TURKMENISTAN/IRAN: NATURAL GAS "AGREEMENT" LEAVES

C O N F I D E N T I A L ASHGABAT 000568 SIPDIS SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 05/05/2018 TAGS: PREL EPET IR TX SUBJECT: TURKMENISTAN/IRAN: NATURAL GAS "AGREEMENT" LEAVES PRICE AND VOLUME UNDECIDED Classified By: Charge d'Affaires Sylvia Reed Curran for reasons 1.4(B) and (D). ¶1. (C) Although Iran and Turkmenistan agreed April 25 to resume delivery of Turkmenistan's natural gas to Iran, they are still negotiating both the price and volume of natural gas deliveries, the Iranian ambassador told Poland's Ambassador Marciej Lang during a May 5 diplomatic event. The two sides have agreed to use Euros as the currency for their transactions. While Iran has agreed to pay "world prices," however, it remains unclear exactly what the amount will be. The Iranian ambassador also told Lang that his country would like to increase the overall volume of Turkmenistan's natural gas exports to Iran, and wants the two sides to construct a second pipeline that would supplement the exports via the Korpeje-to-Kurt-Kui pipeline. ¶2. (C) COMMENT: From the beginning, the argument between the two was about price. Iran was importing natural gas from Turkmenistan for $65 per thousand cubic meters and exporting similar amounts to Turkey for at least $250 per thousand cubic meters. With Turkmenistan looking to get much higher prices for its gas from Gazprom and China in the coming years, it no longer wanted to accept an arrangement where Iran was profiting off Turkmenistan's product. We believe that the price remains undetermined because Gazprom, which promised in late March to begin purchasing Turkmenistan's gas for "western prices," has yet to unveil its new price. Turkmenistan is likely holding out until it sees what it can get from Gazprom -- and what Europe will be paying. ¶3. (C) COMMENT CONTINUED: By contrast, increasing the volume remains a tough problem. Although the Korpeje-to-Kurt-Kui pipeline was built to carry a maximum of 13 billion cubic meters (bcm) of gas, Turkmenistan has been delivering only around 8 bcm of gas to Iran in recent years. One of the main reasons for this is Turkmenistan's natural gas production, which has always been limited and which has slowly begun to decrease. President Berdimuhamedov called on Turkmenistan's gas sector to produce 81.5 bcm of gas in 2008 (an increase of about 9 bcm over 2007 production),but we are already beginning to see signs that natural gas production this year is behind target. Unless Turkmenistan can figure out a way of increasing overall natural gas production, it will be unable to fulfill any new delivery contract with Iran without making sharp cutbacks on deliveries to other partners (primarily Russia/Gazprom). END COMMENT. CURRAN