C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000699

SIPDIS

SIPDIS

DEPT FOR SCA/CEN FOR JMUDGE AND PDAS SMANN

E.O. 12958: DECL: 07/03/2016
TAGS: PGOV PREL ENRG TX UP RS BO ZK
SUBJECT: DEAL OR NO DEAL? NIYAZOV PLAYS HARDBALL ON
TURKMENISTAN,S GAS PRICE

REF: ASHGABAT 673

Classified By: Classified by Ambassador Tracey A. Jacobson, reasons 1.4
(b) and (d).

Summary
--------------


1. (C) On June 29 GazProm Chairman Alexei Miller returned to
Turkmenistan to discuss gas prices with President Niyzaov )-
his second visit in less than two weeks. The following day,
a Ukrainian delegation headed by Minister Plachkov met with
Oil and Gas Minister Atayev for a similar negotiation. Both
meetings were inconclusive for Russia and Ukraine, both
insisting that they have existing contracts while Niyazov --
emboldened by his previous success in getting a higher price
for Turkmen gas -- is not budging on his asking price of $100
per billion cubic meters. END SUMMARY

It,s (Alexei) Miller Time!
--------------


2. (C) Shortly after being summoned on June 19 (reftel) to
negotiate prices for Turkmenistan,s natural gas with
President Niyazov, GazProm,s Alexei Miller returned on June
29 for another round of talks. According to Foreign Minister
Meredov, Miller and Niyazov met for over three hours, with
Miller offering to buy the Turkmen gas contracted for the
first half of 2006 -- 30 bcm -- by the end of September, for
the previously agreed price of $65/tcm. He made a proposal
for Turkmenistan to sell gas to Ukraine only in the fourth
quarter, for &the best price they could get,8 in order to
fill Ukraine's gas reservoirs for the coming winter. Miller
also said Russia would sign a contract for up to 50 per
billion cubic meters (bcm) in 2007 for the Ukrainian price,
plus and an additional 10 percent.


3. (C) Niyazov rejected this offer, saying it was impossible
to sell gas for just one quarter (Note: FM Meredov also
characterized the offer as a "sneaky" collaboration between
the Russians and the Ukrainians. End Note.). Niyazov also
told Miller that after Turkmenistan delivers the contracted
30/bcm to Russia in September,

it will then be free to choose
its buyers, selling at the border, and will be free to
support various pipeline projects, including Nabucco, and the
proposed Trans-Afghan, and Trans-Caspian.

4. (C) Following this unsuccessful bid to keep prices low,
Miller flew back to Moscow empty-handed to consult with
Russian President Putin. FM Meredov called Ambassador at home
to report that after Miller,s return, the &top boss8
(Putin) called Niyazov to ask him to reconsider the proposal.
Niyazov refused again, and they agreed to talk again on June

30.

Russian Scoff at Niyazov,s Price...
--------------


5. Russian Charge Andrei Krutko told Ambassador on June 29
that Niyazov,s proposed price for Turkmen gas -- $100/bcm --
is "not economically feasible" for Russia. Krutko said that
GazProm's prices for private domestic consumers ($35/bcm) and
enterprises ($50/bcm) will not allow GazProm to buy Turkmen
gas at much more than the current price of $65/bcm, due to
transit and compression costs. Krutko also insisted that
Russia has enough gas to meet domestic and foreign
obligations, and argued that the only reason to buy Turkmen
gas was to "preserve Russia's reserves for future
generations." If Niyazov continues to insist on $100/bcm,
Russia will simply not buy beyond the approximately 10
trillion cubic meters remaining on this year's 30 bcm
contract.

...And Casts Aspersions on the Ukrainians
--------------


6. (C) Russian Charg Krutko also doubted the Ukrainians
delegation would be able to make a deal either, arguing that
Ukraine is not able to pay more than $70/bcm at the border.
He also said that the pipeline is only working at 30 percent
capacity, implying due to Ukrainian sabotage (Note: most of
Turkmenistan,s gas pipeline infrastructure is Ukrainian

ASHGABAT 00000699 002 OF 003


manufactured. End Note.).

Russians Stay on Message about Turkmenistan and Ukraine
-------------- --------------


7. (C) During a separate June 30 meeting with PolOff, Russian
Economic Counselor Dyemyin said that Alexei Miller,s recent
trips to Ashgabat were not unexpected since during last year
visit by Russian FM Lavrov, Niyazov hinted that gas prices
might go up. However, Dyemyin said that the $100 price
increase was &very sharp8 although he admitted that
Niyazov,s argument for a price increase now was fair, given
the recent agreement with Kazakhstan was for $140/bcm.
However, Dyemyin suggested that Niyazov should be
&starting8 with a &more reasonable8 price of $83 or $85
per bcm instead. He noted that by September of this year,
Turkmenistan will supply the remaining portion of the 30 bcm
specified in their contract with Russia and then they need to
make an agreement, because despite Turkmenistan,s ultimatum
about cutting gas delivery without a contract, &it is
technically impossible to store this gas.8 Dyemyin also
speculated that after the G-8 Summit meeting in St.
Petersburg, oil and gas prices will increase anyway.


