TURKMENISTAN ENERGY: "YOU DON'T HAVE TO BE GAZPROMISTAN"

UNCLAS SECTION 01 OF 05 ASHGABAT 000729

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: PGOV PREL ENRG EPET EINV RUS TX
SUBJECT: TURKMENISTAN ENERGY: "YOU DON'T HAVE TO BE
GAZPROMISTAN"

REF: A. ASHGABAT 0699

B. ASHGABAT 0690

C. ASHGABAT 0554

ASHGABAT 00000729 001.4 OF 005



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: In a lively exchange of views between
USDEL and First Deputy Minister of Economy and Finance
Jeparov, the U.S. side championed multiple export routes for
Turkmenistan,s hydrocarbon resources, explained the economic
disadvantage of &selling at the border,8 identified major
problems Turkmenistan needs to address to facilitate
significant Western investment, and emphasized U.S. interests
in Turkmenistan,s energy are strategic.


3. (SBU) SUMMARY CON,T: Jeparov admitted Turkmenistan does
not fully comprehend how to calculate energy transit costs,
evidenced lack of understanding of market forces on national
economies, and asked the United States to consider a double
taxation treaty with Turkmenistan. However, he showed real
openness to U.S. views. This important meeting emphasized
the need for us to intensify our efforts to educate
Turkmenistani officials about Western models of business and
investment. END SUMMARY


4. (SBU) SCA PDAS Steve Mann, EUR DAS Matt Bryza, and EEB
Rob Garverick met for nearly two hours on July 12 with First
Deputy Minister of Economy and Finance Tuwakmamet Jeparov and
Chief Specialist Galina Romanova. Both are open-minded and
intellectually able young stars of the ministry. Minister
Hojimyrat Geldimyradov, who in past meetings has deferred to
them, was unavailable, likely because of the on-going
sessions of the Russia-Turkmenistan Joint Economic Commission
and concurrent cabinet of ministers meetings.

MAKE IT EASIER ON WESTERN INVESTORS


5. (SBU) Mann said the answer to President Berdimuhamedov,s
question, &Where,s the new pipeline?8 is another question:
&Where,s the gas?8 To convince large Western energy
companies to invest in Turkmenistan, they need long-term,
stable access to significant hydrocarbon deposits. They also
need a positive business environment that supports and
facilitates investment. Mann suggested that Turkmenistan
needs, for example, to bring its visa regime into compliance
with international standard procedures, and allow an
international school to operate successfully. Noting that
Turkmenistan currently invests $1.5 - 2.0 billion annually in
the oil and gas sector, Mann asserted that U.S. estimates
suggested that eight to ten times that amount would be needed
to achieve Turkmenistan's full export potential.

"NOT BECAUSE WE LOVE YOU -- IT'S HOW MARKETS WORK"


6. (SBU) Opening by saying that he was pleased to be in
Turkmenistan again, where he first visited almost a decade
ago when working on the original Trans-Caspian Pipeline
negotiations, DAS Bryza explained that we consider three
important relationships when looking at Caspian energy
discussions. First is with Turkmenistan, because we are
concerned about its prosperity and independence, and want it
to receive the fairest, highest prices for its energy
resources. Second, the United States maintains important
relations with its friends in Europe, both NATO members and
others alike. In seeking a fair price for its gas, Bryza
explained that Turkmenistan should receive the equivalent of
the European price less a fair transit price, net-back

ASHGABAT 00000729 002.6 OF 005


pricing is the most fair, transparent, and efficient way to
set pricing. Third, U.S. relations with Russia are important
to us. We want fair competition, not confrontation with
Russia.


7. (SBU) Bryza noted Gazprom does not use transparent
net-back principles to set prices for Central Asian gas.
While consumers in Europe pay $285 per thousand cubic meters,
Turkmenistan receives only $100, which means someone else
gets the remaining $185 difference. We want Turkmenistan to
receive the highest possible price for its gas, not because
we love Turkmenistan or are generous, but because that is how
markets work. When markets function efficiently, national
security and prosperity are strengthened. If Turkmenistan
gains direct access to the European market, Russia will have
to pay Turkmenistan more for gas. Noting that Central Asian
gas will ultimately find its way to Europe anyway, Bryza
stressed that now was the time for Turkmenistan to seek
direct access to the European market before Gazprom
monopolizes the transit infrastructure.


