06MOSCOW12763, CPC UPDATE: FURTHER MOVEMENT TOWARD FINISH LINE?

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Reference ID Created Released Classification Origin
06MOSCOW12763 2006-12-04 03:45 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO4882
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2763/01 3380345
ZNY CCCCC ZZH
O 040345Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5628
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 012763 
 
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 AND MCKIBBEN 
 
E.O. 12958: DECL: 12/01/2026 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CPC UPDATE: FURTHER MOVEMENT TOWARD FINISH LINE? 
 
REF: MOSCOW 12587 
 
Classified By: Econ M/C Quanrud.  Reasons 1.4 (b/d). 
 
1. (C) SUMMARY.  On December 1, Ian MacDonald, head of 
Chevron Russia and former head of CPC told us that the 
hoped-for "seniors'" meeting -- at which a CPC expansion MOU 
may have been signed -- did not come off this week.  However, 
CPC shareholders held a highly positive meeting which cleared 
away several lingering issues, including approving funding to 
fix a deteriorating stretch of the pipeline and reaching 
agreement on a budget for the first quarter of next year. 
However, as expected (reftel), the GOR insisted on a transit 
tariff of USD 38/ton.  MacDonald views this stance as firm 
and expects the Kazakhstanis to agree to it but predicted 
ExxonMobil would resist.  On other issues, he said that the 
GOR deferred the tax case against CPC until December 25 and 
Chevron will soon inform interested parties of its official 
negotiating stance on the construction of the 
Burgas-Alexandroupolis pipeline (BAP).  END SUMMARY. 
. 
SHAREHOLDERS' MEETING BREAKTHROUGHS 
----------------------------------- 
. 
2. (C) MacDonald told us the shareholders met on November 
28-29 and agreed on a number of long-outstanding items. 
First, they approved funds and the contract for the purchase 
of pipe for the rehabilitation/replacement of a 116-kilometer 
stretch of pipeline in Kazakhstan.  Without this approval, 
MacDonald said CPC would have been forced to reduce the 
entire pipeline's throughput, which would have thrown CPC's 
finances into a tailspin.  Second, shareholders approved a 
USD 150 million operating budget.  Although only for the 
first quarter and slightly less than Chevron had proposed, 
approval of the budget means another mini-crisis in the near 
term avoided.  Third, they approved the 2005 financial 
statement, which Russian reps had been holding up under what 
some suspected were reasons linked to the tax suits against 
CPC (see below). 
. 
MOU PROGRESS 
------------ 
. 
3. (C) According to Chevron, the GOR and GOK have agreed to 
do some final editing of the MOU in the very near future. 
The central changes relates to Russia's "firm government 
position" that CPC's debt must be repaid by 2014.  This date 
appears to be immutable in the Russians' mind, and it appears 
Kazakhstan will agree to it.  As reported reftel, this would 
precipitate a tariff increase to USD 38/ton, the maximum 
allowed in the founding agreement.  Given the fact that the 
bulk of the higher transportation costs would be paid by 
Kazakhstan, MacDonald expects that if the Kazakhstanis agree 
to pay the higher tariff, then the others will follow suit. 
He noted that compared with the previous unanimously-agreed 
tariff, this increase amounted to significantly less than a 
dollar a barrel, which is acceptable in the current price 
environment.  He opined nonetheless that resistance from 
ExxonMobil, or at least extra time for them to agree to this 
latest increase, could be expected. 
 
4. (C) Beyond the tariff level, the last issues being 
discussed are the size of the board (western firms want 22, 
the GOR wants 20 or 16, and Lukoil wants 16) and some rules 
about quorums.  Chevron proposed to the GOR, outside the 
formal meeting, that the GOR accept the westerners' 
preference for board size in return for shareholders' 
acceptance of Russia's preferred quorum modalities.  A few 
other very minor technical issues on corporate governance 
remain, but Chevron notes that while they are not important 
to Russia they are important to the companies. 
. 
CPC TAX CASE 
------------ 
. 
5. (C) The November 29 court of appeal hearing on the tax 
claim against CPC was deferred to December 25 because the 
Russian Property Agency did not appear in court after having 
been called to court as a witness for the GOR.  While many 
interpretations could be placed on this deferral, Chevron and 
most others believe it most likely that the GOR did not want 
the result of the case to influence finalizing the MOU, as 
the deferral puts additional pressure on the producing 
 
MOSCOW 00012763  002 OF 002 
 
 
company-owners to concede to the MOU.  Moreover, the MOU will 
be perceived as evidence that CPC can be profitable, and thus 
will influence the court's decision in a good way, but 
nonetheless no one is ruling out a negative court decision. 
. 
PROGRESS ON BAP 
--------------- 
. 
6. (C) Separate from the CPC talks and shareholders' 
meetings, MacDonald informed us that he had a very positive 
and constructive talk with Sergei Oganesyan, head of the 
Federal Energy Agency, about both CPC a
nd the BAP pipeline. 
Oganesyan appeared not well educated on BAP (whereas, by 
comparison, Transneft is quite well-versed, according to 
MacDonald).  Oganesyan casually remarked that BAP does not 
need Chevron because it would be built anyway, but by the end 
of the conversation came to see the need for Caspian oil via 
CPC to fill BAP.  In fact, he agreed fully that KazMunaiGaz 
should be a partner in BAP along with Chevron, the two 
companies comprising the "Caspian partners" in BAP.  In the 
end, both agreed that the main problem was that there is not 
enough equity to go around for the parties interested in 
participating.  MacDonald informed us Chevron is in contact 
with parties in Greece and Bulgaria and intends this week in 
a series of meetings in London to decide on its formal 
approach to all parties.  He promised that contacting our 
embassies in the region would be on their agenda. 
. 
COMMENT 
------- 
. 
7. (C) As in our previous updates, CPC is not appealing for 
any particular advocacy or help at this point but wants to 
keep the USG informed.  While this deal will not be over 
until it is over, progress in the shareholders' meetings, 
coupled with a positive (even joking) meeting with Oganesyan 
-- long one of the bete noire's of the CPC story -- and the 
apparent near-finality of the $38/ton tariff and the 2014 
debt retirement date, may mean that we are only mechanical 
steps away from final approval of expansion. 
BURNS

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