8. (C) Concerning Ukraine, Dyemyin said that the $100 price
would potentially &ruin Ukraine,s economy8 because the gas
will be more expensive in Ukraine due to the various
transport costs. He also said that the &two precursors8 to
any gas agreement would have to be that Ukraine a) pay its
existing debt of $64 million and b) conclude an agreement
with Russia on the transit of Turkmen gas through Russia to
Ukraine. Also, he defended GazProm,s non-market price
variances between what it charges Ukraine and other CIS
countries -- like Belarus or Armenia -- citing that prices
are necessarily higher in countries where GazProm does not
own the gas transport infrastructure.

Platchkov Meets with Atayev
--------------


9. (C) On June 29 and July 3, PolOff met with Alexander
Kucheruk and Igor Roman of the Ukrainian Embassy to discuss
the Ukrainian delegation,s activities. They acknowledged
that Ukraine sent a large delegation headed by Plachkov and
that their June 30 meeting was with Oil and Gas Minister
Atayev, Deputy Minister Nuriyev, TurkmenGas Chairman
Hajigurbanov and other members of Turkmenistan,s petroleum
sector. According to Roman and Kucheruk, Plachkov came to
the table with nothing more than an attempt to get
Turkmenistan to fulfill the terms of the signed in December
(sales price between $50 and $60 per bcm).


10. (C) According to the Ukrainians, the Turkmenistani side
proposed that Ukraine purchase between 10 and 11 bcm of gas
during the fourth quarter at a price of $100/bcm, after
Turkmenistan has supplied Russia with the rest of the
contracted gas volumes Atayev also said Turkmenistan would
consider supplying gas in 2007 if Ukraine gets a transit
license for gas export though Russia. Because the Ukrainians
insisted that they have an existing contract at the lower
$50/bcm price, the negotiations were inconclusive. Roman
also told PolOff that Ukrainian Prime Minister Tymoshenko
planned to visit Moscow and later Turkmenistan in late
July/early August, in order to discuss Central Asian gas
supplies and transit arrangements.


11. (C) During the Plachkov meeting, the Ukrainians confirmed
their $64 million in debt to Turkmenistan for gas supplied
from 2003-2005, and agreed to cover this amount through the
supply of large pipes on September 4th. The government of
Turkmenistan also agreed to recalculate the costs of several
large Ukrainian investment projects, including the
construction of a drainage and communication tunnel under
Ashgabat, the Gotur-Depe compressor station and the
construction of the railway bridge over the Amu-Darya river
(Note: The Ukrainian diplomats confided to PolOff that
much-needed repairs on Turkmenistan,s gas transport system
would work in their favor, since the Ukraniaian-manufactured
turbines and compressors are were in need of &immediate
renovation8 and faces imminent &breakdown,8 according to
recent conversations that Kucheruk had with TurkmenGaz

ASHGABAT 00000699 003 OF 003


representatives. End Note.).

Belarus Not A Factor
--------------


12. (SBU) Despite numerous press reports from the Belarusian
state claiming that the state gas transit concern BelTansGas
sent a &group of expert negotiators8 to discuss buying gas
directly from Turkmenistan as part of their &energy security
plan,8 according to Belarusian First Secretary Andrey
Malashevitch, this patently is not the case. During a
meeting with PolOff on June 29, Malashevitch confirmed that a
person who works for BelTransGas did come to Ashgabat for
four days and had an &informational8 meeting at the
Ministry of Oil and Gas with a &department head level8
official, but this was a personal friend of the Ambassador,
and the meeting was &just to provide official cover8 for
the Ashgabat vacation of an old schoolmate.

Comment
--------------


13. (C) Just like the carpet dealers in Tolkuchka Bazaar,
Niyazov is asking an unreasonably high initial price for
Turkmenistan,s gas in hopes of settling on a better deal
than he has now with Russia. Buoyed by this year,s earlier
success at extracting a higher price, and reveling in the
pomp and ceremony of his many high-level trips and visits
about gas, Niyazov is standing firm on his price for now.
After three delegations have left Ashgabat in the past two
weeks without any firm deals, it remains to be seen if his
price posturing is pure bargaining bravado or if he,s really
willing to risk angering Russia )- his gas, only real
export route -- in order to squeeze more money out of them.
END COMMENT.

JACOBSON
JACOBSON