TURKMEN PREFERENCES MAY DETERMINE THE FORM AND

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000235 SIPDIS SCA/CEN; EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 02/13/2019 TAGS: PGOV PREL EPET EINV TX CH SUBJECT: TURKMEN PREFERENCES MAY DETERMINE THE FORM AND PACE OF ENERGY DEVELOPMENT Classified By: Charge Richard Miles for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Longtime resident and EU TACIS program coordinator Michael Wilson,s contacts and knowledge of business activities in Turkmenistan give him a bird,s eye view of energy sector development. On February 11 he shared his perspectives on the dramas that are currently unfolding as the Government carefully embarks on the effort to develop its hydrocarbon fields with foreign partners. According to Wilson, the Government may become more receptive to foreign national energy companies helping with the major onshore work because they are willing to operate under less favorable contract conditions and resolve issues internally, unlike major Western oil companies. Small service providers now appear to be favored partners, but they may not be up to the task of doing the more technically challenging onshore work. He also expressed the view that the Turkmen view business relationships through a political lens, suggesting that this Government prefers to do business with companies that are backed up by their governments. Regardless, if his comments are accurate, Turkmen preferences will color the way that energy development unfolds here. END SUMMARY. TURKMEN FACE CHALLENGES IN SECTOR DEVELOPMENT ¶2. (C) Wilson, a former entrepreneur and longtime Ashgabat resident, expressed his opinions on a range of energy development issues with Political Officer on February 11. He said that in early 2008 China National Petroleum Corporation (CNPC) representatives knew that the contracted deadline for exporting gas to begin wouldn,t be met by the end of the year. Turkmenistan,s failure to boost production will become increasingly clear, he said, and senior Turkmen energy officials will be on the chopping block. The Chinese are prepared to negotiate with the Turkmen to extend deadlines and are expecting to get other compensatory benefits when production doesn,t meet goals, he said. ¶3. (C) Wilson argued that the Turkmen expected greater interest in onshore exploration and development from foreign national energy companies, once the Gaffney-Cline audit was made public in late 2008. The audit did not draw more Russian and Chinese involvement, partially because of the global financial crisis that created capital shortfalls, but also because of the technical complexity of developing the onshore fields. Wilson commented that one of the reasons the Turkmen may hold a preferential view of national energy companies as potential partners is that Russian and Chinese companies don,t include clauses providing for international arbitration in their contracts, preferring instead to resolve disputes under Turkmenistan's national legal framework, unlike major Western oil companies are likely to do. The Turkmen security services prefer the control that domestic legal resolution gives them, he said. ¶4. (C) Wilson claimed that when South Korean officials met with President Berdimuhamedov in late 2008 and discussed energy cooperation, they provided the President with details of the Gaffney-Cline audit that he did not appear to know about, such as Gaffney,s frank assessment of the technical complexities and expense of the high pressure sub-salt work that would have to be done. Wilson assessed that some of the firings in the energy sector in mid-January may have been connected with sector leaders, failure to show the President all of the audit,s findings. ¶5. (C) Wilson opined that the Turkmen do not yet want to manage a major oil company,s presence onshore, because the company would need to establish a large footprint in the ASHGABAT 00000235 002 OF 002 country and would require hundreds of skilled expatriates, local facilities and administration. Taken all together, this would represent a loss of control for the central government in terms of land, visas, and planning. One reason the Government may prefer doling out projects piecemeal to small service providers is that the process will be slower, giving the Turkmen Government more time to build its own capacity to manage projects, he said. ¶6. (C) He said the Government,s decision to sign only service agreements onshore, largely with smaller service companies, will eventually backfire, because such companies will not apply the expertise or technology necessary to extract hydrocarbons under the high pressure, sub salt conditions that predominate onshore. When an accident happens or something else goes wrong, Government officials *- seeking to preserve their own posts *- will make the service company a scapegoat, he predicted. MARKET ACCESS A POLITICAL ISSUE ¶7. (C) Turning to the question of market access here, Wilson opined that all foreign business in Turkmenistan is inextricably political, in that the Turkmen view a commercial relationship with a given company as indivisible from the bilateral political relationship they have with the country where the company is based. According to his theory, one way of getting access to the Turkmen market is through high-level government interaction. One example, he said, was the King of Belgium,s hosting of a dinner for Berdimuhamedov when he was on an official visit to Brussels in November ¶2007. The Belgian-based company Enex facilitated the event, and senior company officials were in attendance. They used the opportunity to advance the company,s proposals directly to the President. Although he believed that work with the Russian energy company Itera is advocated by the Russian Government here, he did not think Itera would get any large contracts. He argued that the Russian company Itera, which was formed in the 1990s as an entity comprised of both government and private business interests in an attempt to divide up former Soviet gas resources, represents too great a source of potential Russian influence, and as a result, Itera will continue to get contracts only for small projects. Even the company,s gift of a mega yacht to the President in October 2008 will not persuade the Turkmen to sign with Itera, he said. ¶8. (C) COMMENT: Wilson,s views are his own, but he has been working in Turkmenistan for some 16 years, has a broad range of contacts in both the business and diplomatic communities, and was a businessman in a former life. His observation that the Turkmen Government views business relationships through the lens of the bilateral political relationship may explain the progress of business deals made through state visits and intergovernmental commissions, in contrast to companies who compete on their own. END COMMENT. MILES