STATE AGENCY'S MURADOV TELLS SENATOR LUGAR

C O N F I D E N T I A L SECTION 01 OF 04 ASHGABAT 000061

SIPDIS

SIPDIS

STATE FOR SCA/CEN, H, EEB (AMB. STEVE MANN)
PLEASE PASS TO USTDA DAN STEIN AND TO SENATOR LUGAR'S STAFF
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 01/14/2018
TAGS: PGOV PREL EPET TX
SUBJECT: STATE AGENCY'S MURADOV TELLS SENATOR LUGAR
TURKMENISTAN SEEKS "HARMONY" IN PRICE-SHARING ARRANGEMENTS

REF: ASHGABAT 0049

Classified By: Charge Richard E. Hoagland for reasons 1.4(B) and (D).


1. (C) SUMMARY: Executive Director of Turkmenistan's State
Agency for Management and Use of Hydrocarbon Resources,
Bayrammurat Muradov, told Senator Richard Lugar on January 11
Turkmenistan needs energy revenue to fund its development,
and increasing foreign direct investment in Turkmenistan's
hydrocarbons sector and promoting pipeline diversification
are the leadership's top priorities. Muradov said the
Turkmenistan government welcomes foreign involvement under
production sharing agreements (PSAs) in the Caspian Sea, even
though the government would like to train Turkmenistan
citizens eventually to manage offshore operations. In
looking at cost-sharing arrangements around the world,
including in Kazakhstan's Kashagan fields, Turkmenistan has
concluded that giving either side an excessive share of the
profits hurts a project in the long term and instead is
looking for "harmony." Muradov also acknowledged that
Turkmenistan is getting a relatively low price for its gas
from Russia, but stressed that Turkmenistan's alternatives
are limited, since no European companies are seeking to
negotiate a higher at-the-border purchase price for
Turkmenistan's gas. Although none of this is especially new,
Muradov's forthright presentation demonstrates a willingness
to consider possible new options as the authorities seek to
work through the very complex decisions with which they are
being presented, including on price-sharing arrangements and
delivery options. END SUMMARY.


2. (C) Senator Richard Lugar (R-IN) met January 11 with
Executive Director of Turkmenistan's State Agency for
Management and Use of Hydrocarbon Resources Bayrammurat
Muradov. The nearly one-hour meeting was extremely cordial
and straightforward. Muradov received the delegation with
great respect, and was deferential to Senator Lugar
throughout the meeting.


3. (C) Lugar told Muradov that he had earlier in the day
discussed agriculture and energy with President
Berdimuhamedov (septel). Lugar said that he had a good sense
of the President's desire to cooperate with many countries.
He told Muradov he had also mentioned to Berdimuhamedov that
President Saakashvili of Georgia was very pleased that the
president would visit Tbilisi for the upcoming presidential
inauguration -- and about the chance to discuss natural gas
in Georgia. Lugar had also discussed with Berdimuhamedov the
need for a Trans-Caspian pipeline (TCP) or other transport
system for Turkmenistan's gas and the responses of countries
wanting to import that gas. He asked Muradov how the United
States could assist Turkmenistan's efforts to develop its
energy sector.

TURKMENISTAN'S PRIORITIES: DEVELOPING THE CASPIAN BLOCKS


4. (C) Noting that energy has become more politics than
business, Muradov said energy is the basis for Turkmenistan's
development. The State Agency's objective is to attract
foreign direct investment for Turkmenistan's 32 Caspian Sea
blocks needed for that development. The U.S. firm, Western
Geco, in 2000 had concluded that there are reserves of 18
billion barrels of oil in the Southern Caspian Sea. While
there has been an increase in interest in working in
Turkmenistan, including from U.S. companies, many of those
companies are looking for a quick profit and have bid on
onshore projects, Muradov said. "We're trying to attract
offshore investment. This is very important not just for
regional but also for global energy security." Muradov

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further noted, "We want our investors to profit because that
will guarantee new export routes for us." (COMMENT: This,
and Berdimuhamedov's similar comments (septel),indicates an
evolution in Turkmenistani understanding of how a
trans-Caspian pipeline could eventually be built. END
COMMENT.)

PROMOTING PIPELINE DIVERSIFICATION


5. (C) Muradov noted that President Berdimuhamedov had
ordered an international audit of Turkmenistan's hydrocarbons
reserves (reftel). "We're young, and not always effective,"
Muradov said, adding Turkmenistan needs advice from experts.
As has been said at the highest levels and in numerous fora,
diversification of hydrocarbons export routes is one of the
leadership's top priorities. The lack of transit guarantees
disadvantages both producers and consumers, and the State
Agency wants to be able to provide such guarantees for energy
producers. Muradov said that these are Turkmenistan's
priorities, and the government welcomes positive,
constructive advice.

BALANCING FOREIGN INVOLVEMENT AGAINST GOING IT ALONE


6. (C) When Senator Lugar asked what role Turkmenistan sees
foreign companies playing in the hydrocarbons sector, Muradov
responded in the offshore blocks Turkmenistan seeks
partnerships with foreign companies under production sharing
agreements (PSAs). While the government wants to train
Turkmenistani citizens eventually to manage offshore
operations, it is also asking whether, in light of
globalization, Turkmenistan should do everything itself. The
government has to proceed carefully, trying to decide what to
do itself and what to contract to foreigners. This is
another area where Turkmenistan would welcome advice.