8. (SBU) Bryza recounted that a Central European Prime
Minister had recently told him his country wants Central
Asian gas, but Azerbaijan told this Prime Minister it had no
available quantities, and Russia told him that it had "bought
all Turkmenistan's gas forever." Acknowledging
Turkmenistan's requests for concrete proposals for new
pipelines, Bryza repeated PDAS Mann's assertion that this
will happen only when Western companies see the advantage of
investing in Turkmenistan. Bryza assured Jeparov that when
this happens, we will use all of our diplomatic influence in
Europe and the Caucasus to make it possible for Turkmenistan
to receive the highest possible price for its gas. This is
part of our strategic vision for international relations.

IS A TRANS-CASPIAN PIPELINE TOO EXPENSIVE, "GRANDIOSE"?


9. (SBU) Jeparov noted that in gas policy, President
Berdimuhammedov is committed to continue former President
Niyazov,s diversification policies. China's agreement to
construct a gas pipeline already represented an alternative
route, and a Trans-Afghanistan Pipeline could provide
significant transit revenues for that country. A
Trans-Caspian Pipeline to Europe via Turkey could be
realized, but Jeparov asked what concretely constitutes
energy security for Europe.


10. (SBU) Jeparov commented that while there was currently
no direct pipeline from Central Asia to Europe, the
Trans-Caspian proposal was perhaps a &grandiose8 project
that was more expensive than existing arrangements. Not
true! interjected both Mann and Bryza. Jeparov said
Turkmenistan currently receives (from Gazprom) $100 per
thousand cubic meters at the border, and it is difficult to
calculate what appropriate transit fees should be. He agreed
that monopolist transport was economically inefficient, but
Russia offers guaranteed market access that Jeparov suggested
actually supported European security, because this gas
ensures uninterrupted Russian supply to European consumers.
Additionally, he noted Turkmenistan's large potential gas
reserves in the South Yoloten field and the recently
announced new oil field in western part of the country (NOTE:
Presumably the Akpatlawuk field. END NOTE),both of which
could allow for multiple export routes in the future.


11. (SBU) To attract Western energy majors to Turkmenistan,
Jeparov agreed that the business climate was important, but

ASHGABAT 00000729 003.4 OF 005


he wondered exactly what this term meant. If it referred to
the legal base, Soviet-era laws already existed. He added
that earlier offers by Turkmenistan to address the gaps
between U.S. and Turkmenistani legislation had not been met
with enthusiasm. For example, the United States had never
followed up on the need for a double taxation treaty for U.S.
firms operating in Turkmenistan. He asked what other
specific gaps might exist and how they might be specifically
addressed. Jeparov explained that previous potential foreign
investors considering new projects in the Caspian region had
offered draft laws providing guidance for specific necessary
changes in legislation, which became the basis for
Turkmenistan's current law on hydrocarbons.

OTHER AREAS FOR WESTERN INVESTMENT


12. (SBU) Jeparov listed other sectors where Western
investment would be welcome: upgrading electricity
generation and the Soviet-era electrical grid, renovating and
modernizing existing factories, liquefied natural gas
production, chemical industries related to natural gas
production, and agricultural fertilizers for domestic use and
export. However, Jeparov said his ministry could not help
improve the visa regime, since that is the Ministry of
Foreign Affairs, responsibility. (COMMENT: In fact, the
Ministry of National Security (ex-KGB) ultimately controls
Turkmenistan's visa policy. END
COMMENT.)

SOMEONE WILL PAY FOR GAZPROM'S FAILURE TO INVEST


13. (SBU) Addressing transit costs, DAS Bryza stressed that
we want Turkmenistan to fulfill its contractual obligations
to Russia, but both we and Europe want diversification.
European policymakers are concerned about the commercial
pressures of relying on a sole supplier. Furthermore, they
view Gazprom as less and less able to meet its own
contractual obligations. According to the International
Energy Agency, after 2010, Gazprom may not be able to meet
its commitments, because it hasn't invested in upstream
production and pipeline infrastructure. Reductions in
deliveries over the last two years to Estonia, Lithuania, and
Italy emphasize this point.


