C O N F I D E N T I A L SECTION 01 OF 04 ASHGABAT 000699

SIPDIS

SIPDIS

STATE FOR SCA/CEN, EUR/CARC, EUR/RUS, EEB

E.O. 12958: DECL: 07/16/2017
TAGS: PREL PGOV EPET EINV RS CH AZ
SUBJECT: TURKEMISTAN ENERGY: FM MEREDOV SAYS U.S.
INVESTMENT IN HYDROCARBON SECTOR WELCOME

REF: ASHGABAT 0690

ASHGABAT 00000699 001.2 OF 004


Classified By: Charge d'Affaires Ambassador Richard Hoagland for reason
s 1.4(B) and (D).


1. (C) SUMMARY: SCA PDAS Steve Mann met for nearly two
hours on July 11 with Turkmenistan's Deputy Chairman of the
Cabinet of Ministers and Minister of Foreign Affairs Rashit
Meredov. Meredov:

-- insisted Turkmenistan has significant gas deposits in its
off-shore Caspian blocks that are open to Western companies;

-- expressed fear that if Turkmenistan sells all of its gas
now, there will be none for the future;

-- did not understand that Turkmenistan selling its gas at
its borders works only for Gazprom; and

-- mentioned in passing Turkmenistan may need to take a new
look at Caspian Sea delimitation methodology.


2. (C) SUMMARY CON'T: Mann explained to Meredov
Turkmenistan needs to make a choice between a short-term
"Russian model" of hydrocarbon development, with limited
results, or the "Western model," which, while slower and more
complicated, would prove substantially more profitable for
Turkmenistan. If Turkmenistan wants to pursue a more
profitable model, it would need the technology and resources
that only private Western firms could provide. To attract
world-class companies, it would need to open new hydrocarbon
fields, allow companies to develop onshore blocks, and ease
its climate for doing business. Meredov stressed
Turkmenistan's desire to expand its energy dialogue with the
United States. Reiterating Turkmenistan's interest both in
building a Trans-Caspian pipeline and in maximizing its
profit, he urged Western companies to submit concrete
proposals. He told Mann that, during the May 2007 trilateral
summit in Turkmenbashy, President Berdimuhamedov had only
signed on to a framework agreement for a littoral pipeline.
END SUMMARY.


3. (C) Mann

told Meredov he had been in touch with Chevron,
Conoco-Phillips and Exxon-Mobil, which were positive so far
about their contacts with the Government of Turkmenistan.
Noting SCA DAS Evan Feigenbaum's June 24-29 visit and other
U.S. delegations to Turkmenistan, Meredov agreed that the
relationship had progressed substantially over the last six
months, and said he look favorably on the U.S. invitation for
Turkmenistani officials to visit Washington during the next
six months.

WESTERN DEVELOPMENT MODEL MORE COMPLICATED BUT MORE PROFITABLE


4. (C) Meredov was positive about U.S. firms' efforts so far
to do business in Turkmenistan. The government was eager for
foreign investment and looked forward to receiving concrete
proposals. (COMMENT: The key to this is "concrete
proposals." END COMMENT.) He reiterated Ashgabat is
committed to multiple export routes for Turkmenistan's
hydrocarbons.


5. (C) Stressing U.S. recognition of the need to move from
theory to concrete action, Mann said,"We want to make this
real." He explained two models for energy development: the

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short-term statist model Gazprom offers, which is fast but
delivers modest results, and the Western model, which is more
complicated and slower, but is more profitable in the long
run. If Turkmenistan chooses to implement the second model,
there would be challenges, including the need to resolve
three sets of issues:

-- TAKE CARE OF THE UPSTREAM AND OPEN ACCESS TO NEW
RESOURCES: In his meeting with Feigenbaum, Berdimuhamedov
had asked, "Where's my pipeline?" The answer, said Mann, is,
"Where's the gas?" The first time a Trans-Caspian Pipeline
(TCP) had been discussed, the consortium was willing to build
a pipeline that could transport 30-35 billion cubic meters
(bcms) of gas without gaining agreement on a dedicated gas
field. That business model, however, had been experimental,
and it is premature to talk about a pipeline until access to
long-term, serious sources of gas are identified. The TCP
was only the midstream. Returning later to this topic, Mann
pointed out that the Baku-Tbilisi-Ceyhan (BTC) and Shah-Deniz
pipelines had been successful because they were connected
with specific oil and gas fields. By comparison, the
Odessa-Brody pipeline had been built without an assured
supply, and it was not a successful model.

