06MOSCOW10777, RUSSIAN ENERGY:CASPIAN PIPELINE CONSORTIUM UPDATE

WikiLeaks Link

To understand the justification used for the classification of each cable, please use this WikiSource article as reference.
Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #06MOSCOW10777.
Reference ID Created Released Classification Origin
06MOSCOW10777 2006-09-26 04:04 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO9982
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0777/01 2690404
ZNY CCCCC ZZH
O 260404Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2922
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 010777 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 01/26/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY:CASPIAN PIPELINE CONSORTIUM UPDATE 
 
 
Classified By: Econ M/C Pamela Quanrud.  Reasons 1.4 (b/d). 
 
1. (C) Summary.  This fall the Caspian Pipeline Consortium 
(CPC) faces both its long-awaited expansion decision and a 
serious tax case being brought against the CPC's Russian 
(CPC-R) operations.  Expansion will once again be on the 
agenda of the September 27-28 shareholders meeting, where 
western shareholders are expected to react to a GOR/GOK MOU 
signed in July that lays out one possible way forward for 
expansion.  The tax case, which threatens to cost the 
consortium's Russian operations $700-800 million in back 
taxes and penalties, has already made it through its first 
test in court, and CPC-R's appeal will be heard in November. 
 
2. (C) New CPC General Director, Vladimir Razdukhov told us 
September 19 that he is hopeful he can find a way to 
synthesize Russian and Western shareholder interests to allow 
the expansion to proceed before the technical studies done 
two years ago in preparation for the expansion expire at 
year's end.  Ian MacDonald, Razdukhov's predecessor and new 
head of Chevron (please protect) is also quietly optimistic 
that a way forward can be found on expansion, which would 
pave the way for Chevron to participate in the 
Burgas-Alexandroupolis (BA) Bosporus bypass pipeline.  End 
Summary. 
. 
Expansion Plans 
Still in Play 
--------------- 
. 
3. (C) In separate conversations with Razdukhov and 
MacDonald, both said much is hanging on the reaction of 
western shareholders this coming week to a July 1 MOU signed 
between the GOR and GOK (Energy Ministers Khristenko and 
Bakhtvkhoza), which outlines the conditions under which both 
governments are prepared to move forward with CPC expansion. 
Razdukhov characterized the MOU as a breakthrough in the 
GOR's policy toward CPC expansion, but realistically assessed 
that western shareholders would unlikely accept the terms of 
the MOU without amendment.  MacDonald expressed a similar 
confidence that a reasonable way forward could be found based 
on the MOU, but was unsure if ExxonMobil, in particular, 
wanted the deal badly enough at this point in time.  We have 
not seen the MOU, but both Razdukhov and MacDonald tell us it 
addresses the underlying financial structure of the 
consortium, something the GOR has sought for years, and 
MacDonald's comments suggest that the MOU could be the basis 
for a way forward -- at least for Chevron. 
 
4. (C) Timing is also an issue, as the technical study which 
lays the groundwork for the expansion is set to expire at the 
end of this year.  Should the shareholders not find a way 
forward by then, the consortium would be forced to decide 
whether to commission and pay for a new study, something both 
Razdukhov and MacDonald hoped could be avoided. 
. 
The Tax Issue 
------------- 
. 
5. (C) Razdukhov and MacDonald outlined for us as well a new 
issue facing the Russian operations of the consortium -- a 
tax case which alleges that CPC-R has been improperly 
claiming a deduction for interest on its debt payments. 
CPC-R received assurances in writing from Deputy Finance 
Minister Sergey Shatalov in 1996 that the interest payments 
were legal, and subsequent changes to the tax code would seem 
to confirm that opinion.  Nevertheless, CPC-R lost an appeal 
in administrative court two weeks ago, and has begun to make 
installment payments on some $175 million in back taxes for 
2002 and 2003.  Cases are being opened for tax years 2004 and 
2005 right now, based on the same allegations.  All told, if 
the court rules consistently against CPC-R, the consortium 
will owe some $700-800 million in back taxes and penalties, 
and will face an annual increase in it tax obligation in 
excess of $100 million. MacDonald, as the head of CPC-R 
during this period, is worried that criminal charges could be 
brought against him as well. (Note: the magnitude of the tax 
claim against CPC-R could automatically throw the case into 
criminal court, but this has not happened as yet.) 
 
6. (C) CPC-R lost its first trial in the case two weeks ago. 
The appeal will be heard in November.  According to 
MacDonald, CPC has always won these types of cases on appeal 
 
MOSCOW 00010777  002 OF 002 
 
 
in the past, but he was hesitant to predict victory this 
time.  Razdukhov was more hopeful that the consortium would 
win on appeal.  Should the appeal be unsuccessful, then the 
case will go to the Court of Cassation in March.  If, in the 
end, the case goes against CPC, MacDonald predicted Chevron's 
senior management would lose its appetite for CPC expansion. 
. 
The BA Bypass Pipeline 
-----------
----------- 
. 
7. (C) When asked to comment on Chevron's interest in BA, 
MacDonald stated simply, "If CPC is expanded we will 
participate; if it isn't, we won't.  We've told the Russians 
that."  He also confirmed Chevron's position that the Greek 
and Bulgarian governments should not get a stake in the 
consortium was just an opening negotiating position. 
However, while not giving us a firm number, he did indicate 
that his company would not agree to Greece's and Bulgaria's 
push for a one-third stake. 
. 
Comment 
------- 
. 
8. (C) The quest for CPC expansion continues, and much of 
what we report here is similar to previous turning points: a 
three-month deadline; tension between the western and Russian 
shareholders and between the two major western shareholders; 
and external pressure being brought to bear -- this time in 
the form of a tax case.  What may be different this time is 
Razdukhov, who brings a Russian accent to CPC's front office 
and with it longtime relationships within the GOR -- 
including with PM Fradkov, who was Minister for Foreign 
Economic Relations (MFER) during Razdukhov's stint as MFER 
Deputy Minister.  Razdukhov talked about two possible paths 
forward for CPC: either find a way forward amicably on 
expansion, or take the consortium into bankruptcy, which 
would put it in international arbitration.  MacDonald had 
always shied away from the latter option as head of CPC, but 
Razdukhov seems willing to put it more clearly on the table. 
This will certainly change the dynamics in the room, but in 
ways which Razdukhov himself admits will be unpredictable. 
However, he did not, he tells us, take over CPC to watch over 
its demise.  This week's shareholder meeting will be the 
first test of whether he has the skills to keep the 
consortium together. 
. 
9. (C) On the tax problem, the Ambassador will raise this 
issue when he meets later this week with Finance Minister 
Kudrin.  Regarding BA, neither MacDonald previously nor any 
other Chevron official we have spoken to has been as blunt as 
this regarding Chevron's stance on BA.  Without Chevron's 
oil, BA's economics deteriorate but we suspect that, if the 
GOR wants BA enough, they will find a way to get enough 
Russian oil into the pipeline. 
BURNS

Wikileaks

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: