TURKMENISTAN: U.S. ENTREPRENEUR AWARDED CONTRACT

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000154

SIPDIS

STATE FOR SCA/CEN, EEB
PLEASE PASS TO USTDA DAN STEIN
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 01/30/2019
TAGS: PREL EPET ESTH TX
SUBJECT: TURKMENISTAN: U.S. ENTREPRENEUR AWARDED CONTRACT
FOR OIL CLEANUP PROJECT

REF: 07 ASHGABAT 968

Classified By: Charge d'Affaires a.i. Richard Miles. Reasons 1.4 (B) a
nd (D).


1. (C) SUMMARY: Due to President Berdimuhamedov's interest
in cleaning up oil pollution located around the Avaza Tourist
Zone on the Caspian Sea, an Amcit businessman has concluded a
contract for cleaning up oil spills -- contingent, however,
on a successful demonstration that his technology can do the
job. Estimates for revenues from the sale of the recovered
oil are USD one billion. The businessman estimates that this
job could keep him busy for the rest of his life since it
will take at least 20 years to clean up such spills all over
the country. It took him about 18 months to get the
contract, after endless presentations and contract
negotiations. Oil and Gas Ministry officials did not
understand how to analyze contracts, and demands for bribes
at the State Commodity and Raw Materials Exchange ranged from
USD 10,000 to USD 220,000. His insights provide a snapshot
of what it takes to conclude contracts in Turkmenistan. END
SUMMARY.

LARGE PROFITS TO BE MADE FROM RECOVERABLE OIL


2. (C) An Amcit businessman said in a meeting on January 29
that the Ministry of Oil and Gas approved his proposal to
clean up oil spills located around the coastal town of Hazar
in Balkan province. However, the contract is contingent upon
a successful demonstration of an oil spill cleanup. If the
demonstration cleanup proves successful, the Ministry will
award the company with a contract for as much work as the
company can handle. The Amcit estimates that it will take
over 20 years to clean up various pools of spilled oil around
the country, which contain billions of tons of recoverable --
and sellable -- oil. The exact amount is difficult to
estimate without further testing, but within ten years, he
estimates that this project will generate USD one billion.
His profit estimates through 2012 are: Government of
Turkmenistan - about USD 71 million, and his company - about
USD 98 million (assuming oil is selling at USD 60 per barrel
on the world market).

HOW DID THE OIL LAKES FORM?


3. (C) Following a year of negotiation, former Minister of
Oil and Gas, Bayramgeldi Nedirov, signed this contract in
July 2008. The initial site is located near the Nobel Oil
Field, northQhe city of Hazar (formerly Cheleken) which
operated from 1890 until 1950. Numerous pools dot the
landscape in the Galkynysh district, from the Nobel Oil
Field, arcing east of town and then down to the "Hazar Oil
Lake" located approximately seven kilometers south of town on
the Caspian Sea coast. The Amcit explained that at the time
of this field's operation, workers drilled for oil until it
came gushing out, causing millions of gallons to be spilled.
The fields were also improperly capped when drilling stopped.
Nowadays, open pools of oil remain all over the area,
covering many tens of square kilometers, which have over time
mixed with sand and thickened from evaporation. Photos of
the crude oil pools show that underneath a crust of sandy
dirt, sand and oil have mixed into a tar-like substance,
which the Amcit claims is comprised of about 50 percent oil.
He claims his equipment can remove approximately 95 percent
of the oil and convert it to usable crude oil. His company's
method to separate the oil, water, and sand is a complex
process by which the sludge is liquified, main ingredients
are separated via centrifuge, and then the usable crude is
collected.


