same guarantees, plus greater managerial control over project 
development.  Darbayev was concerned that SOCAR's unwillingness to 
trade equity for IOC finance and expertise will drive negotiations 
to a stalemate.  "SOCAR thinks they can complete this project 
without the oil companies.  We disagree," Darbayev said.  "And they 
think the companies have nowhere else to turn.  But if KCTS does not 
come together soon, the companies will export oil through pipelines 
to Russia or China." 
 
KMG CONSIDERS DEMANDS FOR TAX STABILITY UNREASONABLE 
 
¶8.  (SBU) KMG's Darbayev was just as frustrated by demands from 
Chevron and ExxonMobil for guaranteed tax stability, noting that 
Kazakhstan's new Tax Code explicitly ends the principle of tax 
stability in contracts.  "They want us to change the laws of the 
republic to accommodate them on this project.  We simply cannot do 
that."  Darbayev said KMG is willing to give the IOCs a significant 
equity stake in KCTS and favorable terms on tariffs, access, and 
quality, but KMG cannot adjust the country's entire investment 
climate just to please one or two partners.  He said when Minister 
of Energy Sauat Mynbayev heard of the demand for tax stability, he 
shook his head and said, "That is just too much to ask." 
 
KMG WELCOMES USTDA FEASIBILITY STUDY 
 
¶9.  (SBU) Darbayev reiterated KMG's strong interest in a 
definitional mission by the U.S. Trade and Development Agency 
(USTDA) to assess the feasibility of KCTS and said that USTDA's 
"independent, expert assessment" would give the project a necessary 
seal of approval.  Darbayev noted that, despite disagreements over 
ownership and the role of the IOCs, KMG and SOCAR remain committed 
to the project and have already begun to develop a scope of work for 
the requisite engineering studies.  In fact, the next meeting of KMG 
Trans-Caspiy's board of directors is scheduled to take place in 
London on March 11, when the board will review the scope of work for 
the feasibility study. 
 
KAZTRANSOIL EAGER TO JOIN KCTS 
 
¶10.  (SBU) On February 13, Energy Officer met Nurbol Sultan, the 
32-year old, newly-appointed general director of KazTransOil (KTO), 
the oil transportation and marketing company wholly-owned by 
national oil company KazMunaiGas (KMG).  Sultan, who has a degree in 
finance from Guildhall University in London, impresses one as a very 
pragmatic and rational business executive.  He said he is focused on 
managing commercially successful projects in order to deliver a 
return on investment.  "I don't worry about the politics of these 
projects.  That's not my job," he said.  He said KTO is eager to 
participate in KCTS and disclosed that they have already conducted a 
 
ASTANA 00000283  003.2 OF 003 
 
 
feasibility study on the pipeline portion of the project.  Despite 
KTO's interest and expertise, however, Sultan said that KMG has not 
yet formally invited KTO to join the project.  (NOTE:  Sultan was 
unaware that SOCAR representatives were in Astana on February 10-11 
to discuss financing and organizational issues for KCTS.  END NOTE). 
 Sultan said that he will travel on February 17 to Moscow to discuss 
expansion of the Atyrau-Samara pipeline with Transneft, and then to 
Azerbaijan and Georgia to discuss oil shipments from Baku to Batumi, 
where KTO owns and operates an oil terminal. 
 
AMERICAN APPOINTED TO KAZTRANSOIL BOARD OF DIRECTORS 
 
¶11.  (SBU) On February 11, Energy Officer met Dan Mihalik, who was 
recently named to the board of directors of KTO.  Mihalik said that 
KMG President Kairgeldy Kabyldin personally asked him to serve on 
the board, which is chaired by KMG First Vice President Maksat 
Idenov.  According to Mihalik, KTO's immediate priority is to raise 
its accounting and health and safety practices to acceptable 
international standards.  This would enable the company to raise 
capital for investments in new projects such as the Eskene-Kuryk 
pipeline that represents the first stage of KCTS.  Mihalik said 
there are no insurmountable obstacles to KCTS, calling the remaining 
issues "purely technical and commercial."  Mihalik will attend up to 
eight KTO board meetings per year and serve simultaneously as a 
senior technical consultant to Agip, one of the Kashagan consortium 
members. 
 
¶12.  (SBU) COMMENT:  Although certain details remain to be worked 
out -- most notably whether or not international oil companies will 
take an equity stake in KCTS -- all major stakeholders agree that 
the project must move forward to accommodate increased crude 
production from Kashagan and Tengiz beginning in 2013.  We believe 
that although the project is complex and the negotiations far from 
over, the parties involved understand that they have much to gain 
and little to lose from closing this deal.  We urge colleagues in 
Baku and Washington to support the project in meetings with SOCAR 
and Azerbaijani government officials.  Surprisingly, since KCTS 
provides an alternative oil export route that does not transit 
Russian territory, Russia has not openly opposed the project.  That 
may be because Russia expects to win contracts for the construction 
of new oil tankers at the Astrakhan shipyard on the Volga River. 
END COMMENT. 
 
HOAGLAND