TURKMENISTAN: CHEVRON WANTS TO RACHET UP LEVEL OF

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000588

SIPDIS

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

E.O. 12958: DECL: 05/07/2018
TAGS: PREL ECON ENRG EPET TX CH
SUBJECT: TURKMENISTAN: CHEVRON WANTS TO RACHET UP LEVEL OF
ADVOCACY AND ENGAGEMENT

REF: ASHGABAT 0453

Classified By: Charge d'Affaires Sylvia Reed Curran for reasons 1.4(B)
and (D).


1. (C) SUMMARY: Recognizing that the competition for
on-shore contracts for drilling in the Amu Darya basin in
eastern Turkmenistan is increasing, Chevron is focusing on
bringing Turkmen officials to the negotiation table soonest.
After Deputy Premier for Oil and Gas Tagiyev and Executive
Director for the State Agency for Management and Use of
Hydrocarbon Resources Muradov separately told Chevron Country
Manager Doug Uchikura on May 2 and 3 respectively that
Turkmenistan is currently unwilling to consider production
sharing agreements on-shore, Chevron is working on drafting a
new form of agreement. Uchikura believes the most difficult
element to finesse will be the issue of "reserve booking,"
which he claimed is a Securities Exchange Commission
requirement. Chevron is also planning to bring a high-level
company official to Turkmenistan in June in hopes that a
personal connection with the president will help jump-start
negotiations. But with Turkmenistan's officials continuing
to maintain, despite growing disagreement from international
experts, that Turkmenistan can carry out all on-shore
drilling itself, Uchikura's real message is that "someone" --
preferably from the U.S. government -- needs to convince the
president that Turkmenistan needs help. He also urged that
the United States invite President Berdimuhamedov to
Washington for a meeting with President Bush, a
contract-signing ceremony (hopefully, with Chevron) and the
inauguration of a new U.S.-Turkmenistan Business Council.
END SUMMARY.


2. (C) Chevron's Country Manager in Turkmenistan, Doug
Uchikura, reported during a May 6 meeting with EmbOff that
Chevron has provided to a technical team visiting Chevron's
facility in London the additional technical information
requested by Executive Manager of the State Agency for
Management and Use of Hydrocarbon Resources Bayrammurat
Muradov following Chevron's April 9 briefing (reftel). Now
that Chevron has addressed Turkmenistan's questions about the
company's technical capabilities, the company is eager to get
negotiations moving. And to try to achieve that goal,
Uchikura met the evening of May 2 with Deputy Premier for Oil
and Gas Tachberdi Tagiyev, and May 3 with Muradov.

TAGIYEV STICKS TO PARTY LINE: NO PSAS ON SHORE


3. (C) According to Uchikura, Tagiyev, who had been publicly
criticized by the President during a cabinet meeting earlier
that day for lagging gas and oil production, seemed --
uncharacteristically for the usually dour Tagiyev -- "almost
happy." Tagiyev stuck to the party line that Turkmenistan
can take care of on-shore production by itself, and had added
that the government would be unwilling to consider any
on-shore production sharing agreements (PSAs) for at least
3-5 years. When Uchikura told Tagiyev that Chevron could be
flexible on the format of an agreement and will not insist on
a PSA, Tagiyev raised Turkmenistan's prior, "negative"
experience with ExxonMobil and Shell. Uchikura reportedly
stressed to Tagiyev that his company was focused on working
sub-salt hydrocarbons because Turkmenistan has all the
experience it needs to work above the salt. Noting the
special circumstances that make sub-salt drilling especially
challenging, dangerous and expensive to carry out, Uchikura
said he drew a parallel between Turkmenistan's need for
foreign commercial involvement in its off-shore Caspian
blocks -- where drilling is deeper and more challenging
technologically -- and drilling in the sub-salt. Tagiyev

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reportedly did not respond.

CHEVRON WORKS WITH MURADOV TO IDENTIFY SOLUTION


4. (C) The next day, Muradov echoed Tagiyev's statement that
there would be no on-shore PSAs. Muradov told Uchikura that
some of the existing on-shore PSAs have problems, so
Turkmenistan is shying away from such agreements. (COMMENT:
The only currently existing on-shore PSA which Turkmenistan
might find problematic is that with Burren, who failed to
consult with the government before selling its holdings in
November 2007 to the Italian firm, ENI. To date,
Turkmenistan reportedly has refused to issue visas to ENI
representatives, forcing Burren personnel to continue to run
day-to-day operations. END COMMENT.) Uchikura responded
that, although his firm is willing to be flexible on the
format of an agreement, Chevron must have an agreement that
allows it to "book" reserves in order to satisfy U.S.
Securities and Exchange Commission requirements. (NOTE:
"Booking" reserves gives a firm the right to extract
hydrocarbons that are not necessarily owned by that firQthe
right to take volumes in kind, and the right to a clear
mineral interest. Under such an arrangement, a firm also has
exposure to risk. END NOTE.) Muradov and Uchikura agreed
that Chevron will draft a new form of agreement in Russian
and English that might serve as a basis for negotiation.
Uchikura said that he told Muradov that he is willing to
continue satisfying any technical questions that the State
Agency might have about Chevron's capabilities, but Chevron
sees such questions as delaying tactics. Chevron wants to
get to negotiations, and it believes this is the best path
forward.


