TURKMENISTAN: WHY BURIED HILL FOR SERDAR? WHY

S E C R E T SECTION 01 OF 04 ASHGABAT 000254

SIPDIS

SIPDIS

STATE FOR SCA/CEN, EEB FOR AMB. STEVEN MANN
PLEASE PASS TO USTDA DAN STEIN
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 02/15/2018
TAGS: PREL PGOV EPET AJ TX
SUBJECT: TURKMENISTAN: WHY BURIED HILL FOR SERDAR? WHY
NOW?

REF: ASHGABAT 0164

Classified By: CDA RICHARD E. HOAGLAND: 1.4(B),(D)


1. (C) SUMMARY: Canadian petroleum company Buried Hill
signed a contract in December 2007 to work Caspian Block III
-- a key area disputed by Turkmenistan and Azerbaijan -- but
the deal was not announced until after a February 12 meeting
between the company's CEO, Roger Haines, board member former
Canadian Prime Minister Jean Chretien, and Turkmenistan's
President Berdimuhamedov, according to Buried Hill's country
manager. The deal originated in a memorandum of
understanding (MOU) that the company signed with Turkmenistan
in September 2004 to work an on-shore block at Tagta-Bazar
and Block III, and the company has been working since that
time to bring the deal to completion. In the two months
since the contract was signed, the company has reportedly
complete seismic imaging surveys and hopes to begin drilling
by late 2008. While acknowledging that the company would be
drilling in a disputed area, the country manager confidently
asserted that there is no reason for the company to run into
trouble because the agreement is "purely commercial." We
speculate publicizing the deal now might be part of
Ashgabat's negotiating strategy with Baku. END SUMMARY.


2. (SBU) Turkmenistan's state-run media announced February
13 President Berdimuhamedov had met February 12 with Canadian
petroleum firm Buried Hill's CEO Roger Haines and board
member former Canadian Prime Minister Jean Chretien.
According to the media reports, Haines briefed the president
about the status of its work in the block and plans to begin
drilling soon. The television news report of the meeting
showed no other Turkmen official on Berdimuhamedov's side of
the table, but, oddly enough, State Agency Hydrocarbon
Director Murandov sitting on the Buried Hill side as
interpreter.

BURIED HILL CONFIRMS DEAL


3. (C) During a February 18 meeting with PolOff, Buried
Hill's country manager Eldar Iskanderov confirmed that the
company hasw had a memorandum of understanding (MOU) with
Turkmenistan for an on-shore block in Tagta-Bazar and for
Block III in the Caspian Sea since September 2004, and signed
a production sharing agreement (PSA) with Turkmenistan's
State Agency for Management and Use of Hydrocarbon Resources
in December 2007. (NOTE: Block III, which contains the
disputed islands of Serdar/Kapaz and Azeri/Chirag/Guneshli,
is different from Turkmenistan's Block 3, which is located in
the far northwest quadrant of Turkmenistan's Caspian Sea
claims. END NOTE.) According to Iskanderov, the PSA is for
the entire Block III, but does not include the on-shore
Tagta-Bazar block, though Iskanderov confirmed that the MOU
for Tagta-Bazar remains in force. Iskanderov said during the
meeting that his company is very optimistic that the
Government of Turkmenistan will eventually agree to allow
western companies to drill on-shore. Companies, however,
must have patience and use the "right approach" in making
their case.


4. (C) Iskanderov stated that the company had been
negotiating its PSA for more than a year. He claimed
negotiations had been "very smooth," and characterized the
company's new PSA as a "standard-type agreement," with a
"fair" cost-recovery factor closer to that which Wintershall
received in the mid-2000's than to those signed in the mid
1990's.


ASHGABAT 00000254 002 OF 004


NO POLITICS INVOLVED: SOLELY A COMMERCIAL DEAL


5. (C) Since the PSA was signed in December 2007, Iskanderov
claimed, Buried Hill has carried out seismic imaging of Block
III. He asserted the February 12 meeting with the president
was solely to inform him of the company's progress in Block
III, and to congratulate him on the first anniversary of his
inauguration. Buried Hill's decision to announce its new PSA
via a press release on its website was made with the full
approval of the Government of Turkmenistan. When asked why
the government had not confirmed the PSA in its reporting on
the meeting, Iskanderov suggested that the reference in the
government's media coverage to the "contract" was meant to be
a tacit admission that the PSA exists. (NOTE: See para 10
below. END NOTE.) However, Iskanderov somewhat evasively
maintained that Buried Hill is making its announcement now
because "it is time. People need to know."


6. (C) Iskanderov also maintained that the signing of the
PSA is solely a commercial deal, and the on-going
delimitation talks between Turkmenistan and Azerbaijan have
nothing to do with Buried Hill. The company signed a
contract with the government in whose territory Block III is
contained. It is for Turkmenistan, though, and not Buried
Hill, to resolve the territorial differences with Azerbaijan.


PLANS TO BEGIN DRILLING IN LATE 2008


7. (C) Buried Hill says it plans to begin drilling 3-4
wells, beginning at the outermost edge of Block III and
gradually working its way westward. The biggest bottleneck
is in getting a rig in place. All the rigs currently in the
Caspian Sea are already contracted for, and the closest
alternative deep-water rigs are in the North Sea and the
Persian Gulf. However, Buried Hill hopes to begin drilling
its first exploratory well before the end of 2008. It
expects to find both oil and substantial amounts of
associated gas. Iskanderov claimed that his company has not
yet decided how to transport the hydrocarbons it produces.
In principle, it is willing to transport its oil and gas by
pipeline in any direction. He suggested that that Buried
Hill hopes to build a joint (with Petronas) pipeline to the
shore, where Buried Hill would then process its oil and gas.
However, Iskanderov said, his company has not yet approached
either BP or Petronas to discuss transport options.

