TECHNOCRATS AND GENERALISTS IN TURKMENISTAN'S PETROLEUM

UNCLAS SECTION 01 OF 03 ASHGABAT 000488

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SUBJECT: TECHNOCRATS AND GENERALISTS IN TURKMENISTAN'S PETROLEUM
SECTOR


1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: As Turkmenistan reforms its oil and gas industry,
two principally different development strategies exist among the
country's hydrocarbon leadership. One school of thought -- the
technocrats -- places primary emphasis on accessing modern
technology and/or services. The technocrats believe that
Turkmenistan has adequate institutional, financial and human
capacity to develop the country's resources (at least, onshore)
independently of international oil companies. Proponents of the
other approach -- the generalists -- are less categorical and
interested in closer engagement and know-how transfer. While
representatives of the latter approach also understand the
relationship between the presence of international oil companies and
the general investment climate in the country, they continue to lose
the debate about future policy because they lack the technical
expertise that would give them credibility. END SUMMARY

THE CONTEXT


3. (SBU) From the outset, President Gurbanguly Berdimuhamedov made a
promise to bring prosperity to his people. He inherited from his
predecessor, former President-for-Life Saparmurat Niyazov, an
economy nearly totally dependent on the hydrocarbon industry,
leaving Berdimuhamedov little choice but to continue relying on
hydrocarbon revenue, at least for the foreseeable future. But with
economic and rural development high on the president's list of
priorities, Turkmenistan must not just sustain its current oil and
gas production level, but increase it significantly.

THE TECHNOCRATS


4. (SBU) Turkmenistan's 16 years of independence have not produced a
new, modern gas and oil elite, and the old Soviet-trained
hydrocarbon engineering cadre (or rather, what is left of it after
Niyazov's purges of 2005) is still the dominant force in
Turkmenistan's petroleum industry. This old guard - personified by
Deputy Prime Minister of Gas and Oil Tachberdi Tagiyev - hold top-
and mid-level management and analytical positions. These cadres,
although technically competent, have had limited exposure to modern
technologies and have never received formal training or significant
experience in commercial and economic aspects of the oil and gas
business.


5. (SBU) These technocrats, who spent their entire professional
careers in a state-run system, are firmly wedded to a "we can do it
all ourselves" way of thinking. In their opinion, the current
industry structure can be efficient with advanced equipment. The
technocrats fail to understand that Turkmenistan's reliance on
foreign companies solely in a service capacity does not allow
creation of a value chain - the standard across the industrialized
world. They see limited value in working with international oil
companies and in learning from them. However, in promoting a system
of inviting international service companies and purchasing foreign
hardware, they have run up against some problems:

-- The number of petroleum service companies is limited, and not all
operating in Turkmenistan are of the highest technical caliber and
have made some serious mistakes. For example, Turkish firm Chalik
Enerji, drilling under contract for the government, had some major
blowouts in 2006.

-- State oil production, which relies heavily on service operators,
is declining, while the production of foreign operators, like Dragon
Oil and Burren Energy, working under production sharing agreements
(PSAs),is on the rise.

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-- The state's sole reliance on imported technology in an upgrade of
Turkmenbashy refinery cost $1.5 billion, but delivered low returns
due to continued state control of crude and gasoline prices.


6. (SBU) Perhaps their most serious problem, however, is the
gas-and-oil sector technocratic leadership's inability to engage in
a full-fledged and equal partnership with gas pipeline and marketing
companies. The technocrats simply do not understand the
complexities of legal arrangements for joint infrastructure
management and gas sales mechanisms. As a result, Turkmenistan has
limited itself to a policy of selling gas at the border, ruling out
alternatives that might actually increase Turkmenistan's overall
profit margin.

THE GENERALISTS


7. (SBU) Most positive developments in Turkmenistan's oil and gas
industry took place in the mid 1990's when a cadre of generalists
emerged under the leadership of then-Deputy Chairman of the Cabinet
of Ministers for Gas and Oil Yolly Gurbanmuradov. The strength of
Gurbanmuradov and his team was their knowledge of the international
financial system and modern business practices. During
Gurbanmuradov's time in office, Turkmenistan passed a Petroleum Law
laying the foundation for PSAs and establishing an agency to manage
PSAs. To date, the law remains in effect. But Gurbanmuradov became
too powerful and was perceived as a threat to Niyazov. The
resulting purge of Gurbanmuradov and his apparatus, including the
former "competent body" and Turkmenneftegaz (the body responsible
for managing downstream and marketing arrangements),decimated the
ranks of generalists, leaving only the unskilled behind.


8. (SBU) In March 2007, perhaps understanding the need for an agency
that would be responsible for general petroleum investment issues,
Berdimuhamedov re-established the former "competent body" as the
State Agency for the Management and Use of Hydrocarbon Resources.
President Berdimuhamedov appointed Bayrammurat Muradov, an official
with banking, fiscal and financial management experience, as the
Executive Director of the State Agency. As a generalist, Muradov is
less categorical than his technocratic colleagues and appreciates
the fact that international oil companies can bring to Turkmenistan
not only technology and capital, but also a wealth of management and
marketing experience. He also understands the positive effect of an
international oil company presence on the overall investment climate
in the country. However, his and his team's lack of virtually any
technical background in the gas and oil sector leaves them at a
disadvantage in discussions with their technocratic colleagues.


9. (SBU) Muradov is by far a better strategist than any of the
technocrats. He is of the opinion that the Government needs to set
up a vertically integrated petroleum company, similar to
Azerbaijan's SOCAR or Kazakhstan's KazMunaiGaz. Such a company
could eliminate the coordination gap between the upstream and
downstream sectors, as well as between the analytical and
operational entities. More importantly, he seems to appreciate the
fact that an integrated national company would be more independent
and flexible -- and, ultimately, an efficient business entity.
Executive Director Muradov looks further into the future and
foresees a need for foreign capital. He instructed his relevant
personnel to learn about the listing requirements at major stock
exchanges, including the New York Stock Exchange, in preparation for
the possible listing of a Turkmenistani national petroleum company.



10. (SBU) COMMENT: Although it seems obvious to outsiders that the
two groups should be able to work together in a complementary

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fashion that is not yet possible in Turkmenistan. The country's 15
years of relative isolation from the outside world and its lack of
exposure under former President Niyazov to Western management
techniques have allowed issues of power, prestige and tradition to
dominate business, often at the expense of profit. With the
technocrats disinclined to give up any of their authority and the
generalists unable, to date, to shift the focus of the debate away
from solely technical issues to include a broader discussion of
whether the old policies are really serving Turkmenistan's long-term
interests -- an area where they should be on more even ground -- the
generalists have not been able to date to sway the president into
reconsidering policies of engagement with international oil
companies. In the short term, continued support for a broader
market-oriented approach and advocacy on behalf of U.S. oil business
may ultimately convince the government to review its ways. However,
in the longer term, generalists do not stand a chance without
development of young petroleum professionals with mastery of market
principles and advanced engineering. END COMMENT.

HOAGLAND