06MOSCOW11079, CPC AND SHTOKMAN: SOME RESIGNATION, SPRINKLED WITH

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Reference ID Created Released Classification Origin
06MOSCOW11079 2006-10-03 07:18 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO7562
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #1079/01 2760718
ZNY CCCCC ZZH
O 030718Z OCT 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3333
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 03 MOSCOW 011079 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM, MCKIBBEN, MCCORMICK, AND COEN 
 
E.O. 12958: DECL: 09/28/2036 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CPC AND SHTOKMAN: SOME RESIGNATION, SPRINKLED WITH 
HOPE 
 
REF: MOSCOW 10777 
 
Classified By: Amb. William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) SUMMARY.  On September 28, Ambassador met with 
Chevron's VP for Business Development Jay Pryor and the 
company's Russia chief, Ian MacDonald.  On Shtokman, Chevron 
believes it has little chance of affecting the outcome of the 
now-politicized deal, but noted that market realities 
(missing the Atlantic Basin LNG window) and any good news on 
WTO may be the catalyst allowing Gazprom to announce 
consortium members by year's end.  Chevron seems resigned to 
the Kremlin-inspired linkage between the 
Burgas-Alexandroupolis (BA) bypass pipeline and CPC expansion 
but maintains that now the bypass discussion is driving 
expansion and not the other way around.  In Athens, Pryor 
said that Putin tasked Transneft with finding a way to get BA 
built, thus putting the pipeline company on the hot seat and, 
perhaps, provides the incentive to get CPC done. 
Nevertheless, the final go-ahead on expansion will not 
require a BA deal alone but will undoubtedly hinge on 
upcoming discussions between Putin and Nazarbayev.  END 
SUMMARY. 
. 
Shtokman: High Politics and Rhetoric Meet Market Realities 
--------------------------------------------- --- 
. 
2. (C) Pryor said that Chevron recognizes the Shtokman 
decision is not for Gazprom to make and is now resigned to 
the fact that encouraging WTO passage and maintaining contact 
with Gazprom is all they can do at this point.  If it were 
Gazprom's decision to make, Chevron believes it stands a very 
good chance of getting in as senior Gazprom officials have 
confided to Chevron that its offer is the best of the five, 
Pryor said.  Presidential energy advisor Igor Yusufov 
confirmed this to Pryor in a recent meeting and added that 
the Kremlin's aim was to use the various delays and confusing 
cues to do little more than squeeze the best offer from the 
companies.  To reinforce this view, MacDonald said that Putin 
shopped Chevron's offer to Total during his recent trip to 
France, hoping Total would up the ante.  For this reason, 
MacDonald and Pryor are not concerned about Putin's efforts. 
 
3. (C) Pryor noted that the Kremlin is playing a dangerous 
game delaying Shtokman because it could well miss the market 
window for Atlantic Basin LNG.  This would consign Russian 
exports from Shtokman to be piped to Europe and thus would 
move Russia off of Shtokman's original purpose -- to 
diversify exports away from Europe.  Putin's statement in 
France about possibly diverting Shtokman volumes by pipeline 
to Europe would have the same negative effect, although 
MacDonald pointed out that there is no inconsistency between 
the volumes Putin mentioned and longstanding plans to 
consider shipments of gas from Shtokman to Europe by pipeline 
in subsequent phases of the field's development after the 
first phase firmly targets LNG to North America.  Pryor noted 
that Japan's offered prices for LNG have risen 20 percent in 
the last two weeks -- the sort of market force that will pull 
Middle Eastern and Asian LNG to Asian markets, starving the 
U.S. west coast and thus driving Atlantic LNG to the U.S. 
East and Gulf coasts, leaving little market for Russia during 
the current window. 
 
4. (C) As for Shtokman's linkage to WTO, Pryor added that 
Chevron's sense is that Gazprom itself (and many senior GOR 
officials) really want Shtokman decided this year.  At the 
same time, it is clear beyond doubt now that Russia needs 
massive new supplies like Shtokman to come online to meet its 
myriad gas commitments.  Looking forward, Pryor added that 
part of Chevron's offer to Gazprom involves assets in the 
U.S. and he said that Gazprom is "amazingly scared" about 
U.S. corporate governance requirements.  The Ambassador 
replied that this is understandable, but that it is precisely 
this sort of integration that can have a disciplining effect 
on Gazprom and Russia over time, hopefully making Shtokman 
both the first and the hardest such deal to cut and the 
future somewhat easier. 
. 
Life and Taxes? CPC's Future 
---------------------------- 
. 
5. (C) Moving to CPC expansion, Pryor and MacDonald both 
 
MOSCOW 00011079  002 OF 003 
 
 
claimed that the government and all but one western partner 
(unspoken, but it is ExxonMobil) have agreed on the economic 
terms for expansion.  On the twin issue of agreeing with the 
GOR on corporate governance -- something that has long 
plagued negotiations -- Chevron believes the GOR is about to 
present a scheme that will be acceptable to the other 
shareholders.  This twin deal would complete the technical 
package nec
essary for CPC expansion.  Chevron believes the 
next milestone could be Putin's upcoming meeting with 
Nazarbayev in Uralsk where inter alia they will cut a deal on 
Karachaganak gas sales.  In addition to adding to political 
momentum for CPC expansion, Chevron expects Nazarbayev to 
soon pressure the last western partner holding out on the 
economic terms for CPC expansion to give in since the 
sticking points are economically immaterial given the scope 
of the project. 
 