-- OPEN UP TO NEW COMPANIES: Turkmenistan has opened only
its offshore Caspian Sea blocks to Western companies, yet
these blocks primarily have oil, rather than gas. Chevron is
interested in opening up a new field in the Amu Darya basin,
where there is gas, but it is being told that onshore blocks
are closed to Western companies. Turkmenistan needs to find
a new way of doing things if it wants to increase direct
foreign investment in the gas sector.

-- EASE THE VISA REGIME FOR HYDROCARBON-RELATED EXPERTS:
Although Turkmenistan allows representatives of U.S.
petroleum companies to enter the country, other support
experts -- e.g., energy and financial analysts -- have
problems getting visas. Easing the visa regime -- including
for journalists, who need to be able to enter Turkmenistan
freely -- is very important for increased investment.


6. (C) Mann presented Meredov a case study of Norway's
hydrocarbon development experience, which he suggested has
many parallels to Turkmenistan's situation. Norway, which
had developed its offshore fields, had benefited by promoting
multiple pipelines. By becoming an investment partner in its
pipelines, it had realized a high percentage of profit.
Turkmenistan, too, had the ability to participate as an
investor. Likewise, Azerbaijan -- through SOCAR -- had
similarly profited from its investment in the BTC pipeline.
Thus, the "sell at the border" model does not maximize
Turkmenistan's profit.

LIMITED WINDOW OF OPPORTUNITY


7. (C) Noting that Turkmenistan had only a relatively narrow
window to take advantage of Europe's growing demand for gas,
Mann urged Turkmenistan to act now to send a signal that it
is seeking to enter the European market as a trustworthy gas
supplier. Specifically, he recommended Turkmenistan lay a
pipeline from the Livanov field (worked by Petronas) to the
pipelines in Azerbaijan. Although this would involve only
relatively small amounts of gas, it would nonetheless show
the Europeans that Turkmenistan is seeking to enter the
market.

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TURKMENISTAN NEEDS TO PRACTICE ENERGY NEUTRALITY


8. (C) Mann called for Turkmenistan to restore balance to
its energy policy. Turkmenistan has a policy of neutrality
and says in principle it wants to sell gas in every
direction. Yet -- in practice -- Turkmenistan sells gas only
north to Russia. While the United States respects
Turkmenistan's existing contracts with Gazprom, there is no
balance. For the United States, Turkmenistan energy
"neutrality" was an issue of Turkmenistan's sovereignty, not
personal interest, since not a single molecule of
Turkmenistan's hydrocarbons would go to the United States.

BROADEN THE CONTACTS


9. (C) Mann encouraged Turkmenistan to continue its dialogue
on energy issues with Azerbaijan and Kazakhstan. Mann said
he recently had met with Azerbaijan's Deputy Foreign Minister
Araz Azimov in Washington, who affirmed that Azerbaijan
seriously wants a productive relationship with Turkmenistan.
According to Azimov, the visit of Azerbaijan's Foreign
Minister Mammadyarov to Ashgabat in May had been warm, but
all agreed it would be good for more visits at the
ministerial and presidential level to go forward. Mann urged
that Turkmenistan seek to establish contacts with the
International Energy Agency in Paris, which has access to
huge reserves of data, and make its November 2007 Oil and Gas
Exhibit "big and serious."

