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