14. (SBU) Infrastructure investments must be made, Bryza
stressed, and someone will have to pay for them. First,
consumers will pay with higher prices. But producers will
also suffer because Russia will capture the price increases.
Turkmenistan needs export options to ensure that it receives
the full price for its gas. Bryza showed Jeparov a map and
table of projected shipping costs prepared by the
France-based Mediterranean Energy Observatory that projects
shipping costs for gas to Austria via the Nabucco Pipeline at
$2.05 per one million British thermal units (BTU) for
Azerbaijani gas, and $2.12 for gas from Turkmenistan, versus
$2.90 for the same Turkmenistani gas via Russia. Gas from a
Trans-Caspian route would be cheaper, and producers would
receive the full price less a transit fee. Furthermore, with
the advantage of higher prices through non-Russian routes,
Turkmenistan could negotiate for a fairer, higher price for
its gas with Russia.


15. (SBU) Jeparov fully agreed with Bryza's overall point,
but questioned whether the study accounted for the existing
Soviet-era infrastructure. Bryza confirmed that the
projected costs of existing and upgraded current pipelines
through 2020 were factored in. PDAS Mann stressed that

ASHGABAT 00000729 004.4 OF 005


Jeparov had identified the key point, specifically the
financial structure of pipelines. A pipeline is more than
just pipes, he said. Due to their different financial
structures, one could not compare export routes without
discussing the accompanying financial structures.

MANN INTRODUCES INTERNATIONAL PRICING FORMULAS


16. (SBU) Gazprom's current advantage is that its
infrastructure already exists, Mann acknowledged, but it
needs billions in new investment. As a result, Gazprom must
negotiate new terms every one to three years with its
suppliers and consumers. The rest of the world doesn,t work
like that, and instead signs long-term gas sales agreements.
For example, parties in the Shah Deniz project in Azerbaijan
agreed on a gas sales formula based on several factors that
adjusted prices daily over its twenty year life. The
advantage of such an approach for both parties is stability
and a transparent market price. If the global price
increases, Mann continued, the seller receives more revenue.
The most important part of this arrangement, however, is that
it is stable and internationally recognized. If in three
years -- or tomorrow -- Gazprom changes the price it pays,
Turkmenistan could do nothing because it has no alternative
route to market. We want to promote alternate pipelines to
Europe for Turkmenistan, but Western investors must have
reliable long-term sources of gas.

"SOVIET LEGACY IS HISTORY, BUT DOESN,T HAVE TO BE YOUR
FUTURE"


17. (U) Mann stated frankly potential Western investors
still see Turkmenistan's business climate as very Soviet,
which is understandable because that is part of
Turkmenistan's history. He stressed, however, it does not
have to be part of Turkmenistan's future. We are prepared to
support the development of a new private sector in
Turkmenistan that benefits Turkmenistan's businesspeople.
The current visa regime and requirement for letters of
invitation reflect the heavy hand of security control on
business, which was understandable in the past. But no
business-friendly country in the world has such requirements.
This really should be changed. Jeparov said his ministry
was ready to discuss all issues, except visas, which is
beyond their competence.

"WHAT IS YOUR INTEREST IN TURKMENISTAN'S GAS TO EUROPE?"


18. (SBU) Jeparov asked bluntly, "What is the U.S.
financial interest in seeing Turkmenistan sell its gas to
Europe?" Bryza replied clearly, "We have no financial
interest. Our interests are strategic." Europe is our most
important trading partner. If Europe is financially
disadvantaged, we are, too. When Europe worries about
Russian gas disruptions, as had happened recently to Georgia,
Ukraine, and Belarus, it was more difficult to stand together
against Russia, the world's largest oil exporter. Equal
relations with Russia, which had the world's largest gas
reserves, were needed. Our European allies need energy.
Gazprom will only grow stronger if it monopolizes the
European market and infrastructure.


19. (SBU) After a detailed discussion of the advantages of
the private sector in a global market economy, Mann recounted
his last conversation with Turkmenistan's former President
Niyazov in August 2006. Objecting to Mann's assertion that
Moscow seemed to view Turkmenistan as "Gazpromistan," Niyazov

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admitted that Turkmenistan had no alternatives. Mann stated
again our strategic interest is that Turkmenistan finally
realizes its full sovereignty and independence. A
Trans-Caspian Pipeline is a means to that end.

COMMENT


20. (SBU) Jeparov was clear Turkmenistan remains open to the
concept of a Trans-Caspian Pipeline but understands very
little about the basic needs of Western investors and how the
global economy works. One of the most important things we
can do is provide a steady stream of essential printed
information for broad dissemination throughout the government
of Turkmenistan. END
COMMENT.


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