PETRONAS IN TURKMENISTAN: FULL OF GAS

UNCLAS SECTION 01 OF 02 ASHGABAT 001076 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/RUS, EUR/CARC, EEB PLEASE PASS TO USTDA DAN STEIN COMMERCE FOR HUEPER ENERGY FOR EKIMOFF E.O. 12958: N/A TAGS: PGOV PREL EPET RS AJ TX SUBJECT: PETRONAS IN TURKMENISTAN: FULL OF GAS ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: Petronas, which unexpectedly hit substantial (an estimated 20 billion cubic meters at maximum production) reserves of ethane- and propane-rich natural gas in the Caspian Sea, is looking at gas export options. These options include sending the gas north to Russia via a pipeline for which it would need to pay a substantial sum to help rehabilitate (which it is planning on pursuing), exporting natural gas to Iran, or -- now -- sending it west via a connector pipeline proposed by the U.S. and Azeri governments. Although Petronas mistrusts the Azeris and Turks as potential business partners, the connector pipeline could be the most economically attractive option, and Petronas would be willing to cooperate with a U.S. Trade and Development Agency-funded feasibility study. However, the need to factor ethane and propane extraction into the overall equation could create new complications. END SUMMARY. ¶3. (SBU) During a September 17 dinner, the General Manager of Petronas in Turkmenistan, Suleiman Abdullah, told U.S. Trade and Development Agency Regional Director for Europe and Eurasia Dan Stein that his company, which works Turkmenistan's Block 1 in the Caspian, has found significant amounts of gas along with the oil that Petronas currently is working. Although Petronas currently continues to burn off the gas, it expects to produce up to 20 billion cubic meters (bcms) per year of gas over the coming years. Petronas is planning to build four drilling rigs and operate a collector platform in Block 1. Abdullah told Stein Petronas is entitled to obtain the highest available price for its gas under its production sharing agreement. ¶4. (SBU) In general, Petronas favors sending the gas north to Russia, since Petronas knows that it can count on receiving its share of the gas proceeds, even though the $100 per thousand cubic meters (tcms) Turkmenistan receives from Gazprom is far below the price the Europeans pay. To that end, Abdullah said, his company is planning on rehabilitating the Turkmenistan portion of the Caspian littoral (CAC-III) pipeline, as foreseen in the May 12 Putin-Nazarbayev-Berdimuhamedov agreement in Turkmenbashy. �0A;According to Abdullah, the entire Turkmenistan portion of the pipeline would need to be replaced, and Petronas is considering replacing the 42-inch pipe with 48-inch piping. Petronas has also worked out a deal with Kazakhstan's Kaztransgaz, owned by Kazmunaygaz, in which Kaztransgaz would pay for the replacement of about 500 kilometers of bad Kazakh pipeline and a compressor station located in Kazakhstan (the compressor station has been non-functioning since it was cannibalized some years ago),if Petronas guarantees payment of transport fees for the next 20 years. ¶5. (SBU) Petronas is also looking at -- and, in fact, has already broken ground for -- a gas treatment plant to remove propane and butane from the gas and bring the gas up to commercial pipeline standards. It expects to open the plant north of the Caspian port city of Turkmenbashy in 2010. More speculative plans for the facility would include not only the gas treatment plant, but also a tank farm and -- potentially -- a petrochemical plant to produce up to 450,000 tons of ethylene per year. When Phase I of the plant is complete, Abdullah said, Petronas expects to be able to process five bcm of gas per year. With the completion of Phase II, processing would increase to 10 bcm per year. Abdullah reported that Petronas is considering selling the processed gas to Iran, possibly as part of a swap arrangement. ¶6. (SBU) Petronas is moving forward on both these possibilities, but Abdullah also said, "We will ship our gas ASHGABAT 00001076 002.3 OF 002 wherever the Government of Turkmenistan tells us to do so." Although he expressed considerable mistrust of both the Turks and Azeris, he said Petronas would be willing to consider sending its gas west through a connector pipeline to either the ACG or Shah-Deniz lines -- if the market remained constant and the price was higher than that from the other two options. However, he stressed, while Petronas would be willing to cooperate with such a plan, it would need to know up front the opportunity costs of such participation, vice pursuing either of the other two options. He seemed interested in Stein's proposal to carry out a feasibility study of constructing a connector pipeline to either the ACG or Shah-Deniz platforms, but also urged Stein not to wait too long to give the Government of Turkmenistan what it really is interested in -- a bottom line on the estimated price that it could receive for such an arrangement. Abdullah also stated that he would be willing, in principle, to provide the information that USTDA would need if it carried out a feasibility study. ¶7. (SBU) One issue that Abdullah raised that could substantially complicate plans for a connector pipeline, however, is the composition of the gas Petronas has located: the gas is rich in ethane, butane and propane, and the company would want to extract at least the propane and butane from the gas before it is transported from Turkmenistan. The best option, from Petronas' perspective, would be to transport the gas via pipeline to the Turkmenistan mainland, where the substances could be extracted. In theory the gas could utilize a connector pipeline and go onshore in Azerbaijan, where the processing plant could be built as a Turkmen-Azeri joint venture. However, that would be difficult to sell to the Turkmen officials who would no doubt prefer the plant be in Turkmenistan, since the plant would create jobs and diversify the economy wherever it is built. ¶8. (SBU) COMMENT: Of all Petronas' export options, the connector pipeline could be the most economically attractive solution. While Petronas' cooperation is necessary for the connector pipeline to go forward, the need to factor propane and possible ethane extraction into the overall equation could end up turning the connector pipeline into a Trans-Caspian pipeline unless arrangements can be made to carry out extraction in Azerbaijan. END COMMENT. ¶9. (U) USTDA Regional Director Dan Stein has cleared this cable. HOAGLAND