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

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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