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O 230553Z NOV 09
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UNCLAS SECTION 01 OF 04 ASTANA 002072 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EINV EPET KZ
SUBJECT:  KAZAKHSTAN:  OIL PRODUCTION PLANS AT THE SUPERGIANT FIELDS 
OF TENGIZ AND KASHAGAN 
 
REF:  (A) ASTANA 2027 
      (B) ASTANA 2026 
      (C) ASTANA 1539 
      (D) 08 ASTANA 2259 
 
ASTANA 00002072  001.3 OF 004 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The DCM and Energy Officer visited Atyrau, 
toured the Tengiz oil field, and met with senior government 
officials and energy executives in November.  Previous reports about 
the visit (ref A and B) have discussed the corporate culture, 
political players, educational programs, and investment climate of 
Atyrau oblast.  This report focuses on the plans, prospects, and 
problems at Tengiz and Kashagan, as the two largest oil fields in 
Kazakhstan prepare to increase production dramatically in the years 
ahead.  END SUMMARY. 
 
A TOUR OF TENGIZ 
 
¶3.  (SBU) Tom Hanson, Maintenance Superintendent for Tengizchevroil 
(TCO), gave the DCM a guided tour of the Tengiz field on November 6 
(ref B).  The Tengiz project-license area is immense, and even 
photographs of its vast, limitless expanse, stretching to the 
Caspian Sea, do not do it justice.  The Tengiz reservoir is 19 
kilometers wide by 21 kilometers long, and the oil column measures 
an incredible one-mile thick.  The reservoir area is so large that 
one would have to run nearly two marathons to cover the entire 
distance around it.  The project area includes the super giant 
Tengiz field, the smaller but sizable Korolev field, and several 
exploratory prospects.  According to TCO, the Tengiz and Korolev 
fields contain an estimated 750 million to 1.1 billion metric tons 
(6 billion to 9 billion barrels) of recoverable oil. 
 
¶4.  (SBU) Hanson described the process to separate, stabilize, and 
load oil into more than 22,000 rail cars and pipelines, such as the 
Caspian Pipeline Consortium (CPC) pipeline.  According to Hanson, 
dealing with the gas is the hard part.  He explained that some of 
the sour gas is re-injected back into the well to maintain pressure 
in the reservoir, and some is treated and separated into 
liquid-petroleum gas, such as propane and butane, sulfur, and dry 
gas.  Hanson said that Tengiz currently has the highest-pressure gas 
reinjected in the world, at 650 bar. 
 
TCO'S FUTURE GROWTH PROJECT 
 
¶5.  (SBU) Hanson said that the Future Growth Project is not yet 
sanctioned, but he expects the project to receive approval from the 
authority (KazMunaiGas) this year and to begin engineering work in 
¶2010.  TCO General Director Todd Levy told Energy Officer on 
November 9 that the government is "dragging its feet" on the Future 
Growth Project and is reluctant to defer short-term revenue from 
current production.  According to an internal TCO presentation that 
Levy delivered to Minister of Energy and Mineral Resources Sauat 
Mynbayev, the Future Growth Project will cost $9.7 billion, mainly 
for new crude stabilizers gas compressors, and power stations.  If 
the TCO consortium and the approving authority -- represented by 
national oil company KazMunaiGas (KMG) -- sanction the project, it 
would start in 2017, increase proven reserves by 100-130 million 
tons, and increase production to 36 million tons per year (or more 
than 1 million barrels per day, or bpd).  Levy said that the 
reserves and future production growth could be lost forever if the 
project is not sanctioned in 2010. 
 
