TURKMENISTAN'S HYDROCARBONS: FLOUNDERING IN

C O N F I D E N T I A L ASHGABAT 000307

SIPDIS

SIPDIS

STATE FOR SCA/CEN, EUR/CARC, EEB
PLEASE PASS TO USTDA DAN STEIN
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 03/06/2018
TAGS: PGOV PREL EPET EINV AJ TX
SUBJECT: TURKMENISTAN'S HYDROCARBONS: FLOUNDERING IN
GO-IT-ALONE APPROACH

REF: A. ASHGABAT 0295


B. ASHGABAT 0286

C. ASHGABAT 0254

D. ASHGABAT 0211

Classified By: CDA Richard E. Hoagland: 1.4 (B),(D)


1. (C) SUMMARY. During back-to-back meetings on Feburary 29
with U.S. Coordinator for Eurasian Energy Diplomacy
Ambassador Steven Mann, Turkmenistan's Deputy Chairman for
Oil and Gas Tachberdi Tagiyev, and Executive Director of the
State Agency for Management and Use of Hydrocarbon Resources
Byrammurad Muradov, welcomed additional U.S. training for
Turkmenistan's hydrocarbon officials. Although Tagiyev
offered a vaguely positive read-out of negotiations with
ConocoPhillips/Lukoil, Chevron, and Marathon, Muradov was
much more blunt and admitted his agency (and by extension,the
Government of Turkmenistan) is in over its head.
Turkmenistan has failed to reach agreement with
ConocoPhillips on two important issues and might consider
inviting other companies to bid on the blocks that
ConocoPhillips wants. Chevron needs to convince those in the
government who believe in a "do-it-ourself" approach to allow
a foreign (Western) company to work onshore. Although
Marathon's proposal interests the Turkmen, they do not
understand the technology involved and need more engagement
by Marathon. In the Caspian, Muradov seemed to feel that
finding an economic accommodation with Azerbaijan would be
easier than reaching political agreement on delimitation. He
admitted Turkmenistan had considered a natural-gas deal with
Hungarian company Millander in 2005, but the idea is now
"irrevocably buried." Turkmenistan needs to be convinced it
needs to hire outside expertise if it is to move forward with
Western energy majors' contracts. END SUMMARY.


2. (SBU) U.S. Coordinator for Eurasian Energy Diplomacy
Ambassador Steven Mann met February 29 separately with
Tagiyev and then Muradov. Charge and U.S. Trade and
Development Agency (USTDA) Regional Director for Europe and
Eurasia Dan Stein accompanied Mann to both one-hour meetings.

"WE WELCOME TRAINING"


3. (C) Tagiyev told Mann that "cadres capacity" remains a
serious problem. Several companies -- Petronas and
Wintershall -- are working on training programs, Russia last
year took 75 students for hydrocarbon higher education, and
the recent German government and business delegation is
looking at training possibilities. He welcomed any further
training USTDA could provide in Ashgabat, Turkmenbashy, and
Balkanabat. Stein noted a USTDA consultant will visit
Ashgabat in coming weeks to look at designing a curriculum
for the Ministry of Oil and Gas's training center (Ref A) and
assisting with development of Turkmenistan's petrochemical
industry. Noting that U.S. universities have world-class
expertise, Mann told Tagiyev that the U.S. government is
prepared to assist with university placement for 30-50
promising individuals. The United States needs to know in
advance in which areas Turkmenistan wants them trained, and
Turkmenistan needs to cover any financial obligations for the
students. But the United States government would be pleased
to facilitate the process and would help match these students
with the best universities for providing the desired kinds of
training. If Turkmenistan identifies students by the summer
of 2008, the students could be in place at U.S. universities
by the summer of 2009.