ASHGABAT 00000154 002 OF 003


AVAZA TOURIST ZONE BRINGS OFFICIAL INTEREST TO THE AREA


4. (C) The Amcit estimates that cleanup of the Hazar Oil
Lake alone will take two years, a priority for the Ministry
because of its location on the Caspian Sea, an area of great
focus for the government because of its desire to develop the
Avaza Tourism Zone (reftel). The lake is also a solid test
case to prove the capabilities of this technology since the
oil in this lake has essentially turned into cement after so
many years of evaporation and mixture with sediment. It also
contains decades of ancient raw sewage, so the company must
still consider the process by which it will neutralize the
facility's output to make it safe. The Hazar Oil Lake
cleanup project will create about 100 jobs for Turkmen and 20
expatriate staff. The company will build a USD three million
desalinization plant at the Hazar Oil Lake site over the next
year, as a way to foster good relations with city officials.
The desalinization plant will eventually also provide clean
water for Hazar. After plant construction is completed, the
company will separate the oil, water, and sand during a
one-month test phase, during which he expects to recover
3,000 tons of crude oil.

POTENTIAL FOR THIS WORK IS ENDLESS, ALSO IN THE REGION


5. (C) He also said that companies are still drilling for
oil in the Goturdepe area -- located further inland in Balkan
province -- and additional "liquid lakes" that can be cleaned
up are forming all the time. Simonov Lake, which used to
function as a sturgeon breeding ground outside of
Turkmenbashy, is a small project compared to other sites
around the country with an estimated 200,000 tons of oil.
The company expects that the BBC will shoot footage at the
Hazar site that will be used to make a documentary. The
company hopes that this will generate interest in this
company's services, which it can then export to countries
such as Kazakhstan and Azerbaijan.

BUSINESS CLIMATE: NOT SO GOOD


6. (C) The Amcit reported that the State Commodity and Raw
Materials Exchange, which has to approve all contracts
between Turkmen ministries and agencies and foreign
companies, held the contract up for five months because his
company would not pay bribes. He also reported that State
Commodity and Raw Materials Exchange officials demanded
bribes ranging from USD 10,000 to USD 220,000, until the
Minister of Oil and Gas stepped in and -- in the hallways of
the Exchange -- demanded to know what was happening with this
contract and what was holding it up. He shared a list of
lessons learned:

-- It is important that your project be worthwhile, and that
it will present no risk -- financial or otherwise -- to
Turkmenistan. (NOTE: This company is supplying all of the
initial investment funds, totaling $35 million, which it has
privately raised. END NOTE.)

-- The company has found that their local lawyer, who the
Amcit describes as having "good connections in government"
due to longstanding relationships with key individuals, an
indispensable part of the project.

-- Turkmen government officials display alternating qualities
of naivete (in believing the financial plan as presented) and
disbelief (in what the technology can do). For example, the
Turkmen accepted the estimated profit figures without
questioning them, but because they don't understand the
technology -- regardless of the company's many site
testimonies from all over the world -- this agreement is

ASHGABAT 00000154 003 OF 003


simply a contract and not a production sharing agreement
until the company can prove that it can do the job of
recovering oil. Curiously, the Turkmen also made sure during
the negotiations that the Amcit's company would make enough
profit.

-- It was critical to the project's approval that technical
experts from the Ministry and the Institute of Oil and Gas
developed a positive view of the project's potential because
Ministry officials expected to get their stamp of approval
before the project would move forward.

-- The Amcit presented the project to the Ministry just a few
days after the president told the Minister to get the oil
spills cleaned up, so the company benefited from being in the
right place at the right time. This example also illustrates
that when the President says jump, the ministers do just that.

-- The Amcit said that companies shouldn't "assume that they
(the Turkmen) will understand, and you should know how much
explanation is required" in terms of contract analysis and
technical issues. He specifically recommended that Turkmen
officials get training in project evaluation, net present
value, and internal rate of return, so that they have skills
that will give them the confidence to conclude deals in a
timely manner.

-- No one in the Turkmen government wants to be held
responsible for making the wrong decision. This contributes
to the delay in concluding contracts, because officials keep
passing the buck up the food chain until someone feels that
he has the authority to make a decision and sign a contract.


7. (C) COMMENT: These insights provide a snapshot of what
is necessary to conclude contracts in Turkmenistan, and
recommendations for capacity-building projects that can help
this country make progress. The story is not over yet: in a
country where rule of law is not respected and international
arbitration doesn't exist, it remains to be seen whether this
U.S. businessman has found a reliable partner in the
Government of Turkmenistan. END COMMENT.
MILES