07MOSCOW509, RUSSIAN ENERGY: CHEVRON AND CPC – LOOKING AT

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Reference ID Created Released Classification Origin
07MOSCOW509 2007-02-06 11:12 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO9133
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0509/01 0371112
ZNY CCCCC ZZH
O 061112Z FEB 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7214
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 000509 
 
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: 02/01/2017 
TAGS: EPET ENRG ECON PREL RU
SUBJECT: RUSSIAN ENERGY: CHEVRON AND CPC - LOOKING AT 
OPTIONS 
 
REF: 06 MOSCOW 12763 
 
Classified By: Econ M/C Pamela Quanrud.  Reasons 1.4 (b/d). 
 
1. (C) Summary: On February 5, Chevron's Russia chief, Ian 
MacDonald, contacted us to talk about CPC expansion and the 
recently-inked Gazpromneft deal.  (This discussion follows up 
on previous meetings with MacDonald with Mark Woloshyn, who 
Chevron has hired to shepherd along the Bosphorus bypass 
issue.)  MacDonald expressed Chevron's frustration with 
Russia's delaying tactics on CPC and laid out a 
well-developed export option across the Caspian and beyond. 
Woloshyn added that Chevron had signed an MOU with the 
Kashagan operators to work together on this alternative.  On 
the Burgas-Alexandropoulis (BAP) pipeline, Woloshyn 
complained that Bulgaria was still asking for too much and 
noted that the Russians are now looking at the possibility of 
re-opening talks with Turkey on the Samsun-Ceyhan bypass. 
MacDonald reported CPC had lost its latest appeal in its tax 
case, but minimized the impact to the consortium's bottom 
line if they were to lose on final appeal this spring.  On a 
positive note, MacDonald hailed the recently inked joint 
venture with GazpromNeft as a foundation for the company to 
build on.  Russia looks set to be left behind as its 
foot-dragging on CPC expansion leads Kazakh shippers to look 
for alternative export routes.  End Summary. 
. 
Frustrated on CPC... 
-------------------- 
. 
2. (C) While noting that CPC expansion is there for the 
taking if the GOR would demonstrate senior leadership, 
MacDonald said that he and other Chevron executives in the 
region were increasingly frustrated with Russia's 
foot-dragging.  As an example of Russia's unwillingness to 
close, he recounted a conversation in which he was told that 
the Russians were thinking about adding yet another condition 
for CPC expansion -- because the GOR was concerned that the 
producing companies might actually agree to the latest 
demands.  In spite of the time he has invested in the 
project, MacDonald left us with the impression that he was 
ready to throw in the towel on expansion and told us that the 
producing companies' "only options are to escalate matters or 
refuse to negotiate further." 
. 
...But Still Need to Get Oil Out... 
---------------------------------- 
. 
3. (C) MacDonald said the frustration is company-wide and 
included their partners working on the giant Tengiz field in 
Kazakhstan.  As such, MacDonald admitted that Chevron's 
announcement on a new southern route for Kazakhstan oil was a 
very real consideration of alternatives to Russia, and not 
just a negotiating tool to promote CPC.  This route involves 
a pipeline from Atyrau to Kuryk, shipping oil across the 
Caspian to Baku, and a new pipeline from Baku to Supsa. 
MacDonald said that BP was not that keen on expanding BTC to 
accommodate these flows.  Woloshyn says the oil may go in 
some combination of BTC, the Baku-Supsa line, and a new BTC 
(but not necessarily all).  He had called on Transneft and 
informed them of this plan. 
 
4. (C) Woloshyn said that Chevron signed an MOU with the 
Kashagan partners to work on this southern route and that 
this would involve what he claimed was "much more than 2 
million b/d."  Such a route would be perhaps the most complex 
transportation chain ever attempted anywhere and would 
involve a different consortium in each part of the 
transportation chain.  He joked that it "might just be easier 
to work with Russia."  Woloshyn continued that Kazakhstan 
wants to find routes out for its oil but doesn't want its 
fingerprints all over the search for alternatives because 
they fear upsetting the Russians.  So, they are letting the 
companies take the lead on coming up with ideas. 
. 
...And Still Need a Bypass 
-------------------------- 
. 
5. (C) Chevron continues to be interested in BAP but both 
MacDonald and Woloshyn say the Bulgarians are still being 
obstinate.  Woloshyn relays that the Bulgarians are insisting 
on ownership of the Burgas terminal and want to sell the 
 
MOSCOW 00000509  002 OF 002 
 
 
24.5% stake that they will get under the consortium up front 
for a currently ridiculous sum.  Neither of these demands can 
or should be met.  Transneft, he claims, has apparently gone 
to the Russian Ministry of Industry and Energy to suggest 
re-engaging with Turkey on the Samsun-Ceyhan bypass. 
. 
Another Loss on Taxes 
--------------------- 
. 
6. (C) On the tax case (reftel), MacDonald said that CPC lost 
its appeal on December 25 and that it would go to the Court 
of Cassation next.  He noted that losing the case would have &#x00
0A;a marginal financial cost -- about $10 million in NPV terms. 
It nonetheless continues to waste CPC's managerial time and a 
legal defeat "would be considered a breach of guarantees 
given by the Russian Federation in the Shareholders 
Agreement." 
. 
Gazprom Neft Deal Could Be a Winner 
----------------------------------- 
. 
7. (C) MacDonald described the Chevron-Gazprom Neft deal as 
"quite promising" and said that this may lead to other deals 
with the company (Note: The JV was set up to carry out 
hydrocarbon exploration and production projects in the 
Yamal-Nenets region.  Chevron currently holds a 70 percent 
stake in the JV but its share will fall to a minority holding 
as Gazprom Neft adds assets. End Note).  In fact, MacDonald 
showed us a letter from Gazprom head Alexey Miller that 
mentioned potential joint projects in the Arctic.  MacDonald 
described it as the best letter he has ever received from 
Gazprom. 
. 
Comment 
------- 
. 
8. (C) MacDonald believes the key problem for CPC expansion 
is lack of GOR leadership.  Whether the Russian game is 
control of CPC itself (perhaps through deliberate neglect to 
close the deal in the hope of CPC's insolvency) or some other 
grand bargain stretching from Greece to Kazakhstan may become 
an academic exercise if Kazakhstani producers head south for 
alternative routes.  Another possible explanation is that 
Russia wants a comfort level that a Bosphorus bypass will 
happen before flooding the Black Sea with more foreign oil to 
compete with their own for transit through the Turkish 
Straits.  One thing is certain -- whether it is Russia 
turning to Samsun-Ceyhan due to Bulgarian intransigence or 
Chevron turning to Supsa and BTC due to Russian 
intransigence, alternatives are plenty. 
BURNS

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