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DE RUEHTA #1105/01 1881109
ZNR UUUUU ZZH
O 071109Z JUL 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5707
INFO RUCNCIS/CIS COLLECTIVE 1710
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1077
RUEHKO/AMEMBASSY TOKYO 1779
RUEHUL/AMEMBASSY SEOUL 0745
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1261
RUEKJCS/SECDEF WASHDC 1178
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1659

UNCLAS SECTION 01 OF 02 ASTANA 001105 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  CHEVRON DISCUSSES NEW INVESTMENTS, CPC 
EXPANSION, AND FUTURE GROWTH 
 
REF: (A) 08 ASTANA 2144 
 (B) ASTANA 0131 
 
ASTANA 00001105  001.2 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On June 10, Chevron executives told Energy 
Officer that they will press hard to sanction expansion of the 
Caspian Pipeline Consortium (CPC) pipeline by the end of the year, 
despite indications from KazMunaiGas (KMG) that a decision will be 
postponed until 2010.  KMG confirmed that the government of 
Kazakhstan would have to waive its pre-emptive right to purchase 
British Petroleum's (BP) shares in Tengizchevroil (TCO) before BP 
can sell its stake in the enterprise to Lukoil.  Chevron touted its 
investment in an Atyrau polypropylene pipe plant as evidence of 
economic diversification, confided that issues related to sulfur 
storage at Tengiz have been resolved, and said they are prepared to 
provide training and logistical support for the maritime 
transportation of crude oil across the Caspian Sea.  END SUMMARY. 
 
BOARD MEMBER SAYS CPC EXPANSION LIKELY BY MID-2010 
 
¶3.  (SBU) During a June 5 meeting with Energy Officer, KMG's 
Director for New Transportation Projects, Timur Rakhanov, who is 
also a member of the CPC's Board of Directors, said he does not 
expect the consortium to sanction CPC expansion until the first 
quarter of 2010.  Rakhanov said there are no political or financial 
obstacles to expansion, but he said more time is needed to prepare 
the necessary legal and technical documentation.  Rakhanov added 
that Russia, CPC's largest shareholder with 31 percent, is pressing 
the consortium to appoint a Russian government representative as new 
general director of CPC in 2010, before the vote to sanction 
expansion is taken. 
 
CPC EXPANSION TIED TO TCO DIVESTMENT 
 
¶4.  (SBU) When asked if Kazakhstan plans to increase its share in 
CPC, Rakhanov said no.  He explained that KMG's recent acquisition 
of BP's shares in Kazakhstan Petroleum Ventures increased KMG's 
crude shipping quota to 14 million tons, which he said was 
sufficient to meet current needs.  Rakhanov did, however, confirm 
that the government of Kazakhstan would have to waive its 
pre-emptive right to purchase BP's shares in TCO before BP can sell 
its stake to Lukoil.  He refused to speculate on the likelihood of 
this happening, but he noted that this is a rare opportunity to 
acquire shares in a lucrative venture, and he said that President 
Nazarbayev would make the final decision.  (NOTE:  BP is in 
negotiations with Lukoil to sell its shares in CPC and TCO for as 
much as $2 billion.  BP holds the shares via its joint venture with 
Lukoil, LukArco.  END NOTE). 
 
CHEVRON CALLS DELAY "UNACCEPTABLE" 
 
¶5.  (SBU) On June 10, Chevron's Managing Director for Eurasia, Jay 
Johnson (protect throughout), told Energy Officer that a delay on 
CPC expansion is "simply unacceptable."  Johnson said that Chevron, 
KMG, and Transneft are working hard to complete the necessary 
financial, technical and engineering negotiations by the end of the 
year and he said he still hopes the consortium will sanction 
expansion in 2009. 
 
THE TIME FOR "FUTURE GROWTH" IS NOW 
 
¶6.  (SBU) According to Johnson, TCO's daily crude production 
averages approximately 560,000 barrels per day.  Johnson confided to 
Energy Officer that there are more than 1 billion barrels in the 
reservoir at Tengiz, but production is time sensitive, due to the 
nature of the geological structure.  Johnson said Chevron is 
prepared to recover the oil during the Future Growth phase, but the 
government must approve the budget and work plan by the end of the 
year.  According to Johnson, "We either produce that oil now, or we 
lose it forever." 
 
ASTANA 00001105  002.2 OF 002 
 
 
 
TCO SETTLES SULFUR ISSUES 
 
¶7.  (SBU) A very relieved and satisfied Johnson told Energy Officer 
that TCO has "ironed out" all of its sulfur issues with the 
Kazakhstani government.  According to Johnson, TCO reached an 
agreement on June 8 with Deputy Prime Minister Umirzak Shukeyev on 
the classification and treatment of Tengiz sulfur.  Johnson 
explained that if the sulfur meets the government's standards for a 
by-product, it will be treated as such.  If it does not, it will be 
treated as waste, and TCO will be assessed environmental fines 
accordingly.  Johnson acknowledged that not all sulfur produced at 
TCO would qualify as a by-product under the government's standards, 
but he was satisfied with the resolution.  TCO plans to increase 
sulfur sales to national nuclear company Kazatomprom (KAP) and 
sulfuric acid plants in Kazakhstan.  Johnson said that TCO expects 
to sell 1.0 to 1.2 million tons of sulfur per year to KAP by 2011. 
"Even though we're losing money on the deal," he said, "selling 
sulfur to Kazakhstani companies allows TCO to increase local content 
and reduce transportation costs.  And, we're moving the product.  So 
it's worth it."  During the first six months of this year, TCO has 
already sold an amount equivalent to 120 percent of the sulfur 
produced at Tengiz. 
 
CHEVRON PROMOTES POLYETHYLENE PIPE PLANT 
 
¶8.  (SBU) On June 8, Johnson said that President Nazarbayev met for 
more than ninety minutes with Chevron's Chief Executive Officer 
David O'Reilly.  "That was the longest meeting Nazarbayev has ever 
had with the company," he said.  Later, Nazarbayev referred to this 
meeting during the June 12 plenary session of the Foreign Investors 
Council in Kostanai, which was dedicated to a discussion of 
diversifying sources of investment.  "We agreed with Mr. O'Reilly to 
double the capacity of the Atyrau polyethylene pipe plant, and to 
construct a new valve plant and shipyard on the Caspian Sea.  This 
is a very good sign," announced Nazarbayev.  Johnson said that 
Chevron would use new technology to produce heat-resistant pipes and 
market its products to the entire Eurasian region. 
 
MOVEMENT ON KCTS 
 
¶9.  (SBU) Johnson said that Chevron supports the development of the 
Kazakhstan Caspian Transportation System (KCTS) and is close to 
reaching agreement with KMG and the Kashagan consortium on its 
participation in the Eskene-Kuryk pipeline.  "We made good progress 
two weeks ago," according to Johnson, "and expected to sign a 
Memorandum of Understanding at the June 12 FIC meeting, but the 
government introduced new conditions at the last minute." 
Nevertheless, he said he expects to conclude negotiations on the 
pipeline portion in the near future.  Johnson also said that Chevron 
is forming a team of marine transportation experts to advise the 
government on the logistics of shipping oil across the Caspian Sea. 
According to Johnson, Chevron welcomes the support and assistance of 
the U.S. Trade and Development Agency to establish a maritime 
academy and a marine training center to train engineers and captains 
in first principles and problem solving.  Of the 900 jobs in 
Kazakhstan's marine transportation sector, fewer than 20 percent are 
filled by Kazakhstanis, and there is just one Kazakhstani officer. 
 
HOAGLAND