VZCZCXRO3843
RR RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK RUEHYG
DE RUEHTA #1400/01 2290304
ZNR UUUUU ZZH
R 170304Z AUG 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 6037
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 1839
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1207
RUEHUL/AMEMBASSY SEOUL 0868
RUEHKO/AMEMBASSY TOKYO 1909
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1394
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHDC 1296
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL 0010
RUEHAST/USOFFICE ALMATY 1796

UNCLAS SECTION 01 OF 03 ASTANA 001400 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EPET ECON KZ
SUBJECT: KAZAKHSTAN:  KMG HALTS KCTS NEGOTIATIONS, THEN 
SEEKS NEW TALKS WITH COMPANIES 
 
REF: A. ASTANA 0578 
     ¶B. ASTANA 0675 
     ¶C. ASTANA 0748 
     ¶D. ASTANA 1201 
     ¶E. ASTANA 1303 
 
ASTANA 00001400  001.2 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  From recent discussions with energy 
executives and government officials, it is clear that 
negotiations over the Kazakhstan Caspian Transportation 
System (KCTS) have stalled.  The key issue is whether and to 
what extent international oil companies (IOCs) will be 
allowed to take an equity stake in the project.  The 
government of Kazakhstan wants to build, own, and operate the 
onshore pipeline and other related infrastructure, but the 
IOCs will not provide financing or volume commitments without 
equity participation in the project.  The government sent a 
letter to the IOCs last week, requesting the resumption of 
negotiations.  While the letter does not indicate flexibility 
in the government's position, it is encouraging that the 
parties are prepared to continue negotiations.  END SUMMARY. 
 
ENERGY EXECUTIVES EXPRESS FRUSTRATION 
 
¶3.  (SBU) In July and August, the Ambassador met with key 
U.S. energy executives with major investments in Kazakhstan, 
who provided an update on their negotiations with the 
government over KCTS.  On July 21, Jay Johnson, Managing 
Director of Chevron's Eurasia Business Unit (please protect), 
told the Ambassador that the parties were very close to 
announcing an agreement on the eve of the Foreign Investors 
Council that President Nazarbayev hosted in Kostanai on June 
¶12.  He said that KazMunaiGaz (KMG) First Vice President 
Maksat Idenov worked tirelessly with Chevron, representing 
the Tengizchevroil (TCO) consortium, and ExxonMobil, 
representing the Kashagan consortium (or G-6), to "hammer out 
a deal" that stipulated 49 percent ownership of the 
Eskene-Kuryk pipeline by the IOCs.  Johnson said Idenov 
presented the proposal to Minister of Energy and Mineral 
Resources (MEMR) Sauat Mynbayev, who approved the deal. 
Then, unexpectedly, KMG President Kairgeldy Kabyldin "threw a 
handgrenade to kill the deal at the last minute."  Johnson 
said Kabyldin introduced several new terms affecting the 
ownership structure and financing of the deal that the IOCs 
simply could not accept.  He called Kabyldin "nationalistic" 
and said it seemed as if Kabyldin didn,t want the IOCs 
owning critical infrastructure on Kazakhstani soil.  Johnson 
said Kabyldin seemed to believe the government could take its 
time to complete the negotiations on KCTS, i.e., to build the 
system only when increasing production from Kashagan really 
requires it, after 2020.  Johnson said it seemed as if 
Kabyldin were saying, "Why give away the infrastructure 
today, when I can wait until Kashagan comes on line?  At 
least then, this deal won,t happen on my watch." 
 
¶4.  (SBU) On July 31, the Ambassador met with Steve Rose, 
Caspian Russia Joint Interest Manager, and Mike Crews, 
Kazakhstan Country Manager, of ExxonMobil (protect 
throughout).  They confirmed that negotiations on the onshore 
portion of KCTS, including the pipeline from Eskene to Kuryk, 
were very close to resolution in June, but came to a halt 
when the government introduced additional provisions at the 
last minute.  Rose said Kabyldin demanded the unilateral 
right to (1) expand the capacity of the Eskene-Kuryk 
pipeline; (2) set or raise transit tariffs; and (3) authorize 
the front-end engineering design (FEED).  According to Rose, 
Kabyldin also wants the option to buy out the IOC's equity 
stake in KCTS at any time.  Rose said those terms were 
 
ASTANA 00001400  002.2 OF 003 
 
 
unacceptable to the G-6 and to TCO.  "They 
want us to assume all of the project risk," he said, "without 
giving us any guarantees.  We want sufficient control over 
the tariffs to ensure profitability of the system.  We also 
believe that the owners of the project should determine when 
and how much to expand the pipeline -- not just the 
government.  And we simply cannot commit to FEED until and 
unless we are an owner," with control of cost, risk, and 
other factors.  Rose estimated the cost of the FEED to be 
$100-200 million and said ExxonMobil would not commit this 
kind of money without ownership.  Rose confirmed that 
Mynbayev had "blessed the outline of the agreement" (without 
the new terms introduced by Kabyldin), but when he saw 
Mynbayev on July 31, the Minister said the government was not 
ready to make a deal, and had made no progress on the MOU. 
Rose said Mynbayev did not seem angry or upset.  According to 
Rose, as the meeting adjourned, he smiled, shook hands, and 
said, "We just need a time out."  Rose and Crews said they 
will wait until the government "makes up its mind," but they 
insisted that either the government must build and finance 
the system on its own, using ship-or-pay contracts as 
collateral to raise capital on the open market, or it must 
include the IOCs as equal (49 percent) partners with 
ownership rights and authorities.  "They can,t have it both 
ways," said Rose. 
 
