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RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0529/01 0830946
ZNR UUUUU ZZH
O 240946Z MAR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5006
INFO RUCNCIS/CIS COLLECTIVE 1400
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0780
RUEHKO/AMEMBASSY TOKYO 1483
RUEHUL/AMEMBASSY SEOUL 0467
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RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0963
RUEKJCS/SECDEF WASHDC 0876
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1337

UNCLAS SECTION 01 OF 02 ASTANA 000529 
 
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 ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  CONOCO'S CEO ON THE N BLOCK NEGOTIATIONS 
 
REF:  (A) ASTANA 0352 (B) 08 ASTANA 2465 
 
ASTANA 00000529  001.2 OF 002 
 
 
¶1.  (SBU) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On March 20, ConocoPhillips (Conoco) CEO Jim 
Mulva briefed the Ambassador on the status of negotiations with 
national oil company KazMunaiGas (KMG) to explore and develop the 
offshore N Block.  Mulva expressed frustration with the pace of 
negotiations and said that Minister of Energy and Mineral Resources 
Sauat Mynbayev "has been pushing us harder and harder."  Mulva was 
scheduled to meet with Prime Minister Masimov later that day, but as 
he explained to the Ambassador, "Mynbayev has the call" on the 
details of the deal.  Conoco representatives also commented on 
Russia's influence over trans-Caspian crude exports, negotiations 
with Azerbaijan's national oil company, the possibility that 
European producers would ship crude to Iran, and prospects for 
onshore oil and gas exploration in Turkmenistan.  END SUMMARY. 
 
JUST ONE-HALF OF ONE PERCENT AWAY FROM A DEAL 
 
¶3.  (SBU) On March 19, the Ambassador met briefly with KMG First 
Vice President Maksat Idenov, who said the parties are close to 
agreement, with the only remaining obstacle the internal rate of 
return on the project (reftel A).  Idenov said that Conoco has 
requested 12.8 percent, or 0.5 percent more than the government is 
willing to offer, but he did not believe that the issue was a 
deal-breaker.  Idenov told the Ambassador that he expects to sign 
the contract with Conoco during the first two weeks of April, at 
which point he will turn his attention to a proposal from ExxonMobil 
to develop onshore resources in the north Caspian and will attempt 
to jumpstart negotiations on the Kazakhstan Caspian Transportation 
System (KCTS). 
 
NO GUARANTEED TAX STABILITY 
 
¶4.  (SBU) Conoco's Nick Olds, company president for the Caspian 
region, confirmed to Energy Officer on March 18 that he expects 
negotiations on the N Block to conclude by mid-April.  He said that 
Conoco will commit to drilling three wells, the first in 2010, and 
expects early oil by 2019.  Ultimately, Olds said, the field will 
produce up to 500,000 barrels per day.  He said that the new 
contract will comply with the new Tax Code and will not be 
tax-stabilized.  "That means there are a lot of levers they can 
pull," he said. 
 
CITIGROUP EXPECTS KAZAKHSTAN'S ECONOMY TO RECOVER 
 
¶5.  (SBU) When asked how the financial crisis has affected the 
business climate in Kazakhstan, Mulva said companies negotiating for 
new opportunities "have to give the government financial support." 
(NOTE:  As part of the Kashagan negotiations, ExxonMobil provided 
the government a long-term, low-interest loan that KMG used to 
increase its shareholding in the consortium.  END NOTE). 
Nevertheless, Mulva said that the head of Citigroup's Moscow office 
recently told him that "of the big three -- Russia, Kazakhstan, and 
Ukraine -- Kazakhstan has the best prospects for a quick economic 
recovery." 
 
KASHAGAN PROGRESS "SLOW" 
 
¶6.  (SBU) Commenting on Kashagan, Mulva said it has taken some time 
for the management of the project to transition from Italy's Agip to 
France's Total.  "It's been slow," he said.  Don Wallett, president 
of ConocoPhillips Russia Inc., added that it has been difficult to 
recruit and place talented, experienced Kazakhstani and expatriate 
staff, although he said that has changed in recent months, as the 
economic crisis has continued.  "People used to tell us they had no 
interest in going to Atyrau," he said, "but now they're calling us 
back, saying, 'I'd love to work in Atyrau.'"  Wallett also indicated 
that the recession has helped free up drilling rigs in the Caspian. 
 
ASTANA 00000529  002.2 OF 002 
 
 
"There's not an oversupply," he said, "but we think they'll be there 
when we need them.  We've got some good leads on a couple of rigs 
right now." 
 
KAZAKHSTAN ABLE TO WITHSTAND RUSSIAN PRESSURE 
 
¶7.  (SBU) When asked about Russia's influence over KCTS, Wallett 
said he did not think Russia would attempt to block or undermine the 
project.  "As long as it's just a tanker shuttle program and not a 
trans-Caspian pipeline," Russia will not oppose it, he said.  He 
added that Kazakhstan has been able to act independently toward 
Russia in the past.  "Kazakhstan seems to be able to make its own 
decisions," he said. 
 
EUROPEAN THREAT TO SHIP TO IRAN INCREASES NEGOTIATING LEVERAGE 
 
¶8.  (SBU) Wallett added that it has been "very tough" negotiating 
with the Azeris on KCTS and he said that having the option to ship 
Kashagan crude to Iran would give European companies in the Kashagan 
consortium leverage in negotiations with Azerbaijan.  "It's good to 
have the Europeans talking about shipping to Iran -- representing 
themselves, of course.  That puts pressure on the Azeris to conclude 
a deal for trans-Caspian shipments." 
 
CONOCO STRENGTHENS BID FOR EXPLORATION IN TURKMENISTAN 
 
¶9.  (SBU) Turning to Turkmenistan, Mulva disclosed that two weeks 
ago, ConocoPhillips invited Abu Dhabi's Mubadala, their partners on 
the N Block consortium, to join their bid with Lukoil to develop 
three offshore blocks in Turkmenisan.  He told the Ambassador that 
Conoco would be the lead operator of all three blocks.  Mulva said 
he hopes that the close relationship between President 
Berdimukhamedov and Sheikh Muhammad will help the consortium's bid. 
"[Oil and Gas Chairman Tachberdy] Tagiyev has been a firm gatekeeper 
to the president," according to Mulva.  "Berdimukhamedov's not 
seeing anybody at the moment." 
 
MILAS