TURKMENISTAN'S PETROLEUM LAW UNDER REVISION

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000697

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E.O. 12958: DECL: 06/02/2018
TAGS: PGOV PREL EPET TX
SUBJECT: TURKMENISTAN'S PETROLEUM LAW UNDER REVISION


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


1. (C) SUMMARY: Turkmenistan's hydrocarbon agencies are
working on changes to the country's Petroleum Law. One set
of changes would seek to address major complaints by
subcontractors in the hydrocarbon sector, exempting them from
paying value-added and many other taxes, and making it easier
for hydrocarbon subcontractors to function in Turkmenistan.
The other set of changes would be to expand contract formats
from the current selection of joint ventures and production
sharing agreements to include risk sharing agreements and --
possibly -- guaranteed production contracts. The current
proposals to the Petroleum Law indicate a possible move on
the part of Turkmenistan's government toward a more open
investment regime. However, it is not yet clear whether
these changes -- and contractual formats -- will also be
applied to onshore gas fields. END SUMMARY.


2. (C) According to a source at Turkmenistan's State Agency
for Management and Use of Hydrocarbon Resources, the
country's Petroleum Law is undergoing revision. Those
revising the law are focusing on regulating operations of
petroleum subcontractors and introduce new oil and gas
contract formats. It is unclear when the revised law will be
ready for review -- and approval -- by Turkmenistan's
parliament.

WHY CHANGE?


3. (SBU) The official said that the revisions were prompted
by the influx of proposals for cooperation from foreign
companies that the State Agency received last year. In
addition to those proposals, the State Agency has also been
studying research papers on various contract structures.

PETROLEUM SUBCONTRACTORS WOULD GAIN ADVANTAGES


4. (SBU) Proposed changes to the law aim to rid the existing
gap in the legal treatment of petroleum subcontractors and
their activities. According to the State Agency official,
changes would subject subcontractors only to the 20% income
tax, while exempting them from paying other taxes, such as
the 15% value-added tax. By comparison, services in other
sectors that are not solely related to petroleum would be
subject to all applicable taxes.


5. (SBU) It is still unclear whether subcontractors'
operations will be primarily regulated by the Petroleum Law
and therefore be overseen by the State Agency. However, the
State Agency source indicated informally that the State
Agency would propose that all subcontractors follow
Turkmenistan's "Rules and Regulations for the Development of
Hydrocarbon Fields," sometimes referred to as petroleum
operations rules. The operations rules were adopted in 1999
for production sharing agreement operators/contractors and
govern all stages of petroleum activities. The operations
rules also require companies to obtain permits from the State
Agency for geophysical surveys, well drilling, well
completion, well workover operations, offshore construction
and abandonment.

TYPES OF CONTRACTS


6. (C) The current draft Petroleum Law provides for four
types of contracts: the production sharing agreement, Joint
Venture/Joint Operations Agreement, both of which are already
recognized within Turkmenistan's current Petroleum Law, and a
new type of contract, the Risk Service Contract. The Risk
Service Contract is already used in Turkmenistan, but would

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be governed by the Petroleum Law.

JOINT VENTURES


7. (SBU) Although this model was one format recognized in
the Petroleum Law of 1996, Turkmenistan presently does not
have any petroleum joint ventures. Turkmenistan sees joint
ventures as a good vehicle for training its petroleum
personnel. In addition, it can provide necessary capital for
increasing production. The new law would allow the State
Agency, Turkmenoil, Turkmengas and other state enterprises to
become joint venture partners. The Law on Foreign Investment
in Turkmenistan requires foreign partners to have at least a
20% share in a joint venture.

RISK SERVICE COTNRACTS


8. (SBU) Risk service contracts require the contractor to
finance exploration and development of petroleum fields. If
exploration is a success, the contractor will be entitled to
a profit calculated as a percentage of petroleum sales
revenue minus the contractor's costs. Risk service contracts
are similar to production sharing agreements, but the risk
service contracts share profits, rather than petroleum.

OTHER FORMATS UNDER CONSIDERATION


9. (C) Although not strictly an risk service contract, the
State Agency is also planning to propose an addition of a
guaranteed production contract. The contractor would
undertake to produce a certain tonnage of oil or pay a fine
for the oil not delivered. (COMMENT: The source at the
State Agency did not specify how such services would be
rewarded, but the most likely solution would be for such a
reward to be focused on the crude produced in excess of the
contracted volume. END COMMENT.) These contracts are most
likely to be used for fields with depleting oil reserves,
such as those in Balkan Province, located in western
Turkmenistan.


10. (C) COMMENT: Several government agencies are involved
in the review of the Petroleum Law. Although the State
Agency, as the entity responsible for implementing the
Petroleum Law, takes the lead in the process, some of the
Agency's proposed amendments, such as those for Profit
Sharing Agreements, have been rejected. The current
proposals to the Petroleum Law indicate a possible move on
the part of Turkmenistan's government toward a more open
investment regime. However, it is not yet clear whether
these changes -- and contractual formats -- will also be
applied to onshore gas fields. END COMMENT.
CURRAN