PRIVATE SECTOR OIL AND GAS TELLS PDAS MANN MORE FOREIGN

UNCLAS SECTION 01 OF 02 ASHGABAT 000260

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/CEN (PERRY)

E.O. 12958: N/A
TAGS: ENRG PREL SOCI EAID AF TX US
SUBJECT: PRIVATE SECTOR OIL AND GAS TELLS PDAS MANN MORE FOREIGN
INVESTMENT NEEDED

Refs: A) Ashgabat 128
B) 06 Ashgabat 1205

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


1. (SBU) Private sector oil and gas representatives told visiting
PDAS Steven Mann during a March 4 lunch that the primary inhibition
to the further (and long-term) development of Turkmenistan's oil and
gas sector was lack of foreign direct investment (FDI). They also
believed that a corollary to Turkmenistan's future success was an
improved educational system. The community was unanimous in its
positive assessment of the new Deputy Chairman of the Cabinet of
Ministers for Oil and Gas Tachberdi Tagyev's technical ability to
manage the internal functions of the industry, but divided over
Tagyev's perceived aptitude to oversee the international business
sections of his new, and expanded, portfolio. All agreed that the
current decision-making authority in the oil and gas sector had not
been clarified. The group welcomed increased attention by the
United States Government to Turkmenistan's hydrocarbon discussions.
End Summary.

Representatives Clear and United . .
--------------


2. (SBU) Familiar interlocutors for the embassy met with PDAS Mann
at the Charge's residence for a Saturday lunch to discuss the oil
and gas sector from the private sector perspective. Representatives
from Burren Resources Petroleum, Dragon Oil, Maersk Oil, Calyk
Energy, Cooper Cameroon, Merhav, and the European Bank for
Reconstruction and Development (EBRD) and European Union Technical
Assistance to the Commonwealth of Independent States (EU-TACIS)
contributed both a deep and broad perspective on the current
situation in Turkmenistan and the prospects for future development.
The group was united in the call for an improved educational system
to support their work, but divided in prioritizing the educational
needs and instructional language. One representative simply said
that the system was so impoverished that discussions regarding the
best strategy should not delay the overhaul of the system, including
better quality instructors and an improved curriculum.

Future Uncertain Without Investment and Leadership
-------------- --------------


3. (SBU) Collectively, private sector oil and gas companies enjoyed
a profitable 2006. The numbers were encouraging, but companies saw
the opportunity for more money in the state coffers and their own
pockets with an improved business investment climate. The private
sector presence was needed to improve Turkmenistan's insufficient
and deteriorating infrastructure and to expand exploration of
petroleum deposits. Maersk General Manager Peter Barnett complained
openly about the difficult year (2006) Maersk experienced with the
national tax authorities, then confirmed that on March 1, Maersk
sold 50% of their interests on Caspian Sea Blocks 11-12 to ONGC
Videsh Ltd (OVL). (Comment: On February 26, Pol/Econoff had the
most recent of a series of meetings with local U.S. company
representatives, this time Weatherford - evaluation, drilling and
intervention, on questions regarding double-taxation. Weatherford's
country manager confirmed that business exploded for the company in
2006, and the local tax authorities had taken a new and more
aggressive interest in their business. End Comment.) Others at the
table disclosed similar frustrations, starting with the daunting
challenge of securing visas, a process which cost up to $700.
Turkmenistan's "unwelcome" mat minimized foreign investment
prospects (ref A).


4. (SBU) The group waxed nostalgic for the clear and competent
leadership of the international companies that was enjoyed when
Yolly Gurbanmuradov was at the helm as Deputy Chairman for Oil and
Gas (1999-2005). After Gurbanmuradov was imprisoned by Niyazov in
2005, Niyazov usurped all oil and gas industry decision-making
authority. No decision-making authority had been clarified under
Berdimuhammedov, and all were uncertain as to who would be the
important strategist for the future of Turkmenistan's oil and gas.
Dragon Oil's Vlad Pashkin described Deputy Chairman Tagyev as being

ASHGABAT 00000260 002 OF 002


out of his element when it came to non-technical discussions, but
Calyk Energy representative Aziz Cengel quickly came to Tagyev's
defense and said that Tagyev had worked well with Calyk Energy.
(Comment: Tagyev was mentored by Gurbanmuradov, who was also known
to have a working liaison with Calyk Energy company owner Ahmet
Calyk. Cengel's quick defense of Tagyev and the above-the-fold
placement in the state-run newspapers of Calyk's meeting with the
new president days after Berdimuhammedov's inauguration suggests
this business liaison is continuing. End Comment).


5. (SBU) All of the private sector representatives said that there
had been little movement in the industry since Niyazov's December 21
death, except for continued rumors of "the Chinese" being awarded
onshore drilling Production Sharing Agreements (PSAs),an obvious
sore spot for several of the lunch attendees (ref B). During
Niyazov's time, foreign companies were only permitted to work
offshore under the successful PSA system. Several representatives
said that "the Chinese" lacked expertise in the field and cited the
late November 2006 Chinese drilling well blow-out in South Yoloten
as an example but some advised that the fire had been extinguished
in mid-January by an "American company."

Fuzzy Statistics, Not a Problem
--------------


6. (SBU) Transparency has never been the Government of
Turkmenistan's hallmark, and the industry representatives seem
unconcerned. When the government's 2005 gas production statistic of
63 billion cubic meters (bcm) was announced at the table, 2006
statistics had not been publicly released, the initial chuckles over
the government's claim that 20 bcm was for domestic demand abated
when the collection instruments were explained. Included in this
number was the fueling of power stations and, according to Dragon
Oil and Burren Resources Petroleum, their companies had to report
all flared natural gas volumes, which was then recorded by the
government as production volume. When the need for open disclosure
of Turkmenistan's recoverable reserves was put on the table, Mann
said that the audit information was unimportant. The industry knew
there was something in the ground, so private industry should
explore the potential, and business would determine whether it was
recoverable.

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


7. (SBU) The group's cautious optimism since Gurbanguly
Berdimuhammedov became president seems to be justified. EBRD
Resident Head Office Tony Myron confirmed that it was not only the
private companies that were doing well in Turkmenistan, but that
available banking evidence suggested that the government's reserves
had grown with the increased world hydrocarbon prices and Gazprom's
deal to more than double last year's contract price for
Turkmenistan's natural gas. All agreed that Turkmenistan's
infrastructure could not currently support more output but that the
country was rich with possibilities. However, with its extra cash,
the government potentially had the financial ability to make some
internal oil and gas investments. And, with Turkmenistan's future
potential as a direct energy supplier to Europe and South Asia
boosting exploratory prospects, the markets were eager to support
additional supplies. End Comment.


8. PSAS Mann has cleared this cable.

BRUSH