GAZPROM SHUTS DOWN TCO 
 
¶6.  (SBU) As previously reported, Russia's Gazprom suddenly stopped 
receiving natural gas shipments from TCO in September (ref C).  TCO 
was consequently forced to reduce oil production at Tengiz and flare 
more natural gas than anticipated.  (NOTE:  Levy said TCO was fined 
$20 million for unauthorized gas flaring caused by Gazprom's refusal 
to accept TCO gas.  Although TCO was within its annual environmental 
 
ASTANA 00002072  002.3 OF 004 
 
 
permit, the company was fined because it did not notify the 
authorities in advance that it planned to flare that amount of gas 
in such a short period of time.  END NOTE).  After Mynbayev raised 
the issue with Gazprom CEO Alexei Miller on September 11, gas 
shipments were resumed temporarily.  Levy told Energy Officer that 
Gazprom agreed on November 6 to receive all of TCO's natural gas 
exports (5 billion cubic meters, or bcm) through the end of 2009. 
TCO is negotiating with Gazprom to export 6.5 bcm in 2010, which 
Levy said Gazprom will export to Ukraine.  "We practically give the 
gas away," Levy said, noting that TCO sells to Gazprom at $50 per 
cubic meter.  "We have to move the gas in order to keep the oil 
flowing." 
 
¶7.  (SBU) TCO's Hanson was previously assigned to Karachaganak 
Petroleum Operating Company (KPO), Kazakhstan's largest gas 
producer.  He told Energy Officer on November 6 that KPO did not 
have the same problem with Gazprom as TCO, since KPO sells 
untreated, sour gas to Gazprom for processing, whereas TCO sells 
sweet, dry gas ready for commercial sale and export to Ukraine. 
 
THE COMPLEXITY OF KASHAGAN 
 
¶8.  (SBU) Richard Fritz, public relations director of Agip KCO, 
formerly the lead operator at Kashagan and now an agent of the North 
Caspian Operating Company (NCOC), admitted that the Kashagan project 
now has "a very complex operating model."  He explained to the DCM 
on November 7 that NCOC defines overall strategy, ensures planning 
and coordination, and is the main point of contact with the 
government.  Agip KCO is responsible for producing 450,000 bpd under 
Phase I, while Shell Development Kazakhstan, a joint venture of 
Shell and KMG, is responsible for production operations under Phase 
II of the project.  ExxonMobil has responsibility for drilling under 
Phase II.  Fritz said he is confident that the Kashagan project will 
be able to combine the policies, cultures, and practices of seven 
international oil companies into one integrated operation. 
 
AGIP EXPECTS TO MEET FIRST OIL DEADLINE 
 
¶9.  (SBU) Fritz reported that Agip KCO has drilled 19 appraisal 
wells, all of which were successful.  He told the DCM that Agip KCO 
has committed to deliver first oil by December 1, 2012, but he 
quickly noted that Agip KCO has made no volume commitment on early 
oil, and it will "certainly not" produce 450,000 barrels per day 
(bpd) right away.  Fritz noted that Phase I is the only approved 
portion of the project, and said that Shell production staff are 
already embedded in Agip KCO to ensure a seamless transition to 
Phase II.  Fritz asserted that Agip KCO could produce 370,000 bpd 
with existing facilities although he admitted that the company would 
need additional reinjection assets from Phase II in order to reach 
its target of 450,000 bpd -- "We have drilled all the wells and have 
all the modules we need in order to achieve commercial production." 
 
SHELL READY TO RUN PHASE II 
 
¶10.  (SBU) Hans Bakker is the Managing Director of the North Caspian 
Production Operations Company (NCPOC), not to be confused with NCOC. 
 KMG and Shell Exploration and Production created the NCPOC joint 
venture to manage the production of Kashagan oil during Phase II of 
the project.  Bakker explained that the project was reorganized, and 
the new, cumbersome corporate structure devised in October 2008 due 
to "massive government discontent" with repeated delays and rising 
costs.  Agip, he said, "were just plodding along, and the cost just 
kept getting higher and higher.  Finally, it became too much for one 
company to deal with."  Bakker highlighted the total estimated cost 
of the project now exceeds $150 billion, and admitted that the 
rising price tag worries the project partners. 
 
