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