TURKMENISTAN: SPECIAL ENVOY GRAY HEARS

C O N F I D E N T I A L SECTION 01 OF 04 ASHGABAT 000734

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E.O. 12958: DECL: 06/05/2018
TAGS: PGOV PREL EPET RS AJ TX
SUBJECT: TURKMENISTAN: SPECIAL ENVOY GRAY HEARS
TURKMEN-AZERI HYDROCARBON COOPERATION NEEDS NURTURING

REF: ASHGABAT 0722

Classified By: CDA RICHARD E. HOAGLAND: 1.4 (B),(D).


1. (C) SUMMARY: Both Deputy Prime Minister for Oil and Gas
Tagiyev and Hydrocarbon State Agency Director Muradov told
U.S. Special Envoy for Eurasian Energy C. Boyden Gray on June
5 Turkmenistan welcomes investment by U.S. companies and
promotes multiple export routes, including Westward across
the Caspian. Both Tagiyev and Muradov professed ignorance of
any Azeri/SOCAR desire to cooperate commercially with
Turkmenistan for a production pipeline that would allow early
gas from Turkmenistan to flow Westward, but we suspect there
is indeed more talk than they let on. However, we know there
is not yet full trust between the parties, and of equal
importance there is great pressure from Russia to prevent any
trans-Caspian linkage. The resolution of the disputed
mid-Caspian fields is a sensitive political question
involving face the two presidents will eventually have to
settle. In the meantime, we should do everything appropriate
and possible to facilitate a Turkmen-Azeri commercial
dialogue. END SUMMARY.


2. (C) Deputy Prime Minister for Oil and Gas Tachberdi
Tagiyev and Director for the State Agency for the Management
of Hydrocarbon Resources Bayrammurad Muradov met June 5 with
U.S. Special Envoy for Eurasian Energy Ambassador C. Boyden
Gray and Coordinator for Eurasian Energy Diplomacy Ambassador
Steven Mann to discuss Turkmenistan's hydrocarbon development
and export plans, and how the United States could help.
Tagiyev said that Western companies have much to offer
Turkmenistan in terms of technology and expertise. He noted
the frequent discussions the government has had with
Ambassador Mann in the past on the issue of Western company
participation and on pipelines, and that Turkmenistan indeed
promotes greater diversification of investors and export
routes. He added the government has also become more focused
on expanding educational opportunities for oil and gas
personnel, sending more students abroad for training and
education.

READY TO WORK WITH WESTERN FIRMS AND OTHERS


3. (C) Tagiyev said Turkmenistan is ready to work with
Chevron, British Petroleum (BP),and other Western firms, but
restricts extracting hydrocarbons onshore to only Turkmen
companies (with a few pre-existing exceptions). Foreign
companies are welcome to work offshore and to propose new
PSAs for Caspian blocks. Foreign service companies, however,
are welcome to work only in support of Turkmen onshore
projects, especially in seismology, recovery enhancement, gas
processing, and petrochemicals.


4. (C) In January 2009, Turkmen gas will be sold to all
customers at the European market price, Tagiyev said. The
Turkmen government is well aware that the European market
price for natural gas has reached as high as $450 per
thousand cubic meters (tcm). Currently, Turkmenistan is
selling its gas for $150 per tcm. The government remains
interested in the profit potential of liquefied petroleum gas
(LPG),fertilizers, and other petrochemicals, Tagiyev said,
and would welcome foreign investment.


5. (C) Gray suggested that Turkmenistan reconsider its
policy that only domestic companies develop hydrocarbon
fields onshore. Would it help, he asked, if companies took

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on more of the legal risk, and also shared more of the
benefits? Tagiyev dismissed this possibility by noting
Turkmenistan has 130 years of experience extracting oil and
gas and can handle onshore exploitation by itself. (COMMENT:
While this is indeed current policy, we continue to believe
there is internal debate on this issue. END COMMENT.)


6. (C) Tagiyev said that when Turkmenistan sold its gas for
$45 per tcm, increasing production was not a necessity. With
an increasing number of pipeline routes to facilitate the
country's export agreements, the government has the power to
raise prices and increase production whenever it wants. Gray
agreed that higher prices were good, and suggested
Turkmenistan continues to have an opportunity to export
natural gas to the west. Tagiyev reiterated that
Turkmenistan sells its gas at the border, and that this
policy protects it from "political controversy." Contracts
signed with Russia, Iran and China have not caused problems
for Turkmenistan.

"THE AZERIS DIDN'T SAY IT TO US!"


7. (C) Special Envoy Gray noted that when he had met on June
2 in Baku with officials from Azerbaijan's state oil company,
SOCAR, they had indicated interest in buying Turkmenistan's
gas at Turkmenistan's maritime border. Tagiyev responded he
had heard nothing like this when he had been with President
Berdimuhamedov in Baku in May. Gray suggested that perhaps
the United States could foster further conversation between
SOCAR and the Turkmen government.

STABILITY OF WESTERN CONTRACTS VS. RUSSIAN REALITY


8. (C) Mann noted that when a deal is signed with a Western
company, the contract is air-tight, and the rule of law helps
assure that participants stick to the contract. However,
when a contract is signed with a Russian company, the
contract is only as solid as the will and intention of the
Russian government. Current Russian legal pressure against
TK-BNP is an example of that reality. Tagiyev dismissively
said that was an internal Russian issue. Mann underscored
that this was precisely the problem: because the Russian
government is indivisible from the Russian energy industry,
all legal disputes are doomed to become "internal issues."