CONOCOPHILLIPS/LUKOIL: MISCOMMUNICATION IS HURTING
NEGOTATIONS


4. (C) TAGIYEV: Noting that ConocoPhillips CEO Jim Mulva
was currently visiting Ashgabat, Mann asked Tagiyev how
discussions earlier that day had gone. Tagiyev responded
that he had a "nice meeting" with Mulva, but negotiations
(for offshore blocks 19, 20, and 21) are dragging, and
Turkmenistan wants to speed up the process. MURADOV: By
comparison, Muradov told Mann that ConocoPhillips seems to
have had "false impressions." According to Muradov, there
are three key issues unresolved:

-- Change of ownership. If CP/Lukoil sell the rights, the
Government of Turkmenistan wants to approve the sale. (NOTE:
The Government of Turkmenistan is extremely annoyed, to put
it mildly, that Burren Energy just sold out to Italy's ENI,
without notifying the government. END NOTE.)

-- Right of refusal. The Turkmen want first right of refusal
in the event of an ownership change, though Muradov confessed
they are unsure how this right should be defined.

-- Arbitration. Turkmenistan is pushing for any arbitration
to be carried out at the ICC in Stockholm. Lukoil, however,
has problems with the enforcement provisions that should
follow from this.

A team of ConocoPhillips experts will visit Turkmenistan the
week of March 3 to work on still-unresolved issues.


5. (C) Mann said he had met with Mulva earlier in the day
and advised Muradov to focus on the important issues.
Stating that Mulva had claimed the State Agency wants to
approve all tenders over $20,000, Mann asked whether this was
true. Muradov asked "Where did he get that idea?"
Apparently genuinely confused, he sent his legal advisor to
look at the wording of the contract. The legal advisor later
reported there will be a cap at an unspecified amount on
tenders to prevent excessive cost overruns. Muradov
stressed, "So far, we have been working off of a contract
text supplied by ConocoPhillips." Noting, "We don't have
lawyers, but they do," Muradov said, "This is not a fair
fight." (NOTE: At the end of January, at Muradov's request,
the Embassy provided him a list of independent law firms and
energy consultancies, many Almaty-based. Apparently,
Ashgabat has taken no steps to engage outside lawyers. END
NOTE.) Muradov later stated he had told Mulva Turkmenistan's
previous image of ConocoPhillips had been positive, but the
company had not had any contacts with the government for two
months. "From our perspective, ConocoPhillips has not met
our expectations." Turkmenistan, he alleged, is ready to
invite other companies to bid on the blocks ConocoPhillips
wants.

CHEVRON, MARATHON, AND DEVELOPING PETROCHEMICALS


6. (C) TAGIYEV: Tagiyev said Chevron had earlier applied
for a license for an offshore block (see below),but for two
months has made no effort to discuss its proposal. MURADOV:
Muradov told Mann he had talked with Chevron's new
Ashgabat-based country manager on February 28, and Chevron is
preparing to submit a new, detailed proposal o/a March 10.
Muradov had told Chevron that it needs to convince the
government that Turkmenistan needs the company to help it


work subsalt onshore. According to Muradov, there are two
schools of thought among Turkmenistan's specialists -- those
who believe that Turkmenistan needs partnerships with
world-class oil companies to work its subsalt natural gas
reserves, and those who strongly oppose any onshore foreign
participation. Chevron should write its proposal to tackle
that issue directly. (NOTE: We suspect Tagiyev opposes. We
did pass Muradov's advice to Chevron's local representative.
END NOTE.) Muradov said he does not understand why Chevron
is not interested in working in the offshore Caspian blocks,
where Turkmenistan is looking for investors. He added
Chevron has offered a serious proposal, but onshore programs
remain a tough, sensitive issue for Turkmenistan, and there
will need to be "tough and serious" negotiations. (COMMENT:
From the beginning, Chevron was interested only in Block III
that includes Serdar because the Turkmen told Chevron they
must work offshore if they want to have any hope for onshore.
But once Turkmenistan revealed its contract with Buried Hill
for Block III (reftel C),Chevron dropped any pretense of
offshore interest. END COMMENT.)