5. (C) According to Uchikura, Muradov stated that
Turkmenistan has drafted a new Petroleum Law that is
currently before the parliament. According to Muradov, the
law could be approved before the end of May. Muradov also
held out the possibility that the parliament debate might
give the State Agency greater flexibility. Uchikura noted to
EmbOff that Chevron wants an agreement with a long time
horizon. Muradov told Uchikura that the new law would offer
a minimum of 10-15 years. Based on his discussion with
Muradov, Uchikura also has concluded that Turkmenistan also
will have no problem with any company getting a fair rate of
return. The missing part, Uchikura told Muradov, is the
reserves booking. Muradov reportedly made another stab at
suggesting that Chevron could work under a short-term
(five-year) service agreement. Uchikura's response was
"We're not Halliburton or Schlumberger. Chevron does not do
such agreements."

CNPC TO PRODUCE ONLY 14 BCM PER YEAR


6. (C) Uchikura told EmbOff that he strongly doubts that
Turkmenistan can meet the president's call for Turkmenistan
to produce 81.5 billion cubic meters (bcm) of gas in 2008.
He related how he recently met with the China National
Petroleum Corporation (CNPC) country manager, a Mr. Lu, who
told him that China is convinced that Turkmenistan will not
be able to meet its contract to deliver 30 bcm per year
without major foreign investment. Lu, who previously worked
in both Sudan and Venezuela, expects that CNPC will only be
able to produce 14 bcm per year (most analysts believed that
the Chinese company would be able to produce up to 17 bcm),
meaning that it will look to Turkmenistan to provide the
remaining 16 bcm. (Lu also told Uchikura that CNPC has 200
Chinese nationals working in the CNPC PSA block. The
pipeline to China will have the capacity to carry 40 bcm of
gas -- likely, Uchikura speculated, 30 bcm of Turkmen gas and

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10 bcm from Kazakhstan.)

TURKMENISTAN NOT PRODUCING SUB-SALT GAS


7. (C) Uchikura added that, according to the Turkmenistani
technical team with which Chevron met in London, Turkmenistan
has only drilled 20 wells through the salt. In drilling
sub-salt, Turkmengaz has hit high temperatures, though not
high pressures. However, government firms have since plugged
all the wells -- probably, Uchikura speculated, because they
lack the capability and resources to safely extract and treat
the gas. The upshot of this information is that Turkmenistan
is currently extracting gas only above the salt, rather than
below-the-salt, where the majority of Turkmenistan's
remaining natural gas reserves are located. And, even if
President Berdimuhamedov were to agree to allow a foreign
company to work on-shore, it would still take 7-8 years
before any company could begin to produce the gas that
Turkmenistan will need to meet its growing volume of delivery
commitments.

CHEVRON URGES PRESIDENTIAL TRIP TO WASHINGTON


8. (C) To help get negotiations rolling, Chevron wants to
bring one of its high-ranking officers to Turkmenistan to
meet with President Berdimuhamedov in June. But with
Turkmenistan's officials continuing to maintain, despite
growing disagreement from international experts, that
Turkmenistan can carry out all on-shore drilling itself,
Uchikura's real message is that "someone" -- preferably from
the U.S. government -- needs to convince the president that
Turkmenistan needs help. In addition, Uchikura, noting that
"everybody except the United States is sending top-level
delegations to meet with the president," urged post to push
for an invitation for President Berdimuhamedov to visit
Washington and meet with President Bush before November.
This event, Uchikura suggested, that could be tied to both a
contract signature ceremony (hopefully for Chevron) and to
the inauguration of a new U.S.-Turkmenistan Business Council.


9. (C) COMMENT: While Chevron reportedly has been far ahead
of other western oil firms in terms of submitting a serious
proposal to work on-shore, Uchikura undoubtedly is aware that
ExxonMobil, which also wants to work in the Amu Darya basin,
is racheting up its efforts to engage with the government
here. This may be driving Chevron's push to meet with
President Berdimuhamedov, even though Uchikura previously had
ruled out such a possibility unless the meeting could take
place as part of a contract-signing ceremony. END COMMENT.
CURRAN