TURKMENISTAN: RESOURCE NATIONALISM EXISTS, BUT

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 001235

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 11/13/2017
TAGS: PREL PGOV EPET ECON TX
SUBJECT: TURKMENISTAN: RESOURCE NATIONALISM EXISTS, BUT
MANAGEABLE FOR NOW

REF: A. SECSTATE 150999

B. ASHGABAT 1209

C. ASHGABAT 1104

D. ASHGABAT 1067

E. ASHGABAT 1066

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


1. (C) SUMMARY: Although the Government of Turkmenistan up
to now has pursued a policy of resource nationalism by
banning foreign companies from its gas fields in the East
(foreign companies are working the Caspian oilfields),
Turkmenistan may be reconsidering this policy. At the heart
of this new thinking is a need to increase production in
order to fund the new president's ambitious program of public
construction, rural development and healthcare and education
reform. While Turkmenistan continues to have world-class
hydrocarbon reserves, its infrastructure has been
deteriorating for years, and the easy-to-reach gas fields are
playing out. Turkmenistan's state-owned hydrocarbon firms do
not have the expertise, technology or resources needed to
maintain production at current levels, far less to increase
the country's production to meet Turkmenistan's growing
number of export commitments. Post understands that
Turkmenistan is considering signing a joint venture agreement
with Chevron that would allow the company virtually
unprecedented (for foreign firms) access to the Amu Darya
basin. Providing officials with the knowledge and
information they need to make informed decisions could help
increase their confidence in dealing with the West in
general, and with Western firms in particular. END SUMMARY.


2. (SBU) A hydrocarbon-rich state that shares borders with
Afghanistan and Iran, Turkmenistan is in the midst of an
historic political transition. The unexpected death of
President Niyazov on December 21, 2006, ended the
authoritarian, one-man dictatorship that by the end of his
life had made Turkmenistan's government among the most
repressive in the world. Following Niyazov's death,
President Gurbanguly Berdimuhamedov quickly assumed power
with the assistance of the "power ministries" -- including
the Ministries of National Security and Defense, and the
Presidential Guard. Berdimuhamedov inherited a country that
former President Niyazov had come close to running into the
ground. Niyazov siphoned off much of Turkmenistan's
hydrocarbon proceeds into non-transparent slush funds used,
in part, to finance his massive construction program in
Ashgabat. Although Turkmenistan only has a population of
about 5 million, its economy is predominantly gas-based, and
the state sector accounts for more than 75% of its economic
activity.


3. (SBU) Western analysts believe that Turkmenistan's
official estimate of its gas reserves -- 75 trillion cubic
meters -- is exaggerated, but there is no disagreement that
Turkmenistan has world-class natural gas reserves and
smaller, but still significant, oil reserves. The bulk of
its gas is located in the Amu Darya basin, in the country's
east, while most oil is located in the Caspian basin to the
west.

INCREASING EXPORT COMMITMENTS MANDATE INCREASED PRODUCTION


4. (SBU) Niyazov inherited a pipeline structure in which all
of Turkmenistan's oil and gas pipelines ran northward, to
Russia. Under Niyazov, Turkmenistan maintained its
Russia-centric export focus, and it did so with a quirky
policy of selling hydrocarbons at the border. In the 15
years following Turkmenistan's independence, the government
flirted with the idea of creating alternate export pipelines,
including through Afghanistan to South Asia, to Iran, and

ASHGABAT 00001235 002 OF 003


across the Caspian to Azerbaijan. Except for a small
pipeline to Iran (with a maximum capacity of 13-14 bcm per
year),none these plans came to fruition, leaving
Turkmenistan overly dependent on its exports to Russia. As a
result, Turkmenistan for years received only $40 per thousand
cubic meters (tcm) from Gazprom, even as Gazprom was charging
European countries $253 per tcm for gas. Given Niyazov's
massive depredations on Turkmenistan's hydrocarbon revenue,
little money was left over for in-country infrastructure
renovation and development. Although Niyazov in September
2006 successfully forced Gazprom to increase its payments to
$100 per tcm, Berdimuhamedov is also relying on both that
increased hydrocarbon revenue and planned production/export
increases to fund his on-going construction program, rural
development and ambitious improvements to the healthcare and
education sectors.


5. (SBU) With those needs in mind and recognizing as well
that pipeline diversification strengthens Turkmenistan's
sovereignty, Berdimuhamedov is actively seeking to expand
Turkmenistan's export commitments. In July 2007, he signed
an agreement with China to export 30 bcm of gas per year for
the next 30 years after a new pipeline to China is completed
in 2009. Berdimuhamedov has also publically raised the
possibility of resurrecting plans for Trans-Caspian and
Trans-Afghanistan pipelines that would avoid the Russian
routes, but he also took the first steps needed to increase
the volume of gas exports to Russia -- agreeing in principle
to refurbish the Caspian littoral pipeline -- during a May
tripartite summit in Turkmenbashy. The result:
Turkmenistan's production now must not only continue to meet
existing commitments of approximately 75 bcms (i.e., 50 bcms
to Russia, 8 bcms to Iran, and approximately 17 bcms for
domestic consumption),but must grow to make possible these
increased exports.

