TURKMENISTAN: THE FIELD OF POTENTIAL FOREIGN OIL

S E C R E T SECTION 01 OF 05 ASHGABAT 000457

SIPDIS

SIPDIS

FOR E UNDER SECRETARY REUBEN JEFFERY
STATE FOR SCA/CEN, EEB
PLEASE PASS TO USTDA DAN STEIN
USEU FOR AMBASSADOR GRAY
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 04/11/2018
TAGS: PREL PGOV EINV EPET TX
SUBJECT: TURKMENISTAN: THE FIELD OF POTENTIAL FOREIGN OIL
COMPANIES GETS MORE CROWDED

REF: A. ASHGABAT 0109

B. 07 ASHGABAT 1172

C. ASHGABAT 0254

D. ASHGABAT 0186

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


1. (C) SUMMARY: With two exceptions, Turkmenistan's record
of dealing with foreign petroleum companies remains sharply
bifurcated between the second-tier companies present in
Turkmenistan since former President Niyazov's time and the
others that are standing in line to complete new agreements
now that Niyazov is dead. Of the companies that have been
present for some time -- Dragon Oil, Petronas, and Burren
(now ENI) -- all except Burren/ENI are thriving. There is
one new party, Canadian company Buried Hill, which has
received a contract for Caspian Block III (a disputed area)
in a murky deal suggestive of political intrigue and
corruption. There remain a large number of other companies,
including U.S. majors like Chevron, ConocoPhillips,
ExxonMobil, and BP, that are interested in working in
Turkmenistan. However, progress is slow. Chevron, which
submitted a bid March 11 to work onshore, continues to be
frustrated by its inability so far to get the government to
the negotiating table. At the same time,
ConocoPhillips/Lukoil, which has been in negotiations since
mid-2007, has yet to close a deal. Other U.S. companies by
all accounts are even further behind. Meanwhile, non-U.S.
firms such as Total, Shell, and TNK-BP, are circling around,
waiting for the situation to change. END SUMMARY.

BURIED HILL ENTERS THE PICTURE WITH SERDAR DEAL


2. (S) Canadian petroleum company Buried Hill signed a
contract in December 2007 to work Caspian Block III -- a key
area disputed by Turkmenistan and Azerbaijan. The deal,
however, was not announced until after a February 12 meeting
between the company's CEO, Roger Haines, board member and
former Canadian Prime Minister Jean Chretien, and
Turkmenistan's President Berdimuhamedov (Ref C). The details
are enveloped in secrecy. Most here, pointing both to the
murky, opportunistic pasts of Haines and Chretien, and Buried
Hill's total lack of experience and technological know-how in
deep-water drilling required for the block III fields, are
speculating that substantial bribery was involved.
Turkmenistan's signing the Buried Hill agreement in December
2007 and announcing it just as negotiations with Azerbaijan
over the disputed maritime border areas were moving forward
may have been intended as a negotiating strategy with
Azerbaijan.


3. (C) Executive Director of the State Agency for Management
and Use of Hydrocarbon Resources Byrammurat Muradov told the
Charge that the deal with Buried Hill is a "contract," rather
than a traditional prodution sharing agreement (PSA). He
insisted the contract is structured so Buried Hill cannot
resell its rights to another company but only return them to
Turkmenistan. Turkmenistan chose Buried Hill "because no one
trusts them" and therefore, they "will be more loyal." To
date, Buried Hill claims to have already carried out seismic
imaging, and says it is looking for a rig so that it can
begin drilling before the end of 2008. Whatever the true
motives might have been, the deal shows Turkmenistan's
preference for working with small companies from the Niyazov
era and its general discomfort -- and insecurity -- dealing
with the majors.

ASHGABAT 00000457 002 OF 005



BURREN/ENI CONTINUES TO FEEL GOVERNMENT WRATH


4. (SBU) When news broke December 3, 2007, that Italian
petroleum giant Eni had signed a contract to take over the
PSA holding of the second-tier UK hydrocarbon company, Burren
Energy, everybody agreed that Burren, which received $3.6
billion in an all-cash deal, had made a killing. However,
neither side had bothered to consult with the Government of
Turkmenistan, but rather, presented the government with a
fait accompli. Although the deal has since gone through, the
government has not cooperated, denying ENI officials visas to
enter Turkmenistan. Consequently, employees of the former
Burren have had to continue to run the company. Government
officials remain raw about the Burren/Eni deal. This may be
contributing to the government's unwillingness to trust other
foreign companies -- a problem that is affecting many of the
firms now seeking to enter Turkmenistan's hydrocarbon
production sector.

