TURKMENISTAN: NORWAY'S STATOILHYDRO OFFERS TO

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000600 SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 05/08/2018 TAGS: PREL EPET NO TX SUBJECT: TURKMENISTAN: NORWAY'S STATOILHYDRO OFFERS TO CARRY OUT "COMMERCIALLY BASED" FEASIBILITY STUDY REF: ASHGABAT 588 Classified By: Charge d'Affaires Sylvia Reed Curran for reasons 1.4(B) and (D). ¶1. (C) SUMMARY. Like many other foreign oil companies, Norway's Statoilhydro is looking for a formula that will allow it to get a contract to drill for natural gas in Turkmenistan's on-shore fields, the company's Vice President for Caspian Operations, Kristian Hausken, told EmbOff May 8. Hausken claimed that his firm's real interest is in becoming involved in a Turkmenistan-to-Europe gas supply chain, rather than in going into large-scale production. For this reason, Statoilhydro is hoping that, if the government signs a contract to sell the firm 10-15 billion cubic meters of gas per year, the government will also agree to allow the company to drill that gas under a "service agreement" in order to guarantee the delivery. To get the ball rolling with hydrocarbon officials, Hausken presented a proposal to carry out a "commercially based" gas supply chain feasibility study -- with unclear results. Unless Statoilhydro is willing to sign a contract that does not give it extraction rights, however, the firm may find its proposal as hard to sell to a government leery of "giving away" its resources as all other foreign companies currently vying for on-shore contracts. END SUMMARY. ¶2. (C) Norwegian oil company Statoilhydro is looking at possibilities for drilling on-shore for natural gas, according to Hausken. The company has concluded that the off-shore Caspian blocks do not contain enough oil to make drilling there profitable. Instead, it is looking at the possibilities of receiving a contract to drill on-shore. A team led by Hausken has been in Turkmenistan May 6-8 for discussions with Deputy Chairman of the Cabinet of Ministers for gas and oil Tachberdi Tagiyev, Executive Director of the State Agency for Management and Use of Hydrocarbon Resources Bayrammurat Muradov, and Minister for Oil and Gas Industry Baymurat Hojamuhammedov. STATOILHYDRO LOOKING FOR A DIFFERENT KIND OF CONTRACT ON-SHORE ¶3. (C) Hausken told EmbOff that Tagiyev and Muradov have both told Hausken that no foreign companies will be allowed to drill on-shore in anything other than a service capacity. However, Hausken interprets this as an indicator that there is some room for maneuver. Specifically, he believes there is a possibility that, if Statoilhydro contracts to purchase 10-15 billion cubic meters (bcm) of natural gas per year from Turkmenistan, it could receive a "service contract" that would allow it to produce enough gas on-shore to ensure fulfillment of the contract. Such a contract, he claimed, would be similar to the arrangement that China National Petroleum Corporation (CNPC) currently has with Turkmenistan. (NOTE: CNPC is operating on the right bank of the Amu Darya River under a production sharing agreement, rather than a service contract. END NOTE.) Hausken stressed that Statoilhydro is not looking for a large contract. Rather, he said, his company wants to be involved in the Turkmenistan-to-Europe gas chain. To that end, the firm is opening an office in Ashgabat and is hoping to bring Statoilhydro's CEO to Ashgabat this summer to meet with President Berdimuhamedov and launch the office. A "COMMERCIALLY BASED" GAS SUPPLY CHAIN FEASIBILITY STUDY ¶4. (C) Hausken noted the feasibility study on a potential gas supply chain from Kazakhstan to Azerbaijan that is currently being carried out. He characterized the study as "basically useless" because it does not make economic sense to establish such a chain from Kazakhstan. During his meeting with Muradov, Hausken said, his company offered to carry out a "commercially-based" feasibility study for a gas supply chain from Turkmenistan to Europe. He said that Muradov became "quite heated" as the two discussed the possibility, but Hausken would not indicate whether Muradov actually seemed willing to consider the proposal. ASHGABAT 00000600 002 OF 002 ¶5. (C) COMMENT: Statoilhydro's idea of using an unusual approach to get a contract to drill on-shore, while intriguing, is dubious. As Chevron noted reftel, most companies making the scale of investment that would be needed to initiate almost any major on-shore project will want to have at least some basic extraction rights. Turkmenistan is unwilling to hand over the rights to "its" resources -- at least not until Turkmenistan's inability to satisfy its natural gas export commitments brings this issue to a point where it must be reconsidered. Unless Statoilhydro is willing to drill without those rights -- and it does not sound as if this is what the company has in mind -- it could be tough getting Turkmenistan to sign a contract, whatever the terminology used to describe that contract is. END COMMENT. CURRAN