VZCZCXRO5799
OO RUEHAG RUEHAST RUEHBC RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDE RUEHDF
RUEHDIR RUEHFL RUEHIK RUEHKUK RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ
RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0675/01 1120755
ZNR UUUUU ZZH
O 220755Z APR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5211
INFO RUCNCIS/CIS COLLECTIVE 1517
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0895
RUEHKO/AMEMBASSY TOKYO 1598
RUEHUL/AMEMBASSY SEOUL 0582
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1080
RUEKJCS/SECDEF WASHDC 0994
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1436

UNCLAS SECTION 01 OF 04 ASTANA 000675 
 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EUR/RUS, NEA/IR, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET EINV RS IR KZ
SUBJECT:  KAZAKHSTAN CASPIAN TRANSPORTATION SYSTEM INFRASTRUCTURE 
INVESTMENTS 
 
REF:  (A) ASTANA 0578 (B) ASTANA 0530 (C) ASTANA 0283 
      (D) BAKU 0314 
 
ASTANA 00000675  001.2 OF 004 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The government of Kazakhstan is committed to 
developing alternative oil export routes, whether by pipeline, rail, 
or tanker, that reduce its dependence on Russia.  From April 9-17, 
Energy Officer joined a definitional mission from the U.S. Trade and 
Development Agency to Azerbaijan and Kazakhstan to identify 
technical assistance projects to develop the Kazakhstan Caspian 
Transportation System (KCTS), which is expected to move as much as 1 
million barrels of oil per day from Atyrau to market through Baku, 
Makhachkala (Russia), and possibly Neka (Iran) by 2015.  With one 
notable exception, company executives and government officials 
agreed that KCTS will be necessary to accommodate oil production 
from Tengiz and Kashagan starting in 2013.  Although many key 
aspects of this multi-billion dollar oil export project remain to be 
determined -- such as whether international oil companies (IOCs) 
will take an equity stake, who will build the pipeline from Eskene 
to Kuryk, and what size oil tankers will be used -- the basic 
concept is already being tested and millions of dollars have been 
invested in infrastructure on Kazakhstan's side of the Caspian. 
This cable summarizes those infrastructure projects; septel will 
look at the stakeholders in Kazakhstan and their equities in the 
project.  END SUMMARY. 
 
PUTTING THEORY INTO PRACTICE 
 
¶3.  (SBU) The basic concept behind KCTS is already being 
successfully tested.  Tengizchevroil (TCO) now sends approximately 
75,000 barrels per day (bpd) by rail from Atyrau to Aktau, where it 
is loaded onto 12,000 deadweight ton (dwt) tankers and shipped to 
Baku, for onward distribution to global markets via the 
Baku-Tbilisi-Ceyhan (BTC) pipeline.  KCTS will replace the rail link 
with a 281-mile pipeline from Eskene to Kuryk; deploy massive, 
63,000 dwt tankers; and enhance port infrastructure in Kuryk and 
Baku to accommodate the larger tankers.  (NOTE:  At the moment, no 
port on the Caspian can dock -- and no shipyard can build -- a 
tanker as large as those called for by KCTS.  END NOTE.)  An 
engineering study commissioned by national oil company KazMunaiGas 
(KMG) projects KCTS capacity at 56 million tons of crude per year 
(approximately 1.1 million barrels per day) and estimates that the 
Kuryk portion of the project will cost $700 million for new rail 
terminals, platforms, berths, and vessel servicing infrastructure. 
 
CRUDE SHIPMENTS TO IRAN EXPECTED TO CONTINUE 
 
¶4.  (SBU) A constant refrain during the definitional mission was 
that KCTS will provide Kazakhstani shippers with the flexibility to 
ship crude to three ports on the Caspian:  Baku, Makhachkala 
(Russia), and Neka (Iran).  On April 13, Murat Kurbanbayev, Deputy 
General Director of MangistauMunaiGas (MMG), said that oil swaps 
with Iran are a significant source of revenue to the company. 
(NOTE:  On April 16, the China National Petroleum Corporation 
purchased 50 percent of MMG for $1.4 billion.  END NOTE). 
Kurbanbayev said Iran will continue to be a viable export option for 
Kazakhstan, particularly as the volume of production and the number 
of tankers in the Caspian increase.  He explained that MMG does not 
sell to Iran directly.  Instead, private oil traders buy oil from 
MMG, pick it up at the port in Aktau, load it onto tankers, mix it 
with lighter crude from other fields, and ship it directly to Neka. 
According to Kurbanbayev, the Ministry of Energy determines what 
volumes go where:  "All of these questions are decided at the top 
and handed down." 
 