VICE MINISTER SUPPORTS KCTS -- "BUT WHY THE RUSH?" 
 
¶5.  (SBU) On August 10, Energy Officer asked Vice Minister of 
Energy Lyazzat Kiinov how important KCTS is to Kazakhstan. 
He replied, "It is very important.  Even if CPC is expanded, 
which we expect to happen next year, there will not be enough 
capacity for Kazakhstan,s crude exports.  The Atyrau-Samara 
pipeline is old, Soviet infrastructure, and in need of 
modernization.  We will definitely need KCTS for TCO,s 
future growth, Karachaganak,s Phase III, and Kashagan.  But 
we don,t need it now.  There is no rush.  We won,t have the 
big increase in volumes until 2013 at the earliest.  Why take 
the risk to build the infrastructure now, without the 
certainty that the oil will be there?  And why rush to train 
all these new sea captains and officers now, when we won,t 
have the tankers for another four or five years?  They,ll 
come back from training in six months, and who will then give 
them a job?"  Kiinov said that KCTS will require large 
tankers (up to 63,000 deadweight tons) and said that the 
government has received expressions of interest from Russia, 
Azerbaijan, and Iran to build the tankers for Kazakhstan. 
But he said, "We don,t want to give up the contract for the 
tankers.  We want to attract an investor who will build the 
ships in Kazakhstan."  (NOTE:  As reported in reftel A, it is 
expected to take at least three years to build the onshore 
pipeline, oil terminals, and offshore buoys for KCTS, and up 
to eight years to train fully accredited sea captains.  END 
NOTE). 
 
KMG DISAPPOINTED THAT USTDA WILL NOT FUND FEASIBILITY STUDY 
 
¶6.  (SBU) On August 10, Arman Darbayev, KMG's Director of Oil 
Transportation Projects, met with visiting USTDA officials to 
discuss possible assistance to expedite vessel clearance at 
Kazakhstani ports and ensure that Kazakhstan's maritime 
legislation meets international standards (reftel E). 
Darbayev's first question to USTDA was, "Why did you back 
out" from financing a feasibility study for the trans-Caspian 
portion of KCTS?  He said that KMG was very eager to have 
USTDA carry out that work.  USTDA responded by noting that 
the IOCs are still engaged in negotiations with the 
governments of Kazakhstan and Azerbaijan over the structure 
and ownership of that portion of KCTS, and USTDA did not want 
 
ASTANA 00001400  003.2 OF 003 
 
 
to get ahead of those negotiations.  Darbayev was 
disappointed, but he said that KMG and the State Oil Company 
of the Azerbaijan Republic (SOCAR) would have the estimated 
$3 million and technical expertise required to carry out the 
work, independently of the IOCs.  Darbayev said the 
engineering studies "will take years" to complete and he 
pushed for a parallel approach, in which the feasibility 
studies would be carried out even as negotiations over 
project ownership and volume commitments continue.  He said, 
"We need the technical details in order to reach agreement on 
commercial issues."  Darbayev also told USTDA that the 
government of Kazakhstan is still willing to grant the IOCs 
an equity share of the Eskene-Kuryk pipeline.  However, he 
did not discuss the ownership structure for the oil terminals 
or offshore infrastructure, which falls under a 50-50 joint 
venture between KMG and SOCAR.  (COMMENT:  To the best of our 
knowledge, negotiations between KMG and the IOCs have focused 
solely on the construction of the Eskene-Kuryk pipeline and 
related onshore infrastructure.  The port facilities in 
Kazakhstan and Azerbaijan are expected to remain under the 
stewardship of the host country.  If that is the case, the 
companies will insist on clear, stable, and strictly 
enforceable terms to ensure a fair and transparent fee for 
the use of the ports.  The IOC track record with the ports of 
Aktau and Baku suggests that this is possible, but not easy. 
END COMMENT).  Darbayev confirmed to Energy Officer that in 
June, the IOCs and KMG were "very close to an agreement on 
KCTS.  We had a two-page MOU ready for signature," he said, 
until a senior government official (NOTE:  Likely KMG 
President Kabyldin.  END NOTE) introduced additional terms 
that the IOCs refused to accept.  Darbayev also disclosed 
that the IOCs demanded that the contract have fiscal (tax) 
and legal stability, but the Ministry of Finance refused to 
guarantee that.  Darbayev said that KMG is eager to continue 
discussing the project, and said that Kabyldin sent a letter 
to the IOCs 
on August 9, asking them to resume negotiations.  However, he 
indicated that KMG will still insist on the new terms and 
conditions it introduced in June. 
 
¶7.  (SBU) COMMENT:  The negotiations over KCTS will continue 
to be complex, arduous, and time-consuming.  That fact will 
neither surprise nor deter any of the oil companies doing 
business in Kazakhstan.  We find it reassuring that the 
government has already expressed its desire to return to the 
negotiating table, and we find it curious that a technocrat 
like Kabyldin could overturn an agreement reached with the 
Minister of Energy.  Our expectation is that Mynbayev, 
Kabyldin, and Idenov will discuss the issue of IOC equity 
ownership with Prime Minister Masimov, who has proven his 
ability to resolve internal conflicts and forge consensus. 
We believe that Masimov can get the wheels moving in the 
right direction on KCTS.  Post will continue to monitor the 
situation and will explore who is driving the government's 
decision-making on this important oil-export project, and 
whether this represents a trend toward greater national 
control over critical infrastructure.  END COMMENT. 
HOAGLAND