CRUMBLING INFRASTRUCTURE AND DECLINING GAS PRODUCTION PROMOTE
NEW THINKING


6. (C) In the gas regions, the focus, including during the
Soviet era, has been on extracting oil in already-explored
large fields known to be gas-rich, such as Dovletabad. Up to
now, the Government of Turkmenistan has sought to work its
gas reserves through its own government-owned company,
Turkmengaz. When necessary, this company has contracted with
U.S. or other western firms, but only through service
contracts with limited terms and scope. While Turkmenistan
agreed shortly after Turkmenistan's independence in 1991 to
allow the Argentinian company, Bridas, to work a gas field in
what is now Yoloton under a joint venture -- under terms
highly advantageous to Bridas -- this deal fell apart a few
years later when Niyazov demanded to renegotiate the PSA and
Bridas refused, leading to government confiscation of Bridas'
property in Turkmenistan and an acrimonious, drawn-out (and
still unresolved) international arbitration process that
Turkmenistani officials continue to cite as the rationale for
not allowing foreign companies access to the gas fields.


7. (C) However, the years of minimal government investment
into renovating and upgrading Turkmenistan's crumbling
hydrocarbon infrastructure have led to a gradual decline in
production. Moreover, most of the reserves in the Cretaceous
layer in these existing fields -- the gas that has been
easiest to extract -- are beginning to play out. Although
western analysts believe that there remain extensive reserves
in the Jurassic layer and in previously unexplored fields,
most also state that the challenges of working these new
reserves are beyond the capabilities of Turkmenistan's
expertise, technology and resources: a thick salt sheet
separates the Cretaceous and Jurassic layers, and much of the
Jurassic-layer gas has a high sulphur content. These factors

ASHGABAT 00001235 003 OF 003


reportedly are leading Turkmenistan's hydrocarbon officials
to reconsider the previous ban on allowing foreigners to
lease on-shore fields. Turkmenistan already has signed a
production sharing agreement (PSA) allowing the China
National Petroleum Corporation to work an area on the right
bank of the Amu Darya river. Officials reportedly are also
considering allowing Chevron to sign a joint venture contract
that would, for the first time in years, offer a western
company the opportunity to develop on-shore gas fields in the
Amu Darya basin (refs b, c, e). Post's understanding of the
proposed deal is that it is Chevron's experience,
demonstrated technical expertise and willingness to consider
non-traditional and innovative contact arrangements that
address the Government of Turkmenistan's reluctance to allow
western firms a foothold in its onshore gas fields that is
leading the government to reconsider its policy. If
Turkmenistan allows foreign firms into the Amu Darya basin,
the policy of selling gas at the border -- the government's
solution for minimizing foreign influence in the gas fields
-- could also eventually change.

FOREIGN COMPANIES IN OILFIELDS UNDER PRESSURE TO CHANGE PSA
TERMS


8. (C) By contrast, the Government of Turkmenistan has been
more willing to allow foreign companies (Dragon Oil, Mitro,
Petronas, Wintershall and Burren Resources) to work its oil
fields in western Turkmenistan and the Caspian Sea. Whereas
the government at first may have needed these firms'
technical expertise and resources to work the oil, the
foreign firms, operating under agreements based on the model
PSA contained in the 1997 Petroleum Law, have become much
more efficient at working oil than Turkmenneft,
Turkmenistan's clunky state-owned oil company. (One expert
recently estimated that it takes Turkmenneft 18 months to do
what it takes the foreign companies, collectively, six months
to do.) Most of these firms have profited under the terms of
their PSAs, and Turkmenistan for some time has been relying
on the overseas sales of petroleum products produced from
these companies' oil to help fund Turkmenistan's activities
in the gas sector. Recently post has heard rumors from these
companies that the government has been seeking to change the
terms of their PSAs, including to change the oil-sharing
percentages. Although these companies reportedly have
succeeded in persuading the government not to renegotiate
their existing PSAs, it seems likely that companies now
negotiating future PSAs for offshore blocks -- reportedly
including ConocoPhillips/Lukoil, Chevron and BP/TNK-BP -- may
need to accept new requirements that the government sees as
being more beneficial to itself.

COMMENT


9. (C) While Turkmenistan undoubtedly would prefer to follow
a policy of resource nationalism, officials seem to be
realizing that their current hand does not allow them such an
option. As Turkmenistan considers the benefits of greater
direct engagement with Western companies, however, it feels
it stands at a disadvantage, due to its officials'
inexperience in dealing with the West in general, and Western
firms in particular. The U.S. government can help to
ameliorate these concerns by providing training and
information directed toward providing Turkmenistan's
officials' with the knowledge and information they need to
make informed decisions -- and to become more confident in
working with Western firms. END COMMENT.
HOAGLAND