¶5.  (SBU) Vladimir Konstantinov, Deputy Director of the Aktau Sea 
Port, told Energy Officer on April 13 that Kazakhstan swaps 
approximately five million tons of oil per year, or 100,000 bpd, 
with Iran.  He confirmed that private oil traders ship Kazakhstani 
crude to Baku, Makhachkala, and Neka and considers it beneficial for 
 
ASTANA 00000675  002.2 OF 004 
 
 
Kazakhstan to have multiple export options.  "It's very good that we 
now ship our crude in all three directions," he said.  "It gives us 
flexibility to maneuver."  The Deputy Governor (Akim) of Mangistau 
Oblast, Amangeldy Aitkulov, echoed these remarks, telling Energy 
Officer on April 13, "It is important for Kazakhstan to have 
alternative export routes, including Iran." 
 
KCTS CRITICAL TO FUTURE OIL EXPORTS 
 
¶6.  (SBU) The government of Kazakhstan, particularly state-owned oil 
company KazMunaiGas (KMG), is committed to moving forward with KCTS. 
 Political support is strong, feasibility studies are underway, and 
KMG is willing to sell IOCs equity in the project.  KMG and IOC 
executives agree that KCTS will be essential if Kazakhstan is to 
develop alternative export routes for its future oil production.  On 
April 15, Richard Eldridge, Director of TCO's Future Growth project, 
told Energy Officer that output at Tengiz will grow from current 
levels of 540,000 bpd to 780,000 bpd by 2013, and 1.1 million bpd by 
¶2016.  Agip KCO's Public Relations Manager Richard Fritz told Energy 
Officer that production at Kashagan will begin with approximately 
75,000 bpd in 2012, and grow to 150,000 bpd in 2013, 300,000 bpd in 
2014, and 450,000 bpd by 2015.  TCO's Transportation Manager Doug 
Schoen said that even if the Caspian Pipeline Consortium (CPC) 
pipeline's capacity is expanded to 1.3 million bpd, there will still 
not be enough westward export capacity to accommodate increased 
volumes from Tengiz and Kashagan, unless KCTS is fully developed. 
 
A DISCORDANT NOTE FROM A KEY STAKEHOLDER 
 
¶7.  (SBU) Vice Minister of Energy and Mineral Resources Lyazzat 
Kiinov, however, sounded a discordant note, telling Energy Officer 
on April 17, "There is no oil transportation crisis.  We are 
expanding the Atyrau-Samara pipeline, we are expanding the CPC 
pipeline, we are expanding the pipeline to China, and we will 
continue to use 12,000 dwt tankers to ship crude across the Caspian. 
 We have all the transportation capacity we will need for the next 
ten years."  (COMMENT:  When listing Kazakhstan's oil transportation 
capacity, Kiinov assumed that the IOCs would be just as willing to 
ship to China or Russia as they would via KCTS.  In fact, that 
decision will depend on a number of factors, including the netback 
price they receive, the volumes they have available, and the quality 
guarantees they are given.  END COMMENT.) 
 
INFRASTRUCTURE EXPANSION UNDERWAY AT KURYK 
 
¶8.  (SBU) The two-lane road from Aktau to Kuryk is absolutely 
atrocious.  Nominally paved with asphalt, the road is riddled with 
potholes and makes for a back-breaking ride, even at speeds below 60 
kmh.  The final five kilometers to town is simply open steppe. 
However, Energy Officer observed more than a dozen dump trucks, 
bulldozers, and steamrollers building a new, four-lane asphalt road, 
which is expected to be completed by the end of the year.  In 
addition, development of other transportation infrastructure in 
Kuryk is also underway.  On April 12, Minister of Transportation 
Abelgazy Kussainov visited Kuryk to inaugurate a new railway 
terminal and a 14-kilometer rail line, expected to be completed this 
year, linking Yeraliyevo to Kuryk. 
 
ITALIAN JOINT VENTURE TO BUILD LARGE TANKERS 
 
¶9.  (SBU) In September 2004, an Italian-Kazakhstani joint venture, 
Ersai, 60 percent owned by Italy's Saipem and 40 percent owned by a 
group controlled by Kazakhstani businessman Nurlan Kapparov, 
invested $100 million to develop a steel fabrication yard to support 
the offshore development of Kashagan and other fields.  According to 
Salvatore Ripepi, Operations Manager for Ersai, the company will 
invest an additional $300 million in Kuryk by the end of 2009, 
including $100 million for a new dry dock.  Ripepi said the dry dock 
investment will enable Ersai to build or assemble large, 60,000 dwt 
tankers.  He added that a number of harbor improvements have been 
made, including installation of a 100-meter opening door, which he 
 
ASTANA 00000675  003.2 OF 004 
 
 
said is larger than any in Europe.  Ripepi said Ersai is already 
equipped to build tankers up to 10,000 dwt and noted that the 
current draught at Kuryk is 4.5 to 5.0 meters, which is deep enough 
for Ersai to service the largest vessels currently plying the 
Caspian Sea.  The company has plans to increase the draught to 20 
meters, which would enable them to service ships as large as 63,000 
dwt.  "The soil investment is done and permits have been awarded," 
Ripepi said.  "We will excavate in July and are now soliciting bids 
for dredging."  When asked to confirm Ersai's plans to build or 
assemble tankers as large as 60,000 dwt, Ripepi said that was indeed 
the company's plan.  "In fact," he said, "it would be very difficult 
for us to work on smaller ships, because we would have to adjust the 
assembly apparatus to do so." 
 
