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