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DE RUEHTA #0530/01 0830946
ZNR UUUUU ZZH
O 240946Z MAR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5008
INFO RUCNCIS/CIS COLLECTIVE 1402
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0782
RUEHKO/AMEMBASSY TOKYO 1485
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RUEAIIA/CIA WASHDC
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RUEKJCS/SECDEF WASHDC 0878
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1339

UNCLAS SECTION 01 OF 04 ASTANA 000530 
 
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:  THE POLITICS OF PIPELINES 
 
REF:  (A) ASTANA 0283 (B) ASTANA 0131 
 
ASTANA 00000530  001.2 OF 004 
 
 
¶1.  (SBU) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On March 17-18, Energy Officer spoke with 
representatives from Kazakhstan's national oil company KazMunaiGas 
(KMG) and international oil companies about planned oil and gas 
export projects, particularly the Caspian Pipeline Consortium (CPC) 
pipeline and the Kazakhstan Caspian Transportation System (KCTS). 
The general consensus is that these export projects will be 
necessary by 2013 if oil production in Kazakhstan increases as 
expected.  Furthermore, the projects have continued to move forward, 
despite the impact of the financial crisis and lower oil prices on 
the cash position of the business partners.  Several representatives 
said they do not expect Russia to openly oppose or obstruct any of 
the projects, even KCTS, which will give Kazakhstan an export route 
that circumvents Russian territory.  Nevertheless, negotiations are 
expected to be difficult, particularly with Azerbaijan and the 
international oil companies on KCTS.  Both KMG and international 
company officials expressed a keen interest in the status of 
U.S.-Iranian relations and said normalization of ties with Iran 
would be a "game changer" for crude exports from Kazakhstan.  END 
SUMMARY. 
 
CPC EXPANSION UPDATE 
 
¶3.  (SBU) On March 17, Energy Officer met with Timur Rakhanov, 
Director of KMG's Department for New Transportation Projects and 
also a member of the Board of Directors of CPC.  Rakhanov is an 
impressive, articulate individual and one of KMG's rising stars.  He 
is young (early 30s), speaks fluent English, studied in London, has 
represented KMG's interest in CPC for more than five years, and 
prides himself on developing, mentoring, and delegating to junior 
staff.  He said that CPC expansion is likely to be approved by all 
consortium members, although a final decision (sanction) is not 
expected until December.  At this point, he said, the consortium is 
discussing "ship or pay" terms and is still seeking a legally 
binding volume commitment from suppliers.  He confirmed that the 
plan is to expand capacity from 32 million tons/year to 67 million 
tons/year, by installing 10 new pump stations throughout the 
pipeline and replacing 700 mm pipe with larger 1000 mm pipe. 
Rakhanov also confirmed that CPC will expand the off-loading 
terminal at Novorossisyk and construct storage tanks with a capacity 
of 100,000 tons. 
 
LUKOIL AND BP IN A STALEMATE 
 
¶4.  (SBU) According to Rakhanov, CPC expansion will take three years 
to complete.  He added that this is a "perfect time" to carry out 
expansion work, since the price of steel and other inputs is low and 
the consortium has a fixed tariff of $38/ton.  Rakhanov also 
confirmed that BP and Lukoil were still in talks about the sale of 
BP's stake in LukArco and implied that negotiations had reached a 
stalemate.  "BP says, 'Everything's OK, talks are continuing' but 
Lukoil says, 'We can't see the light at the end of the tunnel.'" 
He confided that within the next two weeks, KMG expects to complete 
the purchase of BP's share of Kazakhstan Pipeline Ventures' 1.75 
percent stake in CPC, which carries with it the right to ship 10.5 
million tons of crude per year via the pipeline.  However, he 
dismissed the idea that KMG would acquire a portion of the 7 percent 
stake in CPC that Russia purchased from Oman last year.  "True, we 
have the right to acquire 3.5 percent of Oman's stake, but why 
should we?  That 3 percent gives us nothing in terms of control or 
capacity rights," he said. 
 