7. (C) TAGIYEV: Noting that Marathon has developed a
proprietary technology for natural gas-to-fuels conversion,
and that the company wants to introduce this new technology
to Turkmenistan, Mann asked for Tagiyev's views on Marathon.
Tagiyev agreed that developing Turkmenistan's petrochemical
industry is important, since it would allow Turkmenistan to
get more money for its hydrocarbon products. Turkmenistan
has announced a tender for the petrochemical sector, and
Marathon should submit a proposal if its wants to
participate, he said. MURADOV: Muradov later suggested
Marathon's gas-to-fuels technology is of interest to
Turkmenistan, but his government does not have the expertise
to properly evaluate the proposal. "They (Marathon's
specialists) need to spend more time in meetings with us to
help us understand."

DELIMITATION: PROBLEMS, BUT "WE CAN'T LOSE THIS CHANCE"


8. (C) TAGIYEV: When Mann asked how Tagiyev views
Azerbaijan's state oil company, SOCAR, the deputy chairman
guardedly responded, "We have 'normal' relations." He
suggested Turkmenistan will participate in an upcoming
International Energy Agency meeting in Baku, and SOCAR will
take part in Turkmenistani conferences, including in London
and in Ashgabat. MURADOV: In his meeting with Muradov, Mann
noted he had proposed the previous day to President
Berdimuhamedov a feasibility study for a production pipeline
in the Caspian between Turkmenistan's and Azerbaijan's
infrastructures. Muradov responded that Mann's proposal is
already under discussion within the government. Looking at a
U.S. non-paper on potential Caspian development models, he
said, "We need to know exactly what you mean by 'jointly
develop off-shore resources' and 'Joint Authority' approach
used by Malaysia and Thailand." Muradov said that the
Ministry of Foreign Affairs has the political lead on Caspian
delimitation, and he's content to let them have it. Muradov
added, "It would be very bad to lose this opportunity." He
is hoping to work on joint production. Muradov asked that
the U.S. government talk with Azerbaijan's President Aliyev.
"I don't want greed for money and power to cloud the issue,"
he said, acknowledging that "I'm not being explicit. I hope
you understand." (COMMENT: Unless he was speaking only
about Azerbaijan, which is possible, this veilled comment
adds to our suspicion that Turkmenistan sees the delimitation
dispute primarily in economic terms. See reftel A, para


nine. END COMMENT.)

MILLANDER: WE'RE TRYING TO GET AWAY FROM BAD DEALS


9. (C) Muradov said that he had been talking with other
officials about a natural gas deal proposed by the Hungarian
firm, Millander International, Ltd., that Charge had earlier
brought to his attention (reftel D). He learned Millander
had proposed this purchase in 2005, but the idea was
"irrevocably buried." No government agency in Turkmenistan
had agreed to Millander's proposal. The Charge noted that
Hungary's Minister of Foreign Affairs had sent a letter to
Foreign Minister Meredov only a few months ago endorsing the
deal. Muradov responded, "But I didn't see that letter." He
added, "We're trying to get away from such deals." Mann
passed Muradov a Russian translation of a Dun and Bradstreet
report on Millander, showing the insubstantiality of the
company.


10. (C) COMMENT: Both Tagiyev and Muradov played their
typical roles. Although Tagiyev was less tense and intense
than in the past and, for him, was nearly loquacious, he
still said next to nothing. Muradov tends to wear his heart
on his sleeve, and made no secret that he, his agency, and
his government are in way over their heads trying to evaluate
proposals by Western energy majors. USTDA training for the
State Agency is under way, but that will not provide the
years of specialized experience needed to evaluate
complicated Western corporate proposals and contracts.
Turkmenistan needs outside help before the Western companies
give up in frustration. The next opportunity to drive this
home with Berdimuhamedov will be Under Secretary Jeffery's
pending visit. END COMMENT.


11. (U) Ambassador Mann cleared this cable.
HOAGLAND