TURKMENISTAN: GAZPROM CEO LEAVES ASHGABAT

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000830

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E.O. 12958: DECL: 07/07/2018
TAGS: PREL EPET RS TX
SUBJECT: TURKMENISTAN: GAZPROM CEO LEAVES ASHGABAT
WITHOUT RESULTS

REF: ASHGABAT 0819

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


1. (C) SUMMARY: In a last-minute effort to reach at least a
general agreement with the
Government of Turkmenistan on 2009 gas prices and volumes
before Russian President Medvedev's July 4 visit, Gazprom CEO
Alexei Miller met with President Berdimuhamedov on July 1 --
but to no avail. Turkmenistan's leaders apparently stuck
firmly not just to their insistence on higher prices, to be
negotiated annually, but also to their wish to avoid strict
delivery obligations. Without these commitments, Gazprom is
unwilling to move forward on rehabilitation and construction
of pipelines that would make possible the increased delivery
volumes that Gazprom wants. While time is on Turkmenistan's
side, pressure is mounting on Turkmen authorities to
demonstrate that they can substantially boost production to
meet increased foreign demand. Failure to reach at least an
agreement in principle on all of these closely interlinked
issues will increase pressure on Turkmenistan to identify and
expand its work on export alternatives beyond the 2009
opening of the Turkmenistan-China pipeline. END SUMMARY.


2. (SBU) With time before Russian President Medvedev's July
4 visit to Ashgabat running out, Gazprom CEO Alexei Miller
met with President Berdimuhamedov July 1 in an effort to
reach agreement with the Government of Turkmenistan on 2009
gas prices, as well as on larger volumes of gas sales. While
the president reportedly stated that Gazprom "was and remains
Turkmenistan's leading strategic partner," the two sides did
not reach agreement on either of these two issues -- or on
the issue of pipeline rehabilitation, which may also be
complicating negotiations.


3. (SBU) According to Moscow's "Vremya Novostey," the main
disagreement is not over price, but over the principle of
long-term guarantees of deliveries. Turkmenistan wants to
get a price computed on "net back" from the European price --
but to be able to renegotiate annually the price it receives
from Gazprom. Gazprom reportedly is prepared to agree to
higher prices, but wants a real long-term contract, including
a price formula and strict delivery obligations on
Turkmenistan's part. Gazprom does not want to be caught out
on the losing end if Turkmenistan is not able to produce
enough gas beginning in 2009 to meet its other export
contracts and wants to be sure that any cuts made to meet
guaranteed deliveries to China of 30 bcm per year will not be
made out of its alotment. (COMMENT: Post shares Gazprom's
skepticism about Turkmenistan's ability to expand gas
production enough to meet its increased delivery commitments
in 2009. END COMMENT.) Dspite Russia, Kazakhstan and
Turkmenistan signed an agreement in December 2007 to
rehabilitate the now-unused Central Asia Center-III pipeline
along the Caspian shore and build a new pipeline alongside
(together forming the new Caspian littoral pipeline),
construction has not started, reportedly because Russia wants
Turkmenistan to identify a supply source for the pipeline
before construction begins.


4. (SBU) This issue is also tied to the larger issue of
pipeline rehabilitation and export volumes. Russia needs
increased volumes of Turkmenistan gas to offset the limits of
its own gas production. But even if the two sides are able
to agree to increase gas sales beyond their current level of
approximately 50 billion cubic meters (bcm) per year, the

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agreement is unlikely to be implementable until the main gas
pipeline system running between Turkmenistan and Russia --
the Central Asia Center I, II and IV pipelines (CAC-I, II and
IV) -- is rehabilitated and the Caspian littoral pipeline is
opened. Rehabilitation of the pipelines has been a topic of
negotiation for months, and post believes that the main
pipeline system is currently carrying all it can. Although
Turkmenistan is likely willing to fund improvements to the
in-country portion of the pipeline system, the bone of
contention may be funding for the Uzbekistan portion of the
system, which experts here have suggested is most in need of
repair. Uzbekistan simply does not contribute enough gas to
the system to make the investment worthwhile for Tashkent,
while Turkmenistan -- the only other upstream user of the
pipeline -- maintains a "gas sales at the border" policy that
saddles Gazprom with the responsibility of getting the gas
from Turkmenistan's border to Russia. And Gazprom is
reluctant to take on these expenses unless it can be sure
that Turkmenistan is willing and able to fulfill long-term
commitments that would justify paying the costs of the
pipelines' rehabilitation.


5. (C) COMMENT: Many looked to Medvedev's visit for an
indication that Russia's hydrocarbon-dominated relationship
with Turkmenistan is on track as warming relations between
Turkmenistan and Azerbaijan increase the possibility of an
eventual non-Russian alternative route between Central Asia
and Europe. The two sides' inability to reach at least a
general agreement in time for the Medvedev visit will
probably be viewed as a setback for Gazprom. Time is largely
on Turkmenistan's side, given Russia's mounting need to
supplement its own gas production, but Turkmen authorities
are facing mounting pressure to demonstrate that they can
boost production to meet mounting foreign demand. Failure to
reach at least an agreement in principle on all three of
these closely interlinked issues will increase pressure on
Turkmenistan to identify and expand its work on export
alternatives beyond the 2009 opening of the
Turkmenistan-China pipeline. END COMMENT.
HOAGLAND