NIYAZOV CENTRALIZES CONTROL OVER OIL AND GAS

UNCLAS SECTION 01 OF 02 ASHGABAT 000366

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/CEN (PERRY)

E.O. 12958: N/A
TAGS: EPET ECON EFIN ETRD PGOV PREL TX
SUBJECT: NIYAZOV CENTRALIZES CONTROL OVER OIL AND GAS
SECTOR: TAKE 2

Ref: A) 05 Ashgabat 922

B) 05 Ashgabat 1013
C) 05 Ashgabat 1022

Summary
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1. (SBU) In mid-December 2005, President Niyazov
announced a reorganization of Turkmenistan's oil and gas
sector, stripping operational freedom from state
petroleum enterprises. The restructuring centralizes the
president's control over the Oil and Gas Industry and
Mineral Resources Ministry (OGIMRM). However, it also
destroys existing marketing networks and potentially
creates increased uncertainty about existing oil and gas
arrangements with foreign companies. End Summary.

Reorganization Leaves OGIMRM on Top
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2. (U) On December 15, 2005 President Niyazov announced
further reorganization of Turkmenistan's oil and gas
sectors intended to create "subordination from top to
bottom, starting from the state down to the local oil and
gas production enterprises." Under the new structure,
OGIMRM will oversee and coordinate all state oil and gas
enterprises. The Chairmen of Turkmennebit (Turkmen Oil),
Turkmengaz (Turkmen Gas) and Turkmengeologiya (Turkmen
Geology) became OGIMRM deputy ministers.


3. (U) The Turkmen Oil and Gas Trading Corporation
(Turkmennebitgaz) was dissolved as part of the
reorganization. Turkmennebitgaz was responsible for the
entire downstream oil and gas sector, including oil and
gas transportation systems, hydrocarbon refining, and
domestic and foreign sale of oil, petrochemicals, and
natural gas. OGIMRM assumed direct control over domestic
fuel distribution and petroleum-related research and
development. Turkmengaz took over responsibility for the
export of natural gas and liquefied natural gas
production and storage/offloading facilities. Meanwhile,
Niyazov transferred all deep-exploration drilling
activities, which are now authorized by the Cabinet of
Ministers, to Turkmengeologiya. Ultimately,
approximately 800 Turkmennebit employees will be laid off
as a result of the restructuring.

Refineries Merged
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4. (U) In September 2005, Niyazov transferred
responsibility for oil refining to OGIMRM (Ref C). The
December reorganization merged the Turkmenbashy and Seydy
oil refineries under the management of the Turkenbashy
refinery. Niyazov also ordered the Turkmenbashy refinery
to establish an organization for the export and marketing
of petroleum products. Under the new structure, the
Turkmenbashy Refinery will buy oil directly from
Turkmennebit and sell refined petroleum products on the
State Commodity and Raw Materials Exchange. The refinery
will be responsible for offsetting OGIMRM financial
losses as the result of subsidized gasoline sales.

Turkmenbashy Approves All Deals
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5. (U) Not surprisingly, Niyazov will continue to
personally approve all oil and gas deals, in the first
place by naming everything after himself. Under GOTX
law, the Competent Body for the Use of Hydrocarbon
Resources and Oil Operations is the sole organization
responsible for petroleum licensing and the signing of
product sharing agreements. Prior to the
reorganization's announcement, Niyazov suggested that the
Competent Body become an expert panel consisting of top
oil and gas officials. While it will "discuss" gas
sales, a presidential decree will be required to hold

ASHGABAT 00000366 002 OF 002


negotiations or sign agreements with foreign companies.

Comment
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6. (SBU) The December restructuring follows a series of
investigations against key officials on charges of
corruption in the oil and gas industries. In reality,
Niyazov centralized all hydrocarbon revenues under his
control. This move is unlikely to reassure foreign
investors and threatens to destroy existing marketing and
sales networks. End Comment.

JACOBSON