CHEVRON CAUTIOUSLY OPTIMISTIC ABOUT CPC EXPANSION 
 
¶5.  (SBU) On March 18, Jay Johnson, Managing Director for Chevron's 
Eurasia Business Unit, told Energy Officer that CPC expansion could 
be sanctioned by the end of the year, but "it all depends on how 
difficult BP wants to be."    Zamira Kanapianova, Chevron's Country 
 
ASTANA 00000530  002.2 OF 004 
 
 
Manager for Kazakhstan, added that Lukoil is "more cautious" now 
than in the past, partly for financial reasons and partly out of 
deference to the Russian government.  She suggested that Lukoil will 
be careful not to make any moves without the approval of the 
Kremlin.  "Look what happened to Yukos," she said.  Johnson echoed 
Rakhanov's comments that the time is right for CPC capacity 
expansion given the low price of steel, and he confirmed that the 
necessary engineering work and feasibility studies are already 
underway.  Kanapianova added that the 0-116 kilometer segment of CPC 
pipeline is now being replaced.  Johnson said CPC expansion alone 
would not be sufficient to accommodate all of the increased crude 
volumes Kazakhstan expects to export beginning in 2013.  "Once you 
have Tengizchevroil's second generation plant fully operational, 
plus Karachaganak's Phase III, and Kashagan production, you're going 
to need all the pipelines you can get," he said. 
 
IS KCTS A REAL PROJECT, OR JUST A PLOY? 
 
¶6.  (SBU) KMG's Rakhanov said some progress has been made on the 
Kazakhstan Caspian Transportation System (KCTS), but he expressed 
doubts about the ability to secure volume commitments for both 
projects in the near term, suggesting that KCTS could actually 
compete with CPC for crude supplies once it is completed in 
approximately 2015.  (NOTE:  There are currently no crude volume 
commitments to KCTS.  END NOTE).  Nevertheless, Rakhanov supports 
the project, not least because the concept alone has given 
Kazakhstan useful leverage in negotiations with Russia over CPC 
expansion.  Rakhanov said KCTS was "fifty percent responsible for 
changing Russia's attitude" toward CPC expansion. 
 
WHO WILL BUILD THE TANKERS? 
 
¶7.  (SBU) Chevron's Johnson supports the development of KCTS, but 
considers the project incredibly complex and risky, particularly 
from a maritime safety perspective.  "Building a pipeline to Kuryk 
doesn't do you any good," he said. "You still need to get the crude 
across the Caspian.  And there's a real issue around ships."  He 
noted that neither Kazakhstan nor Azerbaijan currently has the 
capacity to build the 60,000 deadweight-ton tankers that would make 
the project viable, and he suggested that Russia would oppose 
efforts by either country to develop the infrastructure and 
expertise to build ships that large.  Johnson said that, ironically, 
KCTS, which would circumvent Russian territory, might need the 
support from Russia, which could build the ships in Astrakhan or 
allow manufactured parts to travel down the Volga-Don for assembly 
in the Caspian. 
 
TENDER CONDUCTED FOR SMALLER TANKERS 
 
¶8.  (SBU) On February 25, the newspaper Vremya reported that 
KazMorTransFlot (KMTF) conducted a tender to build three new 12,000 
deadweight ton oil tankers.  According to the article, KMTF received 
seven bids:  four from Russia, one from Ukraine, one from Bulgaria, 
and one from Korea.  The lowest price came from the Bulgarian 
company MTG Dolphin, at 15.3 million euros per tanker, but the 
article claimed that the company began building tankers just two 
years ago and the terms of the tender require a minimum of five 
years' experience.  The Ukrainian company Okean, owned by German 
shareholders, offered to build the ships for $21.7 million each. 
Russia's Zelenodolsk bid $23.5 million, but the article notes that 
KMTF previously ordered barges from this company and they missed the 
delivery deadline.  Russia's Krasnoe Sormovo bid $22.3 million, but 
according to the article, one of their previous clients, a Turkish 
firm, complained that the company was two years late and kept trying 
to increase the cost per unit from $18 million to $26 million.  The 
Korean company Hyundai was willing to offer a price of $23.5 
million, although a company spokesman said they have built similar 
tankers for $30 million.  Russia's Astrakhan shipyard offered a bid 
of $24.8 million and Russia's Vyborg offered 28.7 million euros. 
(NOTE:  The Korean Ambassador to Kazakhstan told the DCM in 
mid-February that Hyuandai has made a strategic decision to enter 
 
ASTANA 00000530  003.2 OF 004 
 
 
the Caspian region, despite the lack of a suitable shipyard in 
Kazakhstan.  On March 18, KMG's Arman Darbayev, Executive Director 
for Oil Transportation and Service Projects, told Energy Officer 
that Astrakhan's bid was accepted, although the winner of the tender 
has not yet been publicly announced.  END NOTE). 
 