DIFFICULTY DEVELOPING LOCAL CAPACITY 
 
¶11.  (SBU) Bakker expects NCPOC to grow rapidly, from approximately 
200 employees today to 2,500 by 2014.  When asked if Kazakhstan 
 
ASTANA 00002072  003.3 OF 004 
 
 
would have enough skilled specialists to meet rising demand, he 
admitted that this was an "enormous concern."  He mentioned NCPOC's 
receipt of 5,000 applications for just 100 entry-level positions 
this year, and reported that the company is under "enormous 
pressure" to meet local content requirements.  He also said that, 
due to project delays, local employees who have already completed 
Agip KCO's four-year training program (ref B) have not been able to 
apply their skills and may need to be reassessed or reassigned. 
"Another option would be to send trainees abroad to hone their 
skills," he explained, "but that carries additional risks and 
costs." 
 
THE COST OF DELAYS 
 
¶12.  (SBU) Another consequence of repeated delays on Kashagan is the 
deleterious effect on the project's already-procured, expensive 
equipment.  During lunch with international oil-service companies on 
November 10, it was alleged that the Kashagan consortium has 
drilling, power, and other equipment worth more than $100 million 
"just sitting in warehouses in Atyrau, degrading."  They said the 
blades on generators have not been rotated, and consequently may not 
function properly, and they pointed out that the warranty on much of 
the equipment has already expired before it has even been used. 
"They are going to have to buy and bring in brand new equipment," 
one company official said.  "It's like they're starting over." 
 
KMG'S TRIPLE PLAY 
 
¶13.  (SBU) According to Bakker, KMG has little independence and 
great difficulty in balancing its tripartite role as government 
regulator, approving authority, and equity partner.  "All of these 
roles become intermingled," he explained, "and anyway, KMG 
ultimately takes orders from the same people at the very top."  For 
example, Bakker described a negotiation over a real estate contract 
during which the international oil companies outvoted their equity 
partner KMG, but the approving authority, also KMG, refused to 
sanction the deal, giving the national oil company a de-facto veto 
over project management decisions.  "People seconded to Kashagan 
from KMG represent the government," he said, "not the project. 
Their first loyalty is to the government." 
 
FINANCIAL POLICE "IMMENSELY POWERFUL" 
 
¶14.  (SBU) Bakker pointed out that the government is not a single, 
unitary entity.  "There is an unusual level of disconnectedness 
across the government," he suggested.  Echoing comments from 
oil-service companies, he said the financial police report directly 
to President Nazarbayev, and are "immensely powerful" and "totally 
out of control" (ref A).  For example, Bakker said the Kashagan 
partners signed an agreement with Prime Minister Masimov in October 
2008 that guaranteed tax stability for the project.  However, 
according to Bakker, the financial police asserted the document was 
not a legal agreement, threatened to press criminal charges against 
individuals in Agip KCO's tax department, and said, "We don't work 
for the Prime Minister anyway.  Unless the President tells us to 
back off, we are on this case."  They then demanded that Agip KCO 
deliver 40,000 pages of documents -- translated into Kazakh -- 
within seven days, or they would move forward with a criminal case. 
"This sort of thing can put a stop to your business," Bakker said. 
 
¶15.  (SBU) COMMENT:  Kazakhstan is poised to become one of the 
world's top ten oil producers by 2015, and is one of only three 
non-OPEC countries with spare production capacity greater than 1.5 
million barrels per day (Canada and Brazil are the other two).  Both 
the international oil companies and the government of Kazakhstan 
have a lot riding on the ability of Tengiz and Kashagan to achieve 
maximum production.  This visit to Atyrau made clear that a number 
of practical issues -- organizational, contractual, and financial -- 
must be resolved in order for those fields to reach their full 
potential.  END COMMENT. 
 
 
ASTANA 00002072  004.3 OF 004 
 
 
SPRATLEN