TURKMENISTAN: CONSIDERING NEW HYDROCARBON OPTIONS

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 001104

SIPDIS

SIPDIS

STATE FOR SCA/CEN, EEB
PLEASE PASS TO USTDA DAN STEIN
ENERGY FOR EKIMOFF
COMMERCE FOR HUEPER

E.O. 12958: DECL: 10/15/2017
TAGS: PREL PGOV EPET EINV TX
SUBJECT: TURKMENISTAN: CONSIDERING NEW HYDROCARBON OPTIONS


Classified By: Charge Richard E. Hoagland for reasons 1.4 (B) and (D).


1. (C) SUMMARY: During a September 22-29 orientation visit
to Washington and Houston sponsored by the U.S. Trade and
Development Agency (USTDA),a high-level delegation of
Turkmenistan hydrocarbon officials stressed they will be
making substantial changes to Turkmenistan's hydrocarbon
structure. While their plans remain fluid, they are drafting
a new petroleum law which may include arrangements for
concessional/lease arrangements, rather than the product
sharing agreements (PSAs) and joint ventures that they have
opted for up to now. A delegation member also indicated that
Turkmenistan has agreed to sell its gas to China at a price
of $150 per thousand cubic meters (tcms),with the price to
be negotiated annually after 2009. During a meeting with the
head of Turkmenistan's State Agency for Management and Use of
Hydrocarbon Resources, Bayrammurat Muradov, the attorneys
Turkmenistan is using in the Bridas dispute advised Muradov
to pay the award for the Yashlar gas field (located in
eastern Turkmenistan),but to continue to negotiate a lower
amount for the Keymir oil field (located in Turkmenistan's
southwest corner). END SUMMARY.


2. (C) During a September 22-29 orientation visit to
Washington and Houston sponsored by the U.S. Trade and
Development Agency, a high-level delegation of Turkmenistan
hydrocarbon officials delegation members offered up some
tidbits that, put together, provide some valuable insights
into their current thinking and the conundrums they face.
Following are some of the most useful, as reported by an
Embassy Pol/Econ assistant who accompanied the delegation
(please protect).

NEW PETROLEUM LAW IN THE WORKS


3. (C) A number of delegation members noted that
Turkmenistan is closely studying Kazakhstan's oil experience,
especially its experience with PSAs and with attracting
foreign investment. Muradov said Turkmenistan is drafting a
new petroleum law, and is planning to use USTDA-funded
training to bring State Agency lawyers up to speed on the
benefits and drawbacks of various types of agreements.
Although the current petroleum law provides only for PSA and
joint venture operations in the energy sector, the State
Agency has requested to include components on the legal
aspects of PSAs and joint operating agreements in the
curriculum of the USTDA legal program. Muradov also
indicated during a separate meeting that Turkmenistan is
considering switching to a concession/lease model, similar to
that used in the U.S. Outer Continental Shelf program.
Turkmenistan is attracted to the concession model by the
possibility of earning higher revenue for the government,
since such a model does not make any provision for PSA
holders' production costs to be deducted. However, the
government remains concerned by the possibility that such a
model, which allows lessees to own resources in the ground,
could allow foreign companies to make claims on reserves if
things go sour. (COMMENT: This concern is especially
relevant given Turkmenistan's ongoing legal dispute with
Bridas. END COMMENT.) Muradov announced his agency will
publish new rules on foreign onshore activities by the end of
the year, though he stopped short of stating that foreign
companies would be allowed to carry out extraction activities
onshore.


4. (C) Muradov said Turkmenistan is currently looking at
different ways of accessing international markets, and hinted
broadly that Turkmenistan fully expects to revise its current
policy of selling gas at the border within the next five
years. In this respect, his country is planning to establish

ASHGABAT 00001104 002 OF 003


an international company with Government of Turkmenistan
equity that could be traded in international stock exchanges
-- Muradov specifically cited the Azerbaijan International
Oil Company as a model.

DEAL WITH CHINA PART OF "AN OLD COMMITMENT"


5. (C) Stating that the gas deal concluded with China in
June was "an old commitment by an old government" (i.e., that
President Berdimuhamedov was merely following up on a
framework that former President Niyazov had negotiated),one
delegation member said that the PSA granted to China National
Petroleum Corporation at Bagtiyarlik only covered 13 billion
cubic meters (bcms) of the 30 bcms that Turkmenistan agreed
to deliver yearly for each of the next 30 years. Of the 13
bcms that would be extracted yearly from Bagtiyarlik, only
six bcms would go to CNPC. The remaining seven bcms would
represent Turkmenistan's share. The remaining 17 bcms that
Turkmenistan promised China would come from various fields
around Turkmenistan. The delegation member also indicated
that Turkmenistan would begin selling gas to China in 2009
for $150 per tcm, with the price to be renegotiated annually
after the first year.

BRIDAS: THE SAGA CONTINUES


6. (C) Muradov met September 27 with several attorneys from
Mayer-Brown, the legal firm representing Turkmenistan in its
two longstanding, multi-million dollar disputes with Bridas
Oil Corporation of Argentina, both of which Turkmenistan had
lost. The disputes were over awards for two fields -- Keymir
and Yashlar -- that previously had been worked by Bridas. In
response to Muradov's question whether Turkmenistan should
pay the award given to Bridas, the Mayer-Brown attorneys said
Turkmenistan is obligated under international law to follow
up on the court decision. In the case of the award for the
Yashlar gas field, the attorney noted that the award is
significantly lower than it might have been, and he advised
Muradov to pay up. That said, Mayer-Brown also suggested
that Turkmenistan should seek to negotiate a lower amount
with Bridas for the Keymir oil field.


7. (C) Muradov said, as far as he was aware, Bridas had not
approached Turkmenistan for more than two years to receive
its award payments. The attorneys could not offer an
explanation for such behavior, though the company has a
record of all Bridas' earlier requests for payment. They
warned there is no time limit for enforcing the award, and
Bridas can seek to pursue its award in any of the countries
that are signatories to the International Center for
Settlement of Investment Disputes' New York Convention.
Under the New York Convention, Bridas has a right to seize
Turkmenistan's assets used for commercial purposes -- or to
seize assets of foreign entities that owe Turkmenistan
payment.


8. (C) COMMENT: Post continues to believe that
Turkmenistan's seeming intransigence on many issues related
to its hydrocarbon sector is more a consequence of officials'
lack of confidence and experience in dealing with the
international hydrocarbon market than in a blanket refusal to
consider new options. Active U.S. engagement as Turkmenistan
reviews its petroleum law, and USTDA-sponsored training,
could help officials make better choices. In private
exchanges, delegation members acknowledged the foreign oil
companies currently operating in Turkmenistan are not
top-tier, and stated the government wants more involvement by
world-class firms. Continued discussion with the Government
of Turkmenistan on the investment climate -- including the
need to follow-through on contracts -- could help promote a

ASHGABAT 00001104 003 OF 003


better investment environment for companies doing business
here. END COMMENT.
HOAGLAND