7. (C) Onshore, Muradov continued, Turkmenistan has been
working with foreign companies primarily under service
contracts in projects being worked by Turkmenistan's state
firms. However, production is becoming tougher, requiring
advanced science and technology. Responding to a question
from the senator, Muradov confirmed that the firm
Schlumberger works both onshore and offshire in Turkmenistan
through service contracts. He, he added, Turkmenistan,
following market principles,wants to increase the number of
foreign service companies to prevent over-dependence on only
one, like Schlumberger.

TURKMENISTAN LOOKING FOR HARMONY IN PROFIT-SHARING


8. (C) Noting that the Kazakh authorities are negotiating
with six foreign companies to increase the share by national
oil companies in the Kashagan project, the senator asked for
Muradov's thoughts on cost-sharing arrangements. Muradov
replied that cost-sharing arrangements is one of the most
painful issues that the State Agency has to deal with. Based
on what is happening around the world, including at Kashagan,
Turkmenistan has concluded that giving either side an
excessive share of the profits in the long term hurts a
project. "We need the Chinese principle of harmony, and it
can be difficult to find the right formula for harmony. If
both sides understand this is what we are looking for, it is
a good basis for a contract." Muradov added that the State
Agency has also seen that foreign companies active here can
accrue profits beyond what they earn through their daily
operations. For example, the fact that PSAs allow companies
to put their reserves on their books allows them to increase
their share prices, as recently happened with UK firm Burren
Energy.

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9. (C) Muradov asked Senator Lugar for his thoughts on the
situation in Kashagan and on whether it is better to use a
PSA arrangement or the lease system used by the U.S.
Department of the Interior's Minerals Management Service.
Drawing on the situation in Venezuela, the senator noted that
a number of companies, including from the United States, had
contracts there. As time has gone on, President Chavez has
become dissatisfied with the government's share, with the
result that some of the companies previously active there
have left. For the time being and with current oil prices,
this has meant more money for President Chavez and his social
projects. However, some also believe that the lack of proper
servicing of the oil fields will ultimately lead to the
fields' permanent impairment.


10. (C) Lugar said, with that example in mind and looking at
Kashagan, it is obvious the parties involved entered the
profit-sharing agreements that they did because the oil in
Kashagan is very difficult to get to. As Muradov himself had
observed, the costs of development there have risen to
astronomical levels, so Kazakhstan is negotiating with the
six major firms involved in the project to extract the
revenue which it thinks it should have. But it has also
passed legislation which could allow it just to take
ownership of the project. Senator Lugar suggested a similar
situation is likely to happen in many other countries --
though not in Turkmenistan -- because the stakes are high and
the profit-sharing problems Kazakhstan is facing with its
partners are difficult to resolve. "The best course," he
concluded, "may be something like you are trying to achieve
here."

TURKMENISTAN IS CAUGHT IN GAZPROM'S PRICING NET


11. (C) Noting that, although Turkmenistan has had long
discussions with Russia over gas prices, it still is
receiving only about half of what Europeans are paying for
Turkmenistan's gas, Senator Lugar asked how Turkmenistan
determines its gas prices. Muradov responded that, although
no country wants to lose profits and Turkmenistan in
principle would be willing to conduct negotiations for higher
prices directly with the consumers, no European company or
country has said that it is willing to purchase gas at
Turkmenistan's border. And, while it is possible in theory
to discuss higher prices, nobody has offered any concrete
proposals. It is also important to fulfill Turkmenistan's
prior commitments. Consequently, Turkmenistan needs to find
"peaceful and calm" solutions to such issues -- something
that the country is doing under President Berdimuhamedov --
and Russia is reacting with understanding. Although it would
make Muradov's own life easier if a company would be willing
to pay two times the price Turkmenistan currently is
receiving from Gazprom at its border, the lack of alternative
delivery systems means that Turkmenistan must stick with its
current mechanisms.


12. (C) Muradov stated Turkmenistan takes its commitments
under the Energy Charter seriously. To that end, President
Berdimuhamedov has proposed introducing a UN resolution
focused on promoting trunk pipeline security. Muradov hoped
that if the UN adopts the pipeline security resolution,
Turkmenistan can diversify, which, he claimed, "is one of the
goals of democracy."


13. (C) Charge told Muradov he had just made a perfect
argument for why Turkmenistan should become a partner in the
upstream, midstream, and downstream ownership, because
control of the infrastructure gives Turkmenistan the

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opportunity for profit on its own terms. Muradov responded
that such a situation -- so far -- is not on the near
horizon, and Turkmenistan cannot promise something it cannot
deliver. Time will show if the situation will change, but
"I'm not a politician, and I'm trying to do it the way it
should be done. Politics are different for us." Thanking
the senator again for his visit, Muradov hoped that he would
visit more frequently.


14. (C) COMMENT: As usual, Muradov was an up-front, open
interlocutor. The delegation was especially impressed by
Muradov's willingness to ask for assistance and advice. It
was clear from Muradov's presentation that much is in flux in
Turkmenistan's hydrocarbon sector as the authorities seek to
work through the very complex decisions with which they are
being presented, including on price-sharing arrangements and
delivery options. END COMMENT.


15. (U) CODEL Lugar did not have an opportunity to clear
this cable but authorized its transmission.
HOAGLAND