PETRONAS: PLANNING FOR EXPANDED PRODUCTION?


5. (SBU) Petronas, a Malaysian company working Caspian Block
I, continues to move forward with its plans to begin
capturing the unexpectedly large amounts of associated gas
that it discovered. However, there are new indications that
gas volumes may be higher than previously reported. While
the company's outgoing country manager told EmbOff February
23 that the company is still planning on producing only 10
billion cubic meters (bcm) of gas per year, he also stated
that the company is planning to build a 48-inch pipeline --
with the potential to transport 20 bcm of gas per year --
from Block I to shore. Whether this is because Petronas is
hoping to reach agreement with Buried Hill to transport gas
from Buried Hill's holding in Block III to shore (a
possibility which Buried Hill's country manager separately
told Post he is considering),or Petronas is planning to
increase its production is not yet clear. In the meantime,
Petronas is also proceding with a reportedly very thorough
audit, a company requirement when the country managers change.

CNPC


6. (SBU) In July 2007, Beijing and Turkmenistan signed a
major deal to construct a Turkmenistan-to-China pipeline, due
to open in 2009. As part of the deal, Turkmenistan gave a
PSA to CNPC to work the right bank of the Amu Darya River.
Turkmenistan's president also agreed to sell China a
guaranteed 30 bcm of Turkmenistani gas per year for 30 years,
with any shortfalls in CNPC production to be made up with
Turkmen gas from other areas. (NOTE: Estimates suggest that
the CNPC PSA will cover only 13 bcm per year, requiring the
remaining 17 bcm to be purchased from other sources. END
NOTE.) The ground-breaking ceremony for CNPC's primary
facility was held February 22. In March, Turkmenistan signed
a $600 million contract with the Gazprom-owned Stroitransgas
to build the 188-km pipeline section in Turkmenistan.
According to some media reports, the 1.42 meter-diameter pipe
will run from the Malai gas field across the Amu Darya River
to the Uzbekistan border.

WINTERSHALL/MAERSK: PREPARING A DEAL WITH CHEVRON?


7. (C) The German company Wintershall, which more than a
year ago took over ownership of Maersk's PSAs to work Caspian
blocks 11 and 12, is planning to carry out exploratory

ASHGABAT 00000457 003 OF 005


drilling sometime between late April and mid June. The holes
that Maersk drilled were disappointing. Wintershall is
hoping to share the results with Petronas and
Irish-registered, UAE-owned Dragonoil (which has a PSA off
Turkmenistan's Cheleken peninsula) to develop a better
picture of the Caspian Sea and figure out whether there are
any other blocks worth bidding on. But even bigger news from
Wintershall's perspective is that it may be negotiating a
partnership in Turkmenistan with Chevron that could be
announced as early as June (Chevron's country manager has
never raised this issue). According to Wintershall's
talkative country manager, Wintershall would bring to the
partnership PSAs for two offshore Caspian blocks, while
Chevron would bring funding and tremendous onshore drilling
experience.

CHEVRON: WAITING FOR NEGOTIATIONS TO START


8. (C) Chevron, which recently opened an office in Ashgabat,
submitted a formal "indicative bid" on March 11 to work
onshore sub-salt reserves in the Amu Darya basin in eastern
Turkmenistan. (NOTE: The government still has not abandoned
a policy banning any new foreign companies -- with the
exception of CNPC -- from working onshore fields, but a
number of our contacts believe that the government will
change this policy eventually. END NOTE.) In an effort to
bring the government to the negotiating table quickly,
Chevron sent a team to give an April 5 presentation to
hydrocarbon officials (septel). While the presentation went
smoothly, State Hydrocarbon Agency Director Muradov
subsequently told the Chevron country manager that he had
wanted to see more information about how the company applies
its integrated processes to drilling and production. He
expressed concerns about Chevron's transparency, since the
team had refused to leave behind some sensitive proprietary
information. However, Muradov offered the company a second
presentation, which will likely take place in May, and the
company is working on a strategy to strengthen trust.
Meanwhile, Muradov told Chevron that four other companies --
BP, Lukoil, Shell, and Total -- have also expressed interest
in working in the Amu Darya basin. Although Chevron by all
accounts is still ahead of its competitors, it is beginning
to feel the heat of competition.

