TURKMENISTAN'S HYDROCARBON SECTOR: THE

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000695 SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 05/22/2018 TAGS: PGOV PINR EPET EINV TX SUBJECT: TURKMENISTAN'S HYDROCARBON SECTOR: THE TECHNOCRATS VERSUS THE GENERALISTS, PART II REF: ASHGABAT 0488 Classified By: CDA Sylvia Reed Curran for reasons 1.4(B) and (D). ¶1. (C) SUMMARY: Technocratic and generalist participants in a U.S. Trade and Development Agency-sponsored study visit for officials from Turkmenistan's hydrocarbon sector offered different explanations for why Turkmenistan's oil company is facing declining production. The technocrats -- engineers from Turkmenistan's Turkmenoil state enterprise -- blamed the structure of Turkmenistan's hydrocarbon bureaucracy and deteriorating infrastructure, while the generalists -- an economist and legal expert from the State Agency for Management and Use of Hydrocarbon Resources -- attributed the problems to poor management and business practices. While both explanations are correct, the exchange demonstrates both the limitations of the two groups' experience and the value of cross-pollination in training. The State Agency participants also suggested that the prospects of their generalist boss, State Agency Executive Director Bayrammurat Muradov, are improving. END SUMMARY. ¶2. (C) A May 2-17 U.S. Trade and Development Agency-sponsored study visit for officials from Turkmenistan's hydrocarbon sector to the United States that focused on regulatory and legal issues of the oil and gas industry stimulated some informal and friendly debate on underlying reasons for low national crude oil production and possible remedies. The delegation included two officials from the State Agency for Management and Use of Hydrocarbon Resources, an official from Turkmengeology, two officials from the "Turkmenoil" state enterprise, and one from the "Turkmengas" state enterprise. An embassy FSN who accompanied the delegation (please protect),managed to capture some of the main points of the discussion between the "technocrats" (primarily from Turkmenoil) and the State Agency's "generalists." AGREEMENT ON THE PROBLEM: DECLINING PRODUCTION ¶3. (C) Delegation members broadly agreed that hydrocarbon production in Turkmenistan -- particularly of oil -- is low. While production of foreign oil companies holding production sharing agreements has increased in recent years, production totals nonetheless are barely maintaining the same level. (COMMENT: The Turkmengas participant, older and much more discreet than any of the other program participants, said little beyond stating that Turkmenistan is behind the mark in investing in and developing its natural gas sector, and stating that "there is not much value in gas stored sub-soil." While the problems in oil production may be more acute, the gas sector faces similar production challenges. END COMMENT.) TECHNOCRATS' EXPLANATION: PROBLEMATIC FUNDING ¶4. (C) Turkmenoil representatives claimed that Turkmenistan's petroleum sector still has not recovered from the negative effects of the sectoral restructuring and purges initiated in 2005 by former President Niyazov following the arrest of then-Deputy Chairman Gurbanmuradov (reftel). Particularly disastrous for Turkmenoil was a decision requiring Turkmenoil to sell all its crude oil to the Turkmenbashy Refinery for the rock-bottom price of 38,000 manats (around $2.7) per metric ton. According to the Turkmenoil representatives, Niyazov also mandated that all Turkmenoil operations should be funded through the central government, meaning that payments for even basic services or parts can be time-consuming. The cumbersome procurement and ASHGABAT 00000695 002 OF 003 decision-making process results in extended drilling times and deterioration of critical infrastructure. (COMMENT: All this seems to suggest that the recent sharp increase in gasoline prices, which we and others have attributed to both a wish to begin to decrease subsidies and increase conservation, may have been the result of inadequate oil recovery and, consequently, low gasoline production. END COMMENT.) GENERALISTS' EXPLANATION: POOR BUSINESS ¶5. (C) By comparison, the participants from the State Agency looked at the issue more broadly, arguing that the low state production is also a result of poor management and business practices in Turkmenistan's state-run enterprises. The two State Agency participants suggested that only privatized oil companies or joint ventures with advanced business mechanisms can succeed in Turkmenistan. Private ownership, they argued, allows more accountability, transparency, flexibility, and a fair reward system -- the very elements that state-owned companies lack. As an example, they cited the Mitro-Turkmenoil consortium, in which Turkmenoil produces oil under contract to Mitro, working in Hazar. Although Turkmenoil also operates adjacent fields independently, its production and environmental practices in those fields in which it is operating without Mitro's management is less impressive than that of the consortium of which it is a part. And, while the oil production of PSA holders overall is rapidly growing, the state-run industry is failing to produce enough crude to satisfy the demands of the Turkmenbashy refinery -- Turkmenistan's only modern refinery. The State Agency participants said outright that Turkmenistan cannot provide the investment on its own that the country needs to boost output. STATE AGENCY'S READ OF STATE OF PLAY OF TECHNOCRATS VS. GENERALISTS RIVALRY ¶6. (C) The State Agency representatives also told FSN that there are a number of rivalries in Turkmenistan's hydrocarbon sector: between the technocrats and generalists (reftel) and between experienced State Agency employees who had previously served in the State Agency's predecessor, the Competent Body, and the individuals that State Agency Executive Director Bayrammurat Muradov brought on board when the State Agency was established in March 2007. Of these tensions, the one that is the target of most speculation is the relationship between Deputy Chairman for Oil and Gas Tachberdi Tagiyev and Executive Director Bayrammurat Muradov. Stating that the personal relationship between Muradov and President Berdimuhamedov is very close -- State Agency personnel claimed that the president consults Muradov on matters beyond hydrocarbon-related issues because of his extensive financial background -- the individuals on the delegation believe that Muradov's stock is once again on the rise, that Tagiyev's departure from the hydrocarbon sector is just a matter of time, and that the president is biding his time to replace Tagiyev until Muradov is better read-in on hydrocarbon issues. (COMMENT: We caution, however, that this flavor-of-the-month speculation is in an ongoing state of play. Tagiyev was rumored to be on his way out during the summer and early autumn of 2007 and has survived to now, and Muradov is believed to have offered his resignation to the president in late January, but to have had his offer refused. END COMMENT.) ¶6. (C) COMMENT: The informal exchange observed during the USTDA oil and gas training demonstrates both the limitations of the thinking of both technocrats and generalists and the ASHGABAT 00000695 003 OF 003 value of cross-pollination in training programs. We suspect that such exchanges, which promote different lines of thinking, are more common under "neutral" training conditions than they are in normal work scenarios. In this case, the "correct" explanation for Turkmenistan's production problems is probably a combination of both explanations, suggesting that Turkmenistan faces a truly massive challenge -- it needs both to overhaul its infrastructure and restructure its hydrocarbon sector, as well as to promote personnel development -- if it is to succeed in meeting its very ambitious production targets. END COMMENT. CURRAN