6. (C) Chevron is less sanguine about the tax case against it 
(reftel), but still hopeful on that front as well.  The 
Ambassador noted that he had raised the case with Finance 
Minister Kudrin this week and that Kudrin said he understood 
and would look into the situation.  One of Kudrin's aides 
downplayed the likelihood that the tax case would ever go as 
far as converting to a criminal case.  The Ambassador opined 
that Kudrin is effective at ensuring that tax prosecutors 
double-check with those (like his ministry) that offer some 
checks and balances to this sort of untethered law 
enforcement activity. 
. 
Burgas-Alexandroupolis Bypass: CPR for CPC? 
------------------------------------------- 
. 
7. (C) Pryor said that meetings in Athens between President 
Putin and the president of Greece and Prime Minister of 
Bulgaria appear to have gone well and that the 
Burgas-Alexandroupolis (BA) pipeline concept is moving along 
well.  The force of events has essentially driven Chevron to 
accept that CPC expansion is now inextricably linked to BA 
pipeline's success, rather than Chevron's longstanding 
position that causality should be the other way around. 
Pryor noted that Transneft's President Vainshtok appears to 
have been given the order by Putin to "make BA work" and is 
now a man in a hurry (Note: On September 27 another Chevron 
source very close to BA negotiations verified this in no 
uncertain terms.  End Note).  MacDonald noted that Bulgaria's 
EU accession timeline is also motivating the Russians to move 
fast before the roles of Russian companies there comes under 
official EU scrutiny. 
 
8. (C) But Chevron still holds key cards in this poker game. 
MacDonald observed that Russian officials now realize fully 
that BA cannot be realized without Caspian oil, and that, in 
turn, means oil through CPC, and in the Russians' mind that 
means Chevron.  Partly in recognition of this, Russia, 
Greece, and Bulgaria have nominally carved out an early 
position for Chevron, albeit largely in absentia.  According 
to MacDonald and Pryor, the Russians want 17 percent each for 
Rosneft, Gazpromneft, and TNK-BP for a total of 51 percent 
Russian equity.  Greece and Bulgaria seem content at this 
stage with 16 percent each, leaving Chevron with 17 percent, 
or parity with each of Russia's shippers.  Pryor and 
MacDonald agreed with the Ambassador that this is not a bad 
starting point for negotiations over equity control.  (Note: 
Shawn McCormick of TNK-BP -- please protect -- told us on 
September 29 that sources very close to the negotiations say 
the equity split would be 51 percent Gazprom/Rosneft, 25 
percent TNK-BP/Chevron, and 24 percent Greek/Bulgarian 
companies, with Transneft assigned to coordinate the 
arrangement.  This conflicting account seems to indicate the 
contours of the deal are not decided yet.  End Note) 
 
9. (C) This need for CPC to make BA work could resolve some 
related issues -- MacDonald said that Chevron believes that 
should a Bosphorus bypass go forward, the tax case will 
"vanish."  Pryor suggested that the USG need not do anything 
at this point, but clearly as negotiations continue, USG 
efforts at the right moment to promote the pipeline with 
relevant governments -- including Turkey -- would be most 
effective.  BA will clearly need political heavyweights to 
assist in achieving something akin to an international 
treaty.  Regarding Turkey, Pryor said Chevron is still 
strongly engaged on a Samsun-Ceyhan option, and MacDonald 
 
MOSCOW 00011079  003 OF 003 
 
 
added that Chevron still is considering the tempting merits 
of pursuing both bypasses. 
. 
COMMENT 
------- 
. 
10. (C) Putin's shopping of Chevron's offer on Shtokman 
certainly points to the Kremlin's desire to maximize rents 
from the project.  That said, there is little doubt that the 
Kremlin has taken ownership of the Shtokman decision and 
hopes to leverage this into concessions from the U.S. and 
others on WTO and other issues.  Regarding CPC and BA, 
confusing signals about equity ownership means the economic 
viability of the project is unknown at this point and 
probably warrants caution on our part.  When and if Chevron 
climbs on board, then we can offer our political support.  In 
the meantime we should watch how the governments (Russia, 
Bulgaria, Greece, the EU, and Turkey) proceed and how the 
three Russian shippers (GazpromNeft, Rosneft, and TNK-BP) and 
the other actors (Chevron and Transneft, for example) hash 
out their interests. 
BURNS

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