TURKMENISTAN: TURKMENISTAN NOW HAS A NEW

UNCLAS SECTION 01 OF 03 ASHGABAT 001103 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER TREASURY FOR BAKER/LANIER E.O. 12958: N/A TAGS: PGOV EPET TX SUBJECT: TURKMENISTAN: TURKMENISTAN NOW HAS A NEW PETROLEUM LAW REF: A. ASHGABAT 1075 ¶B. ASHGABAT 0697 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: Turkmenistan's long-awaited new petroleum law entered into force on August 20, and all Turkmenistan's newsapers published a copy of the law in full on August 21. Embassy is passing an unofficial translation to the Turkmenistan Desk via e-mail. The law incorporates a number of new changes, including offering up new types of licensing arrangements, and new provisions applying some of the same protections given to production sharing agreement (PSA) holders to service companies and sub-contractors. The State Agency for Management and Use of Hydrocarbon Resources, the successor to the Competent Body of Niyazov's years, has been given very different powers than its predecessor. Discussion of environmental protection, financial and taxation regimes in the new law is substantially expanded, and the new law requires licensees to seek State Agency approval for any license transfers or sales. What the new law does not contain, however, is any clear statement that the government is prepared to allow foreign firms to work on hydrocarbon production onshore. Even though the government has told a number of western firms that it is prepared to open negotiations for such contracts, it is clear that the government is still looking for maximum flexbility in applying its new policy. END SUMMARY. ¶3. (U) During an otherwise uneventful August 20 cabinet meeting, President Berdimuhamedov announced that the draft Petroleum Law that he had previewed on August 15 had been approved by the Mejlis. The law entered into law immediately upon passage.The full text of the law, which consists of 11 chapters and 64 articles, was carried in Turkmenistan's print media on August 21. Embassy will forward via unclassified e-mail to the State Department's Turkmenistan desk officer an unofficial translation of the law. ¶4. (U) Although the new law's structure is largely similar to the previous 1995 law and 2005 amended law, there have been substantial and significant changes made. Highlights include: -- The list of definitions is substantially expanded, including a definition for the State Agency for Management and Use of Hydrocarbon Resources (instead of the Competent Body),as well as definitions for "discovery," "operator," "service company," "subcontractor," "pipeline transportation," "export point," "industrial pipeline," and "export trunk pipeline." -- The new law states that the holder of an exploration license has the exclusive right when it has found a commercially viable oil field to obtain a production license, provided that the application is submitted in a way consistent with the terms of the agreement. -- While the old law laid out only two types of production licenses -- production sharing agreements and joint venture contracts -- the new law expands those possibilities to include royalty and tax-based concession agreements and service agreements with risk. -- Under the new law, when a commercially productive field is ASHGABAT 00001103 002 OF 003 found under conditions of any type of license other than a production sharing agreement, the contractor has the right to reimbursement of production expenditures the quarterly amount of which is determined in accordance with the agreement terms. -- The new law gives the State Agency, rather than the Cabinet of Ministers, the priority right to purchase at competitive market prices the contractor's share of hydrocarbon products. -- The new law has a provision which extends the rights and duties of the contractor to the operator. -- Under the new law, ownership of the export trunk pipeline belongs explicitly to Turkmenistan, provided the Cabinet of Ministers has not made another decision. -- The State Agency's sources of revenue are spelled out and include hydrocarbon production royalties, signing bonuses for contracts, income from product sharing, and income from managing its moveable and real property. -- The new law greatly expands discussion of the tax and financial regime, as well as environmental protection responsibilities in the hydrocarbon sector. STATE AGENCY GIVEN SUBSTANTIAL NEW POWERS ¶5. (U) One of the biggest differences in the new law is the way it treats the State Agency for Management and Use of Hydrocarbon Resources. The agency, which is described as having the status of a legal person and as being an independent subject of economic activity, has been given ownership of properties, as well as the ability to acquire and manage property -- as well as the responsibility to be a plaintiff and defendant in international and arbitration courts. The agency has the right to establish enterprises and to acquire shares of other companies. Its main functions include: -- Establishing rules for development of hydrocarbon fields; -- Preparing and conducting bidding for hydrocarbon fields; -- Conducting direct licensing negotiations with companies; -- Issuing and registering licenses; -- Signing agreements and ensuring their registration in relevant government bodies; -- Conducting oversight over petroleum operations in Turkmenistan and ensuring implementation of licensing and agreement terms; -- Ensuring environmental protection standards are being adhered to; -- Coordinating activities between contractors during petroleum operations; and -- Managing, owning, using and disposing of its property on internal or foreign markets. ASHGABAT 00001103 003 OF 003 TRANSFER OF LICENSES POSSIBLE ONLY WITH STATE AGENCY AGREEMENT ¶6. (U) One area that the new law goes into in some depth is on the transfer of rights and responsibilities of the contractor. Probably a result of the sale of Burren Energy's PSA to Italian company ENI, the new law states that a contractor can transfer or give as a pledge all or part of its license rights only with the State Agency's prior written permission. A contractor is obligated to notify the State Agency in advance, and the State Agency has the right to unilaterally revoke a license and terminate an agreement. The new law also gives the State Agency top priority in purchasing shares of the contractor's agreement. MORE EXPLICIT FOREIGN LABOR CAPS ¶7. (U) The new law also is more explicit in limiting the number of foreign employees that a contractor (or subcontractor) may have in Turkmenistan to 30% of its total workforce. While companies may exceed this level with the permission of the State Agency, if there is a lack of Turkmen citizens with the relevant qualifications, the contractor must establish special training programs to prepare Turkmen specialists to hold those positions. RESOLUTION OF MANY DISPUTES IN TURKMEN COURTS ¶8. (U) Article 58, on resolution of disputes, is also substantially expanded. With the exception of disputes associated with suspension or annulment of the license or with contract implementation, all disputes must be resolved by a Turkmen court or arbitration court. ¶9. (U) COMMENT: Most of these changes were previewed in ref b, and few are surprises. What is clear is that Turkmenistan is determined to build on its experiences -- both positive and negative -- over the past 17 years in rewriting its new law. In most cases, subcontractors and service companies almost certainly will applaud their special new status and rights. For those looking for a clearer indication of a new policy allowing foreign companies to work onshore, however, this new law is sure to disappoint. Even though we have been hearing from a growing number of western petroleum firms that the country seems to be prepared to begin allowing foreign production onshore, it is clear that the government is still looking for maximum flexibility in applying its new policy. END COMMENT. CURRAN