MEREDOV DEFENDS THE STATUS QUO


10. (C) Meredov responded that there are many issues that
Turkmenistan needs to study, including strategic, tactical
and technical ones. Turkmenistan works with different
companies and governments, and the Government of Turkmenistan
does pay attention to the "nuances of the relations" between
Turkmenistan and the firms' host countries. Turkmenistan has
enormous natural-resource wealth, which it needs to use
rationally, for the future benefit of its citizens.
Production pipeline design is linked to these concepts.
Turkmenistan is willing to license offshore blocks through
production sharing agreements, but only Turkmenistan would be
allowed to develop onshore reserves. Meredov added, during
the last round of planning for a TCP, U.S. firms had gained
access to information -- from seismic surveys and other
sources -- on Caspian resources, and should draw on that now.


11. (C) While Meredov was willing to acknowledge that the
Norwegian case study was interesting, he largely dismissed
it, stating that it was for a different country which had its
own approach. When Mann pointed out the tremendous profit
that Norway had received, Meredov added defensively that the
Scandinavian country had its own methodology, based on its
own principles. "We have our own geography and neighbors,"
and Turkmenistan's priority was to develop its economic and
social sector. He fixed on the fact that Norway was using up
all its reserves -- something, he stressed, that Turkmenistan
wanted to avoid. Turkmenistan, according to Meredov, was
seeking new fields, but did not want to look at them on a
short-term basis.

LITTORAL PIPELINE ONLY A FRAMEWORK AGREEMENT -- SO FAR


12. (C) Mann noted that building a TCP would be unattractive

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to Western companies if they had access only to Caspian Sea
blocks, because most of those blocks produce oil, rather than
gas. Meredov disagreed, and pointed out that Petronas had
found gas in the Livanov field. Reminding Meredov that
Petronas had found only associated gas, Mann asked why
Turkmenistan was unwilling to open onshore blocks to Western
companies. Chevron wanted to work in the Amu Darya basin.
Meredov responded that a TCP would be in the western part of
the country, so it made sense to let Western companies work
fields in the west -- i.e., the Caspian blocks. The
Dovletabad fields were for the south (India and Pakistan),
and the Amu Darya fields for the east (China). When Mann
pointed out that, practically speaking, Dovletabad was a
Gazprom field, yet it was located in the south, Meredov
firmly replied, "It is ours, not Gazprom's. Gazprom has only
a three-year contract." Meredov also stressed that the
25-year agreement signed during the May
Berdimuhamedov-Putin-Nazarbayev summit in Turkmenbashy was
only a framework agreement and did not offer up a loss of
Turkmenistan's sovereignty. Turkmenistan had agreed that it
needed to build a littoral pipeline after identifying gas
resources in the Caspian region -- which the president was
willing to sell -- but the president had not actually agreed
to build the pipeline.


13. (C) Commenting on the Caspian blocks, Meredov said --
briefly but significantly -- Turkmenistan may need to take a
new look at Caspian Sea delimitation methodology. (COMMENT:
If this is in fact emerging Turkmenistani government policy,
it is a significant development. END COMMENT.)

TURKMENISTAN HAS A CHOICE: TOLKUCHKA SAUSAGE OR A BANQUET


14. (C) Mann reiterated that the window for building
alternate pipelines to Europe is limited. While Turkmenistan
has gas, accessing that gas is difficult because of
geological factors and technical difficulties. Turkmenistan
could quietly continue to extract its gas, but with limited
profits. Greatly increasing its production, however, would
require world-standard technology -- which neither Gazprom
nor China could deliver. Turkmenistan needed to decide
whether it wanted to eat a sausage at Tolkuchka Bazaar, quick
and cheap, or to prepare for a grand banquet at a fine
restaurant, which would be more complex but would deliver
long-lasting satisfaction.

COMMENT


15. (C) Mann's meeting with Meredov was significant for at
least two reasons: (1) it began to clarify for us Ashgabat's
thinking on its energy development policy, and (2) it made
clear the essential need for frequent and sustained
high-level dialogue to nudge Turkmenistan toward
understanding the advantages of Western investment and
development models. The 15-year-old virgin emerging from the
closed convent has a steep learning curve to become a
sophisticated actor on the international stage. Sustained
contact and dialogue are essential. END COMMENT.


16. (U) PDAS Mann has cleared this cable.
HOAGLAND