9. (C) Tagiyev shrugged that Turkmenistan has experienced
no such problems in the past with its long-term contracts
with Russia, although sometimes pricing disputes have arisen
and needed to be resolved. Nonetheless, diversification of
export is still a priority, and multiple pipelines are still
under discussion. He said the Chinese gas pipeline project
is to be completed in 2009, and the contract calls for
delivery of 30 bcm per year to China, although initial
volumes will be less. He reemphasized Turkmenistan plans to
sell its gas in 2009 to all customers at European market
prices, including to the Chinese.


10. (C) Special Envoy Gray raised the possibility of
President Berdimuhamedov making another visit to the United
States for the UN General Assembly in September and suggested
this would be an opportunity for the president to travel to
other U.S. cities to meet with senior executives from energy
companies. Tagiyev was receptive and agreed to work with the
Foreign Ministry and the Embassy to develop a possible
itinerary.


ASHGABAT 00000734 003 OF 004


OIL AND GAS CONFERENCES: "MINI-TIOGES" AREN'T AS SUCCESSFUL


11. (C) Tagiyev turned to Ashgabat's Oil, Oil Extraction,
and Petrochemical Exhibition and Internation Conference set
to open on June 6. Sixty-seven companies registered to
participate, and 54 of those would be exhibitors at the
exhibition. The fourth and final conference of the year in a
few months would focus on petro-geology. He said the
November 2007 TIOGE conference had been considered a great
success, and a decision had been made to hold four
mini-conferences in the course of 2008. He suggested,
however, that the mini-conferences had been disappointing,
and that fewer conferences would be organized next year.
(COMMENT: The Russian event planner contracted for the four
"mini-TIOGEs" has publicized them neither broadly nor in a
timely manner. The majority of the exhibitors at the current
conference are Russian, Chinese, and Turkish. END COMMENT.)

STATE OF PLAY WITH WESTERN COMPANIES


12. (C) Special Envoy Gray and Coordinator Mann had an
immediate follow-on meeting with State Agency Director
Muradov. He updated in very general terms the state of play
with various U.S. companies. ConocoPhillips/Lukoil
negotiations continue for off-shore blocks, and he still
hopes to reach a mutually beneficial agreement. He noted
companies work hard to make money for their shareholders, but
Turkmenistan also must try to defend its interests. The best
course is to create transparent agreements, which do not need
to be reopened in a year, unlike what has happened to some
foreign investors in Kazakhstan. Muradov said BP has
submitted its proposal for deep gas, and in a few days, the
next round of negotiations will take place. He announced
Turkmenistan will sign a confidentiality agreement with
Marathon the week of June 9 and will start concrete
discussions with them, too. He noted that Chevron has
submitted a specific proposal to work subsalt onshore.

PURSUING COMMERCIAL POSSIBILITIES WITH THE AZERIS


13. (C) Mann said Turkmenistan would reap long-term benefits
by having a major company like Chevron work on-shore with
subsalt gas. He said there are also immediate practical
possibilities in another area, because SOCAR officials in
Baku are ready to purchase existing, off-shore Turkmenistan
gas and transport it through a connector pipeline they would
build, if not finance. The task for all of us over the next
2-3 months, said Mann, is to see how this could be turned
into a specific proposal.


14. (C) Muradov professed surprise and said it appears the
Azeris are saying one thing to the United States and
something different to Turkmenistan. He said he would not go
into detail about discussions with the Azeris since they were
not present, but noted if a customer wants something from
Turkmenistan, they should make a direct proposal. Muradov
said Turkmenistan openly invited the Azeris to participate,
like any other customer, but the reply was simply they "would
think about it."


15. (C) Referring to President Berdimuhamedov's statement
that the issue of delimitation should not get in the way of
commercial possibilities, the Charge said both sides should
see what possiblities exist apart from the disputed
Serdar/Kyapaz field. If there are existing fields producing
gas clearly in Turkmen territory, those could be part of a

ASHGABAT 00000734 004 OF 004


joint commercial development. Alluding to the importance of
settling the Serdar/Kyapaz dispute with Azerbaijan, Muradov
pointed out Azerbaijan is already pumping oil from
Osman-Omar/ACG, another disputed field Turkmenistan has
claimed. Claiming to want mutually beneficial cooperation,
Muradov said that postponing the resolution of the disputed
fields directly benefits Gazprom and Iran.


16. (C) Special Envoy Gray said Turkmen gas and Azeri gas
transited west to Europe would make a good package. He
offered that the EU would be interested in the gas, but
probably does not know how to put together the deal. The
United States would be willing to facilitate this effort.
The United States cannot arbitrate the disagreement between
Turkmenistan and Azerbaijan over the disputed fields, but can
offer advice and provide Turkmenistan with recommendations
for legal consultants. Gray said an energy confrence in
Brussels in September would provide an opportunity for
discussion for the Europeans and the countries in this
region.


17. (C) COMMENT: While Tagiyev said absolutely nothing new,
he was the most open and talkative we have ever seen him.
Both Tagiyev and Muradov professed ignorance of any
Azeri/SOCAR desire to cooperate commercially with
Turkmenistan for a production pipeline that would allow early
gas from Turkmenistan to flow Westward, but we suspect there
is indeed more talk than they let on. However, we know there
is not yet full trust between the parties, and, of equal
importance, there is great pressure from Russia to prevent
any trans-Caspian linkage. The resolution of the disputed
mid-Caspian fields is a sensitive political question
involving face the two presidents will eventually have to
settle. In the meantime, we should do everything appropriate
and possible to facilitate a Turkmen-Azeri commercial
dialogue. END COMMENT.


18. (U) Special Envoy Gray and Coordinator Mann did not have
an opportunity to clear this cable.
HOAGLAND