ADVOCATES FOR AKTAU 
 
¶10.  (SBU) Expansion of the port of Aktau is also underway.  While 
KCTS would ultimately operate from Kuryk, not Aktau, oil shipments 
from Aktau via 12,000 dwt tankers are expected to continue for 
several years.  Aktau port's Deputy Director Konstantinov said that 
four new berths are under development, in addition to new oil 
terminals and a new harbor.  He said these enhancements will allow 
the port to load and ship an additional 240,000-280,000 bpd, 
bringing its total capacity to 500,000 bpd.  Konstantinov confirmed 
that the largest tankers any port in the Caspian can currently 
accommodate are 13,000 dwt and he said that only Aktau, Baku, and 
Makhachkala can handle ships of that size.  He added that the 
largest tanker Neka can currently handle is 5,000 dwt.  Advocating 
for a continued role for Aktau in future oil shipments across the 
Caspian, Konstantinov said that 12,000 dwt tankers are safe, provide 
a steady return on investment, and fit with current terminals.  He 
said that using larger ships would require "huge investments in 
supporting infrastructure." 
 
¶11.  (SBU) Murat Ormanov is General Director of KazMorTransFlot 
(KMTF), which is 50 percent owned by KMG and 50 percent owned by the 
Samruk-Kazyna National Welfare Fund.  His company owns and operates 
16 ships, including three 12,000 dwt tankers built in St. 
Petersburg, eight barges, and five tug boats.  On March 27, KMTF 
awarded a contract to Krasnoye Sormovo Shipyard (Nizhniy Novgorod, 
Russia) to construct three 13,000 dwt tankers for $66.45 million. 
Ormanov said that the first tanker will be delivered in August, the 
second in May 2010, and the third in July 2010.  He added that 
Russian and Ukrainian crews are trained and available to man the 
ships.  According to Ormanov, KMTF also leases up to 30 additional 
tankers from Azerbaijan and Russia and operates "a few" 
80,000-120,000 dwt tankers in the Mediterranean Sea.  Ormanov said 
KMTF shipped six million tons of crude in 2008 in all three 
directions:  Baku, Makhachkala, and Neka. 
 
EXPANSION OF SUPPORTING INFRASTRUCTURE AT BAUTINO 
 
¶12.  (SBU) While the port of Bautino is not expected to play a 
direct role in transporting oil from Kazakhstan across the Caspian, 
Bautino's oil response base, fleet coordination facilities, and 
marine fuel station could provide important support to the shipping 
operations of KCTS.  The largest operation at Bautino is the base 
owned and operated by Agip KCO, which is focused on providing 
logistical support to Kashagan.  Alessandro Masiero, Bautino Base 
Manager for Agip KCO, said the port offers a natural harbor free of 
ice which is navigable year-round. 
 
¶13.  (SBU) The Bautino base currently provides Kashagan with a wide 
range of services, including fleet coordination, crew changes, waste 
management, oil spill response, materials supply, and storage. 
Masiero said Agip KCO will expand the Bautino base and build a new 
jetty, an airplane runway, and a helipad for medevac emergencies. 
He added that the water depth around the base is five to six meters, 
but dredging is ongoing.  In addition to Agip's Bautino base, 
TenizService, a wholly-owned subsidiary of KMG, owns and operates a 
facility at Tupkaragan Bay in Bautino.  TenizService provides rock 
 
ASTANA 00000675  004.2 OF 004 
 
 
loading, waste management, fire response, and marine fueling 
services to the operators of Kashagan, Pearls, and the N Block. 
 
COMMENT 
 
¶14.  (SBU) Although the IOCs and the government of Kazakhstan are 
clearly committed to the project, several fundamental questions 
about KCTS remain unanswered.  It is unclear, for example, if IOCs 
will be allowed to take an equity position in the project, who will 
construct and own the pipeline from Eskene to Kuryk, what size 
tankers will be used, where they will be built and assembled, who 
will crew and pilot the ships, which ports and terminals will be 
used, and which export routes from Baku onward will be utilized. 
These are fundamental, even existential, questions that must be 
answered before KCTS becomes a reality, and before Kashagan volumes 
come online in 2013.  What is clear, however, is that marine 
transportation of Kazakhstani crude from its largest fields to its 
closest markets is not only doable -- it is being done.  TCO ships 
Tengiz crude by rail to Aktau, by tanker to Baku, and by pipeline to 
Ceyhan.  With continued U.S. diplomatic support, future USTDA 
technical assistance, IOC financial and technical contributions, and 
the patience to bake the pie before slicing it up, KCTS can develop 
into a viable, alternative export route for Kazakhstani crude. 
 
HOAGLAND