TURKMENISTAN: GAZPROM REACHES AGREEMENT WITH

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000997 SIPDIS STATE FOR SCA/CEN, EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 07/31/2018 TAGS: PREL PGOV EPET RU CH TX SUBJECT: TURKMENISTAN: GAZPROM REACHES AGREEMENT WITH TURKMENISTAN -- BUT ON WHAT REMAINS UNCLEAR Classified By: Charge d'Affaires Sylvia Reed Curran for reasons 1.4(B) and (D). ¶1. (C) SUMMARY: Despite much hype in the Russian media that Gazprom has locked in its monopoly on Turkmenistan's gas, it appears that, during a July 25 visit to Turkmenistan, Gazprom CEO Alexei Miller reportedly reached agreement only on a pricing formula for Turkmenistan's natural gas exports in 2009, and on Gazprom financial involvement in overhauling and expanding Turkmenistan's trunk pipelines to Russia. Embassy contacts believe there has been no agreement reached as yet on prices, primarily because Gazprom may be having difficulty finding a netback formulation that Turkmenistan understands and is willing to accept. Likewise, while we continue to see movement toward expanding volumes on pipelines to Russia, we believe that any discussion of new, increased export commitments is premature, given Turkmenistan's still-limited production capacity. What this agreement does do, however, is to allow reprogramming of Turkmen capital from pipelines to increased production. END SUMMARY. ¶2. (U) During a July 25 visit to Ashgabat, Gazprom CEO Alexei Miller reportedly reached agreement with the Government of Turkmenistan on a pricing formula for Turkmenistan's gas beginning in 2009, as well as a new program of Gazprom involvement in Turkmenistan's hydrocarbon sector. Russia's "Kommersant" reported that elements of the wide-ranging agreements included: -- A pricing formula for natural gas that takes into account both the European price and the Ukrainian price, and then deducts a certain amount for transport fees. At current price levels, the 2009 price could run between $225 and $290 per thousand cubic meters (tcm) of natural gas, up from $150 per tcm in the second half of 2008. -- An agreement to expand the volume of the proposed Caspian littoral pipeline system, which is to include both rehabilitation of the old Central Asia Center-III (CAC-III) pipeline and construction of a new pipeline alongside, to handle an annual volume of 30 billion cubic meters (bcm) of gas, vice the 20 bcm agreed on during the May 2007 tripartite summit in Turkmenbashy. -- Agreement to either rehabilitate or build new trunk pipelines leading north from eastern Turkmenistan in order to accommodate larger natural gas volumes. (COMMENT: We assume the article is talking about the CAC-I, II, and IV pipelines, which we understand currently are at near-maximum capacity due to the pipelines' relatively poor condition, particularly in Uzbekistan. END COMMENT.) -- Gazprom's agreement to provide interest-free credit financing to expand pipelines and "undertake the facilities provision of gas fields in the country." -- Gazprom's agreement to build an office in Ashgabat and to help establish a branch of the Gubkin Oil and Gas University in Turkmenistan. However, there was no specific mention of volumes, either for 2009 or for out years. EU-TACIS: EXPORT VOLUMES TO INCREASE TO 80 BCM ¶3. (C) To date, there have been no official announcements on the agreement details, and local contacts so far have been unable to confirm the accuracy of Kommersant's details. EU-TACIS' well-connected advisor, Michael Wilson (please ASHGABAT 00000997 002 OF 002 protect),suggested that the Kommersant report is consistent with what he had been told was the latest status of the negotiations. He said that he was told that Gazprom sought during Russian President Medvedev's July 4-5 visit to get a Turkmen commitment to sell 100 bcm, but was told no. He suggested, however, that the two sides may have agreed to begin working toward an eventual arrangement to sell up to 80 bcm per year. Wilson also suggested that, as a result of this agreement, we will begin to see a rapid expansion of Russian commercial participation in Turkmenistan's upstream production. WINTERSHALL: PRICE REMAINS UNDECIDED BECAUSE OF NETBACK ¶4. (C) Pointing out that Gazprom, at least, would have much to gain by making the details of any agreement public, Wintershall country manager Cal Sandhu (please protect),who has proven to be a good source of news and views making the rounds in Turkmenistan's hydrocarbon circles, suggested that the Kommersant article may have overplayed the negotiation results. He acknowledges that Gazprom probably reached at least a partial agreement with Turkmenistan on funding upgrades for the Caspian littoral and CAC-I, II, IV pipelines connecting Turkmenistan to Russia, and some agreement on the means of determining the new price. However, he believes that the netback issue remains unresolved, not least because Turkmenistan's hydrocarbon authorities still do not understand netback pricing elements well enough to commit so quickly. Added to this, Sandhu suggested, even if the Russians agreed to give Turkmenistan interest-free loans, "nothing is ever free" -- especially with the Russians -- and Gazprom almost certainly will seek to reflect the high cost of servicing any loans made to Turkmenistan in its netback pricing. (NOTE: The Kommersant article estimated the amount of money Russia would lose by giving Turkmenistan interest-free loans could run $240-280 million per year. END NOTE.) ¶5. (C) COMMENT: Gazprom is clearly seeking to lock up its near-monopoly on Turkmenistan's natural gas. Sandhu's suggestion is logical that Gazprom would be trumpeting all details if it had reached agreement on the final price -- and gained any agreement from Turkmenistan to increase volumes. We believe Turkmenistan may have acceded to the pipeline proposal primarily because it needs to increase production volume quickly over the next few years (septels),and Russia's offer will allow Turkmenistan more capital for production. In the end, however, we believe that Turkmenistan recognizes the dangers of giving any one company (or country) too large a presence in any one sector. For that reason, Turkmenistan's authorities will continue to fight efforts by Russian companies -- particularly Gazprom -- to expand their activities in Turkmenistan's upstream, which remains the key to fulfilling any additional agreements to expand gas exports. END COMMENT. CURRAN