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 ASHGABAT 00000588 002 OF 003 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 ASHGABAT 00000588 003 OF 003 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