TURKMENISTAN: MINISTRY OF ENERGY ADMITS DELAYS DUE TO

UNCLAS SECTION 01 OF 02 ASHGABAT 001481 SENSITIVE SIPDIS STATE FOR SCA/FO, SCA/CEN, SCA/A, EUR/ACE, EEB USAID/W FOR EE/AA E.O. 12958: N/A TAGS: PGOV PREL EAID ENRG AF TX SUBJECT: TURKMENISTAN: MINISTRY OF ENERGY ADMITS DELAYS DUE TO STRUGGLES WITH CALCULATING INVESTMENT OPTIONS REF: A. ASHGABAT 1410 ¶B. ASHGABAT 0469 ¶C. ASHGABAT 0957 ¶1. (U) Sensitive but unclassified. Not for public internet. ¶2. (SBU) SUMMARY: Turkmenistan's Deputy Minister of Energy and Industry (MOEI) Yarmuhammet Orazgulyev told USAID on November 6 that the Ministry's specialists are struggling with the financial calculations to determine repayment times for the proposed construction of electrical lines to Afghanistan. Only after these issues have been resolved can the Ministry bring the project proposal to the attention of higher levels within Turkmenistan's government for approval. One official wondered since it was unclear what revenue Turkmenistan could expect from the sales to Afghanistan, maybe Turkmenistan should instead build a gas pipeline to Afghanistan so that it could generate its own electricity. Ministry Investment Department specialist Dortguly Jelilov asked for USAID's assistance in analyzing the various investment options and their potential benefits to Turkmenistan. If an inter-ministerial meeting happens in the near future, as recently proposed by Afghanistan, the Afghan side should present a draft PPA, including acceptable price and length of commitment, so that the Turkmen side can begin to build a clearer picture of the possible returns from this deal. END SUMMARY. CANDID ACKNOWLEDGEMENT OF STRUGGLES WITH CALCULATIONS ¶3. (SBU) On November 6, USAID Country Representative, USAID/CAR Energy Specialist and USAID/TKO Economic Growth specialist met with Deputy Minister of Energy and Industry (MOEI) Yarmuhammet Orazgulyev and MOEI Investment Department specialist Dortguly Jelilov to discuss Turkmen energy exports to Afghanistan and possible cooperation through the next phase of USAID's upcoming Regional Energy Markets Assistance Program (REMAP-II). For the first time, Orazgulyev indicated that a new 254-megawatt plant would be necessary to generate the proposed electricity for sale to Afghanistan, in addition to the expected 420 kilometers of electrical lines. (NOTE: Turkmenistan has regularly said that it has a 300 megawatt surplus available for export to Afghanistan. END NOTE.) Orazgulyev acknowledged that the Ministry is struggling with the financial investment calculations to determine repayment times for the proposed infrastructure investments. ¶4. (SBU) Due to its approximate cost of 300 million euros, the Ministry is unsure of the project's potential financial benefits to Turkmenistan. Jelilov suggested that other options, like exporting gas to Afghanistan instead of electricity, might be more advantageous to both sides. Furthermore, the Ministry has not received confirmation from Turkmengas that it would supply gas to the above-mentioned new plant if it were to be constructed. As a result, Orazgulyev said "many questions still need to be resolved." Only once these infrastructure issues have been addressed can the Ministry bring the project proposal to the attention of higher levels within Turkmenistan's government for approval. MINISTRY REQUESTS USAID ASSISTANCE TO RESOLVE ¶5. (SBU) Jelilov said that the current sales price to Afghanistan of $0.02/kilowatt hour was not a purely commercial price. (NOTE: The Government of Turkmenistan considers electricity exports at this below-cost of generation price to be "humanitarian" assistance to Afghanistan. END NOTE.) Due to the uncertainty over possible returns from increased exports to Afghanistan, he suggested that it might be more beneficial for Turkmenistan to continue exporting at current quantities and prices rather than construct the proposed infrastructure that would allow higher export levels. (COMMENT: This was understood to mean that Turkmenistan might lose less money under this scenario. END COMMENT.) ¶6. (SBU) The calculations, Jelilov explained, were connected to the export price for gas. The new generation facility must be supplied with gas, and Turkmengas' prices were expected to double beginning in January 2009, which would raise the cost of electricity generation. Since it was unclear what revenue Turkmenistan could expect from the sales to Afghanistan, maybe Turkmenistan should instead build a gas pipeline to Afghanistan so that it could generate its own electricity. Jelilov asked for USAID's assistance ASHGABAT 00001481 002 OF 002 in analyzing the various investment scenarios and their potential benefits to Turkmenistan. ¶7. (SBU) Jelilov said that Turkmenistan had two options with respect to the project. If it was considered to be a political/humanitarian project, then the President must decide whether to proceed. On the other hand, if it were treated as a commercial project, then the MOEI should make financial projections and communicate the financial benefits to Turkmenistan to the country's leadership. If the latter, then it must be mutually beneficial. TIMING IN AFGHANISTAN NOT THE REASON FOR DELAYS ¶7. (SBU) In response to a direct question from USAID Representative, the Deputy Minister categorically denied that the timing of construction on the Afghan side had anything to do with current delays on Turkmenistan's part. (Reftel A). He reiterated that they were still working through the calculations on their side, and could not get approval from higher level officials before completing this analysis. ¶8. (SBU) COMMENT: In spite of apparent progress during joint working group meetings in April and July meetings (Refs B and C),it appears Turkmenistan is stuck over the financial calculations related to the project(s). In order to protect our planned investments in Afghanistan, we must find a way to help Turkmenistan analyze its options. USAID rep was told on November 5 by a knowledgeable local Afghan source that Afghanistan's Minister of Energy and Water, Ismail Khan, recently invited his Turkmen counterpart to visit Kabul for meetings -- and offered to go to Ashgabat as an alternative. In the next meeting, regardless of location, the Afghan side should clearly articulate whether it expects this project to be "humanitarian" or strictly commercial. This meeting would also provide a good chance for Afghanistan to present a draft power purchase agreement, so that the Turkmen side can begin to build a clearer picture of the possible benefits from this deal. END COMMENT. CURRAN