AZERIS WANT "MONEY FOR NOTHING" 
 
¶9.  (SBU) KMG's Arman Darbayev, Executive Director for Oil 
Transportation and Service Projects, argued that the number one 
question for KCTS -- an issue even more important than the tanker 
fleet -- is whether or not international oil companies will be 
allowed to take an equity stake in the project.  He said the tanker 
issue is a technical and commercial problem:  "If you have enough 
money, you can solve this."  According to Darbayev, however, the 
ownership issue is a "political problem" and therefore more 
intractable.  Darbayev said that Azerbaijan has asked for volume 
commitments from the suppliers before work can begin on KCTS, but 
the suppliers will not commit volumes without a minority equity 
share that will give them greater control over project risk, cost, 
schedule, and safety.  Regarding the proposed pipeline from Eskene 
to Kuryk, Darbayev said the government of Kazakhstan has agreed in 
principle to 49 percent ownership by private sector partners and the 
companies representing Tengiz and Kashagan have agreed to provide 
expertise to develop the terms of reference for the necessary 
feasibility studies.  "I believe we are very close to signing an 
agreement" with the companies to build the pipeline, he said. 
However, Darbayev was clearly frustrated by the negotiating position 
of Azerbaijan's SOCAR, which is firmly opposed to international oil 
companies taking an equity stake, particularly if SOCAR must reduce 
its 50 percent share in the new venture.  He complained that the 
lead negotiator for SOCAR, Vitaliy Bairlibayev, confessed he is not 
authorized or empowered to compromise with the government of 
Kazakhstan.  "Azerbaijan is just a transit country, holding up KCTS 
so they can maximize their tariffs.  They're getting money for 
nothing." 
 
IRAN OPTION GIVES KAZAKHSTAN LEVERAGE 
 
¶10.  (SBU) Darbayev said the only leverage Kazakhsktan has over 
Azerbaijan on the KCTS project is the threat to ship its crude to 
"other directions," meaning Iran.  He noted that the Heads of 
Agreement negotiated with SOCAR includes a provision allowing 
shipment to "other directions," but only by mutual consent, which 
Darbayev said "means never.  The Azeris are very worried about us 
going to Iran instead." 
 
RUSSIAN INFLUENCE OVER KAZAKHSTAN'S CRUDE EXPORTS 
 
¶11.  (SBU) When asked about Russia's attitude toward Kazakhstan's 
multi-vector oil export policy, Chevron's Kanapianova argued that 
Russia would prefer crude to travel through Russian territory, which 
would naturally give Russia greater leverage over Kazakhstan.  She 
said that ten years ago, Russia "used to turn off the Atyrau-Samara 
oil pipeline, citing 'technical reasons,' whenever President 
Nazarbayev said something they didn't like.  But they don't do that 
anymore. Their methods are more sophisticated and more subtle." When 
pressed to elaborate, Johnson suggested that Russia could introduce 
a pipeline tariff tax and simply raise the rate to increase the 
pressure on Kazakhstan.  This would be particularly effective, 
Johnson said, if Kazakhstan were limited to exporting all of its 
crude via Russia. 
 
¶12.  (SBU) KMG's Darbayev acknowledged that Russia was not in favor 
of KCTS:  "Their intention is to block the project," he said. 
However, he did not believe that Russia would take the extreme step 
of blocking transit shipments of tanker components through the 
Volga-Don, if the tankers were built outside the region and 
assembled in the Caspian.  "That would be too much," he said, 
"especially considering the good relations we have with Russia." 
 
 
ASTANA 00000530  004.2 OF 004 
 
 
¶13.  (SBU) Bolat Akchulakov, former Vice Minister of Energy, now 
Managing Director for Oil and Gas at national welfare fund 
Samruk-Kazyna, echoed Darbayev's remarks.  On March 20, he told 
Energy Officer that Russia might try to discourage oil exports that 
circumvented Russia, but would ultimately respect Kazakhstan's 
sovereignty.  "They know that we will continue to ship most of our 
crude through Russia and in fact have maximized the capacity of 
Atyrau-Samara and CPC," he said, suggesting that Kazakhstan simply 
needs other export options in order to accommodate increased 
production volumes. 
 
OPENING UP IRAN WOULD BE A GAME-CHANGER 
 
¶14.  (SBU) Johnson told Energy Officer that Iran is now building 
ships of suitable size for KCTS at its northern port of Neka and he 
suggested that normalization of relations with Iran would remove the 
threat of a Russian veto over KCTS and help ensure the 
diversification of crude export routes from Kazakhstan.  "If we 
could work with Iran," he said, "that would change the equation 
entirely."  Johnson added that both Total and ENI, partners in the 
Kashagan consortium, intend to ship Kazakhstani crude to Iran once 
full production begins in 2015.  KMG's Darbayev said very much the 
same thing:  "If KCTS does not go forward as anticipated, the 
European oil companies will ship their crude to Iran," he said. 
 
MILAS