TURKMENISTAN: STATE HYDROCARBON AGENCY STILL ON

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000167 SIPDIS SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER USAID/W FOR EE/AA E.O. 12958: DECL: 01/30/2018 TAGS: PREL PGOV EPET EINV TX SUBJECT: TURKMENISTAN: STATE HYDROCARBON AGENCY STILL ON LEARNING CURVE ABOUT CHEVRON REF: A. ASHGABAT 0166 ¶B. ASHGABAT 0165 ¶C. ASHGABAT 0164 ¶D. ASHGABAT 0049 Classified By: CHARGE RICHARD E. HOAGLAND FOR REASONS 1.4(B),(D) ¶1. (C) SUMMARY: On January 29, Executive Director of the State Agency for Management and Use of Hydrocarbon Resources Byrammurat Muradov told U.S. Coordinator for Eurasian Energy Diplomacy Ambassador Steven Mann his agency is very close to reaching an agreement with ConocoPhillips on two offshore blocks. By contrast, he said, Chevron's proposal is more problematic. Turkmenistan wants to work with Chevron and likes the company's joint venture proposal, but officials want to avoid establishing a "father-son" relationship similar to the one it already has with Gazprom. Mann put in a plug for hiring consultants, and handed over a list of international law firms. He also stressed that only powerful hydrocarbon firms can provide the resources and technology that Turkmenistan needs to work large fields and fund pipelines. END SUMMARY. MANN SUGGESTS VALUE OF INTERNATIONAL ANALYSIS AND ADVICE ¶2. (C) Characterizing sitting down with a negotiating partner -- particularly with Gazprom -- as being like participating in a chess match, Mann stressed the benefits of having expert analysis and advice "during the breaks." Mann passed to Muradov a list of international law firms that could provide legal advice to the State Agency during its negotiations with foreign firms wishing to enter Turkmenistan's offshore hydrocarbon production sector. (NOTE: Muradov had welcomed U.S. assistance to identify reputable international law firms during a January 10 meeting with the Charge (reftel D). END NOTE.) Mann also offered to give Muradov an analysis of the legal aspects of off-shore development President Berdimuhamedov had requested in their meeting earlier in the day (reftel C) the next time he comes to Turkmenistan. Mann noted Turkmenistan needs well-established, serious international firms. Only these firms have the resources to work large fields and fund pipelines. Chevron has submitted an initial proposal and is waiting for a sign of interest from the government. The �00A;president told Mann he would approve a more detailed proposal from Chevron, and Mann conveyed that to Muradov. MURADOV: CONOCOPHILLIPS CLOSE TO AGREEMENT ¶3. (C) Agreeing that Berdimuhamedov wants to see a strong U.S. company active in Turkmenistan because this would send a signal to other investors, Muradov indicated that the State Agency is very close to reaching an agreement that would allow Lukoil/ConocoPhillips to work (offshore) blocks 19 and ¶20. These are the two blocks that Western Atlas has identified as being the most promising. The State Agency still needs to resolve a few sensitive issues, with arbitration provisions a prominent one. CHEVRON PROPOSAL CREATES DILEMMAS ¶4. (C) According to Muradov, Turkmenistan considers Chevron a powerful, serious company, but has some problems with the proposal: ASHGABAT 00000167 002 OF 003 -- Although Chevron bid on the Serdar field in the Caspian, Turkmenistan considers this to be a field rather than a block. Turkmenistan can only sign production sharing agreements to develop blocks, not fields. -- While Chevron had made a very interesting proposal for on-shore development -- and Turkmenistan likes the legal, financial, and technological aspects of Chevron's joint-venture proposal -- the country needs to be ready to be a partner. The problems are not just structural: Turkmenistan does not want "another father-son relationship" as it has with Gazprom. Turkmenistan wants a partnership, but needs to find a mechanism that will allow it to grow and to strengthen its capacity. It wants to see the precise mechanisms of how the joint venture would work. -- Chevron's proposal to develop the Amu Darya basin covers too large an area. It is unclear what areas Chevron is proposing to develop, what steps Chevron would take, and what its plan of action would be. If the two sides are to agree to a joint venture, Chevron needs to define specifically where on-shore it wants to work. INCREASING HYDROCARBON SECTOR CAPACITY A TOP PRIORITY ¶5. (C) Muradov reiterated the need to increase Turkmenistan's capacity in the hydrocarbon sector. "We can buy equipment and can contract out fields, but we can't do anything on our own without trained personnel." Agreeing that training is important, Mann informed Muradov that the U.S. Trade and Development Agency will begin a training program for Turkmenistan's hydrocarbon sector on February 21. Muradov was grateful for the news. ¶6. (C) Noting that Turkmenistani officials had been watching the Kashagan negotiations closely, Muradov emphasized that his country wants partners that are looking for a long-term relationship, rather than just excessive profits. Turkmenistan is maneuvering carefully and trying to foresee potential problem areas, in an effort to avoid becoming involved in a similar situation. "We need to feel it, believe it," that tangible benefits, including training will come from cooperation with major firms. Mann again plugged the importance of hiring consultants, and of working with powerful hydrocarbons firms, who are are concerned for solid business reasons with maintaining a good image and defending their brand. ¶7. (C) COMMENT: Muradov, always an open interlocutor, was true to form. His readout seems to confirm that the only thing standing between Lukoil/ConocoPhillips and a contract is the State Agency's lack of confidence -- a problem that good legal consultants should help to address. We strongly suspect as well that the Bridas arbitration saga might underlie the State Agency's cautiousness. We believe good possibilities exist for Chevron, despite Muradov's assertions that there are problems with Chevron's proposal. Although the fundamental problem seems to be Turkmenistan's desire to work on-shore with a major hydrocarbon company only in a service capacity, we believe there is room and time for negotiations to continue and for mutual understanding to grow. Given Turkmen unfamiliarity with international business, it is impossible to overstate the degree of ASHGABAT 00000167 003 OF 003 hand-holding and spelling-out that Western firms must do when conducting business here. END COMMENT. ¶8. (U) Ambassador Mann has cleared this cable. HOAGLAND