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O 151127Z JUN 09
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UNCLAS SECTION 01 OF 02 ASTANA 001019 
 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  CONOCOPHILLIPS SIGNS N BLOCK CONTRACT 
 
REF:  (A) ASTANA 0529    (B) ASTANA 0352 
      (C) 08 ASTANA 2465 (D) 08 ASTANA 1910 
 
ASTANA 00001019  001.2 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (U) SUMMARY:  On June 12, ConocoPhillips (Conoco) signed a 
contract to explore and develop the offshore N Block, expected to 
contain significant oil and gas deposits.  Under the terms of the 
contract, which is consistent with a preliminary agreement reached 
on October 5, 2008, Conoco and UAE-based Mubadala Development 
Company will each own 24.5 percent of the project, while KazMunaiGas 
will own 51 percent.  The N Block is located approximately 30 
kilometers south-southwest of Aktau, in Mangistau oblast.  The 
government lists its estimated recoverable reserves at 270 metric 
tons (2.13 billion barrels).  Conoco committed to drilling three 
appraisal wells, the first in 2010, and expects to launch commercial 
production in 2019.  END SUMMARY. 
 
CONOCO COMMENTS ON THE DEAL 
 
¶3.  (SBU) Nick Olds, ConocoPhillips President for the Caspian 
Region, told Energy Officer on June 15 that Senior Vice President 
for International Operations Ryan Lance signed the N Block contract 
with KazMunaiGas (KMG) on June 12.  Olds said the parties worked 
late into the evening to finalize contract details and commented 
that "everything went very well.  All of the legal documentQare 
done.  It's now official."  As previousQ reported (reftel A), 
Conoco committed 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 is a concession based on their previous Production Sharing 
Agreement and is not subject to the terms and conditions of the 
draft Subsoil Law (reftel D).  However, the contract will be in 
compliance with the new Tax Code and will not be tax-stabilized. 
 
¶4.  (SBU) Olds said the hardest part of the negotiations, which 
lasted for more than two years, was resolving legal liability issues 
related to pre-existing conditions on Soviet wells and a sunken, 
Soviet-era drilling rig located within the territory of the N Block. 
 Ultimately, according to Olds, Conoco was released from all 
liability for oil spills or repair work related to the Soviet well 
or sunken rig.  Olds added that coming to commercial terms was also 
challenging.  "We had some difficulty landing on a fair and 
equitable rate of return," he said, noting that Conoco and Mubadala 
will incur 100 percent of the risk and expense for exploring the 
reservoir, while KMG will own 51 percent of the operation.  When 
asked what this deal means to ConocoPhillips, Olds answered, 
"Kazakhstan is a key growth area for our company and we see this 
deal as a way to piggyback on our investment in Kashagan and promote 
our long-term strategic interest in the region."  Olds said the N 
Block was a very attractive asset sought after by many other major 
oil companies, including Shell, Total, BG Group, and Exxon. 
 
¶5.  (U) In a press release on June 12, Jim Mulva, Chairman and CEO 
of ConocoPhillips said, "ConocoPhillips is honored to participate in 
this world-class exploration project in Kazakhstan and we look 
forward to working with KazMunaiGas and Mubadala to develop the oil 
and gas resources in N Block."  Khal-doon Khalifa Al Mubarak, CEO of 
Mubadala Development Company, released a statement on June 12 
saying, "We are pleased to partner with KazMunaiGas and 
ConocoPhillips.  The establishment of mutually beneficial 
partnerships remains a fundamental element of Mubadala's approach to 
business.  Signing this agreement is another important step in 
realizing our strategy to become an active participant in the 
international upstream petroleum sector." 
 
THE GOVERNMENT'S REACTION 
 
¶6.  (U) On June 12, Minister of Energy and Mineral Resources Sauat 
Mynbayev said on Kazakhstani television, "The point is that a 
license for oil exploration will be given to the oil consortium of 
 
ASTANA 00001019  002.2 OF 002 
 
 
the United Arab Emirates.  The consortium will consist of 
ConocoPhillips and Mubadala Development companies.  Bilateral talks 
have been held for a long time.  Now, we have signed a document 
which will satisfy both sides." 
 
¶7.  (U) The President of KazMunaiGas (KMG), Kairgeldy Kabyldin, said 
in a press statement that, "The rise of our cooperation with 
ConocoPhillips and Mubadala to a new level indicates foreign 
investors' great interest in developing Kazakhstan's offshore fields 
in the Caspian and re-affirms the potential of our country's oil and 
gas sector.  This project will enable us to use new technology and 
international expertise in developing offshore oil and gas resources 
of Kazakhstan." 
 
¶8.  (SBU) COMMENT:  The N Block deal is significant for several 
reasons.  First, of course, an American oil company was awarded a 
multi-million dollar investment deal to explore Kazakhstan's 
lucrative offshore territory, beating out rival bids from other 
majors.  The N Block is also the first new contract signed since the 
government unofficially declared a moratorium on new deals in 2007. 
It therefore signals to international oil companies that Kazakhstan 
is back in business, and offshore areas are no longer off limits. 
It is also significant that the deal was signed before the draft 
Subsoil Law was ratified.  If adopted, that law would separate 
contracts for exploration and production, which could mean that a 
company incurring the risk and cost of exploring a field may not be 
given the opportunity to produce the oil it discovers (reftel D). 
The contract nevertheless does signal the government's higher 
expectations and tougher conditions, particularly its lack of a tax 
stability clause and the willingness of international partners to 
pay 100 percent of the costs of exploration in exchange for a 
minority share in the production company.  Finally, it is worth 
noting that Conoco's bid became attractive only after the company 
added the UAE's Mubadala Development Company as partners.  END 
COMMENT. 
 
HOAGLAND