LUKOIL/CONOCOPHILLIPS: CLOSER TO A CONTRACT?


9. (C) ConocoPhillips, along with its partner Lukoil, has
been negotiating a PSA for Caspian blocks 19, 20 and 21 since
the middle of 2007. Muradov told U.S. officials in late
February that, if ConocoPhillips was not willing to make some
compromises, the State Agency is willing to start considering
bids from other companies. (NOTE: We have heard that both
Rosneft and TNK-BP are interested in the blocks for which
ConocoPhillips has been bidding. END NOTE.) ConocoPhillips
CEO James Mulva visited Turkmenistan in February, and
reportedly the two sides have since whittled down outstanding
differences to one issue: arbitration.

BP AND TNK-BP: COMPETITORS IN TURKMENISTAN


10. (C) TNK-BP and BP are both interested in working in
Turkmenistan, but they are moving separately. TNK/BP, which
set up an office in Ashgabat in September 2007, is interested
in eventually working onshore, but in the interim has
submitted PSA proposals to work several undisclosed offshore
blocks in which several other companies also are interested.

ASHGABAT 00000457 004 OF 005


(NOTE: This likely means that TNK-BP is bidding for blocks
19, 20 and 21, and/or blocks 22 and 23. END NOTE.) In the
meantime, TNK-BP has told us that it is seeking to
demonstrate to the government that it can deliver, and has
submitted an offer to assist Turkmenistan with oil recovery
in old fields. It also has carried out 3-D seismic imaging
of the (onshore) Kotur Tepe field, located in western
Turkmenistan. By contrast, BP, hindered by its work on the
Azeri side of the disputed area and by its perceived
reputation for running roughshod over the Azeri government,
is moving even more slowly. It reportedly has held
"exploratory discussions" with the Government of
Turkmenistan, including in March, and is moving to establish
an office in Ashgabat. However, Post is unaware whether BP
has submitted any firm bids as yet.

EXXONMOBIL: EXPLORING THE OPTIONS


11. (C) ExxonMobil is interested in working onshore, in
Turkmenistan's Murgab depression (located in the Southeast.
in the Amu Darya basin). However, ExxonMobil has been warned
that its decision to withdraw from Turkmenistan in the 1990's
(when it was only Mobil) has left some hard feelings, and
says it is goingly slowly to rebuild lost trust. (NOTE:
Prior to 2002, Mobil had an agreement to explore the right
bank of the Amu Darya River, where CNPC now has its PSA.
After its merger with Exxon, the new company opted to pull
out. Its departure reportedly left some in Turkmenistan,
including oil professionals like Deputy Premier Tagiyev and
Turkmengaz Chairman Kakayev, displeased. END NOTE.) With
Chevron and others that want to work the same area now
reportedly far ahead, its go-slow approach may hurt it,
unless Chevron decides to withdraw its bid because the
government is moving so slowly.

MIDLAND OIL: FRUSTRATED


12. (C) Despite initially promising talks with President
Berdimuhamedov and hydrocarbon officials, Midland Oil and Gas
seems not to have made any progress on its PSA bid for
Caspian blocks 23, 30 and 31 (or on any of the other deals it
was seeking to reach with Turkmenistan -- see Ref D). The
good will that the company gained by arranging for
Berdimuhamedov to ring the bell at the New York Stock
Exchange in September 2007 seems to have faded a bit.
Company Board Chairman Robert Murphy left Turkmenistan in
late February frustrated, but reportedly is still trying to
find the right levers to push to get the company's proposed
deals back on line. Ever optimistic, he returned early in
April and plans to stay for several weeks.

OMV


13. (C) The Embassy learned on April 11 that Austria's OMV
has an office in Ashgabat through it's Rompetrol partner and
is scouting around for offshore and onshore possibilities.


14. (SBU) COMMENT: Although U.S. firms are still trying to
get used to Turkmenistan's unique process for negotiating
development of its hydrocarbon reserves, they are not alone.
In the 13 months since the State Agency's establishment, it
has signed only one agreement -- the curious deal with Buried
Hill. While it is clear that the State Agency lacks
confidence, Post still believes that the real issues involved
are officials' unfamiliarity with international hydrocarbons
markets, rather than a dislike of the companies involved.

ASHGABAT 00000457 005 OF 005


With pressure mounting on the State Agency to demonstrate its
worth (there has been some discussion that Muradov's job is
in jeopardy),we believe an agreement can be reached with a
Western major this year. END COMMENT.
HOAGLAND