WINTERSHALL DIRECTOR: HAINES IS BAD NEWS


8. (C) According to Wintershall/Maersk country manager Kal
Sandhu, who claims to know Haines from when both worked in
the Persian Gulf and to have followed his career closely,
Haines at that time was working in a company which he owned,
Gulfstream, that "became involved in shady -- even illegal --
activities." The company was finally sold, and Haines fled.
Eventually, he founded Buried Hill. Sandhu suggested that
Buried Hill first went after Tagta-Bazar, but that former
President Niyazov also gave the company Block III with the
expectation that Buried Hill would negotiate directly with
Azerbaijan. (COMMENT: Embassy has heard Buried Hill was
talking to the Government of Azerbaijan as recently as a year
ago. END COMMENT.) Sandhu characterized the Block III
arrangement as the "price" of getting an MOU for Tagta-Bazar.


9. (C) Sandhu, who claims to have weekly meetings with State
Agency head Muradov, also indicated that, according to
Muradov, Berdimuhamedov's administration does not like the
Tagta-Bazar/Serdar arrangement but feels that it must go

ASHGABAT 00000254 003 OF 004


forward because it does not know legally how to get out of
the arrangement. Muradov once told him that he doesn't know
much about Buried Hill, and asked Sandhu what he knew.
Sandhu claimed to have told Muradov that Haines is "a
scheming, lying opportunist who is bad news."


10. (C) Charge met February 20 with Hydrocarbon State Agency
Director Byrammurat Muradov to try to seek clarification on
the Buried Hill deal. Muradov

-- asserted the deal with Buried Hill is a "contract," not a
traditional production sharing agreement;

-- claimed Turkmenistan had engaged international legal
counsel to help vet the contract -- Calgary-based
international energy negotiator Frank Alexander of Fraser
Milner Casgrain LLP;

-- insisted the contract is structured so Buried Hill cannot
resell its rights to another company but only return them to
Turkmenistan, and said the contract includes "achievement
benchmarks" that can be deal-breakers if not met; and

-- said Turkmenistan and Buried Hill are already looking for
rigs that would allow drilling to start soonest, and think
that a rig currently in the Caspian owned by Maersk Oil
Turkmenistan might be available.


11. (C) When asked, "Why now?" Muradov responded "Azerbaijan
has already had BP working our disputed area. We wanted to
get started as soon as possible." When asked, "Why Buried
Hill?" he replied, "We chose them because no one trusts them.
They're eager to prove themselves, and so they will be more
loyal to us. Besides, Jean Chretien is a famous name, and
that helped us decide, too," suggesting Chretien may have
been involved in earlier negotiations. Muradov added that no
other company was willing to take on Serdar because of the
unresolved delimitation issue with Azerbaijan. In response
to another probe, Muradov asserted categorically,
"Turkmenistan will never agree with Azerbaijan to develop
Serdar jointly." When Charge suggested he had rumors
otherwise, Muradov didn't back down but shrugged, "I don't
believe it, but that would be a political decision,"
suggesting the possibility he is not fully in the President's
loop. He added, "In any case, we would have to deal as
equals."


12. (S) COMMENT: We question whether Buried Hill has the
technological know-how to drill off Serdar, whether they can
actually get a rig, and even whether they have the intention
to do so. Further, we wonder if Turkmenistan signing the
Buried Hill agreement in December 2007 and announcing it now
is intended as a negotiating strategy with Azerbaijan. In
the past, the government has always firmly declared bilateral
Caspian delimitation with Azerbaijan is the sine qua non for
any other step, and added Baku must compensate Ashgabat for
the resources it is "stealing" from the disputed area. In
October 2007, Charge offered to Foreign Minister Meredov U.S.
quiet diplomacy as an honest broker with Azerbaijan to try to
move forward delimitation and the possibility of a Caspian
Sea "infrastructure interconnector" as a prelude to an
eventual Trans-Caspian Pipeline. At that time, Meredov did
not say no, but did not reply. Turkmenistan signed the
Buried Hill "contract" in December 2007. By early January,
Meredov told the Charge Turkmenistan was ready for "detailed
discussions with Ambassador Steven Mann on Azerbaijan." On
January 29, President Berdimuhamedov told Ambassador Mann in
confidence he wanted the United States to help devise a legal

ASHGABAT 00000254 004 OF 004


structure to allow Turkmenistan and Azerbaijan jointly to
develop the disputed mid-Caspian Serdar field (reftel). With
BP already working the general area for Azerbaijan, maybe
Turkmenistan felt it needed to have a similar enterprise
under way to be able to negotiate more equally with Baku.


13. (C) COMMENT CONTINUED: Muradov freely admitted that
choosing a small and questionable company like Buried Hill is
counter-intuitive, but his comment that a firm like Buried
Hill "will be more loyal" is telling. If nothing else, it
emphasizes Turkmenistan's general comfort working with small
companies from the Niyazov era and its general discomfort --
and insecurity -- dealing with international majors. END
COMMENT.
HOAGLAND