TURKMEN GAS DIRECTOR EXPOUNDS ON PRODUCTION,

C O N F I D E N T I A L SECTION 01 OF 03 ASHGABAT 000380 SENSITIVE SIPDIS SCA/CEN; EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 03/24/2019 TAGS: PGOV EPET EINV TX CH RS SUBJECT: TURKMEN GAS DIRECTOR EXPOUNDS ON PRODUCTION, PIPELINE, AND EXPORT PLANS Classified By: Charge Richard Miles for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The director of the Turkmen State Gas Concern (Turkmengas) recently described the company's responsibilities and activities, and discussed the Turkmenistan Government's hopes for development of its hydrocarbon resources. He indicated that Turkmengas is moving forward with the development of a number of gas fields, in spite of awareness of the complexity of developing sub-salt deposits. He described the Government's plans to build a new east-west pipeline inside the country that will help feed new export lines such as the planned Caspian littoral. He expressed confidence that the growing number of planned export pipelines will be adequately supplied in coming years. This new pipeline shows the Turkmen are thinking ahead, but they may be over-focused on export routes when the most significant challenge in coming years will be increasing production. END SUMMARY. ENERGY TRANSIT NEEDS "INTERNATIONAL LEGAL FRAMEWORK" ¶2. (C) Ed Chow, a visiting scholar from the U.S.-based Center for Strategic and International Studies met on March 18 with Turkmen State Gas Concern Director, Baymurat Hojamuhammedov. He said Turkmengas does not do exploratory work, which is the task of the State Geological Concern. Turkmengas focuses on drilling and development, as well as the transport of gas. It also handles both domestic and foreign natural gas marketing. Hojamuhammedov mentioned the April 23-24 pipeline security conference to be hosted by the Turkmen Government, and said that Turkmenistan is seeking the development of an international legal framework that will provide guarantees of the security of energy supplies leaving Turkmenistan. He stated that Turkmenistan is convening the conference because of both physical and commercial security concerns related to transporting energy commodities internationally. The conference's goals would be to discuss and determine the potential threats to pipelines and seek potential solutions to the problem. ¶3. (C) When asked if the energy dispute between Russia and Ukraine last winter, or other similar issues, had raised Turkmen concerns about energy transit, Hojamuhammedov did not point any fingers nor respond directly. He said that the Russia-Ukraine situation had had no impact on Turkmenistan, and that Gazprom had been a most reliable partner. He noted that during the dispute, Gazprom completely observed all the terms of its agreement with Turkmenistan, but he added that the continuing global economic crisis could potentially change that. TURKMENGAZ OPTIMISTIC ABOUT FIELD DEVELOPMENT ¶4. (C) Hojamuhammedov described his government's hopes and intentions for the recently-audited South Yoloten field, from which 100 bcm per year is expected to come, once the field is fully developed. He said that exploratory work is now underway on the field, and its geographic limits have not yet been determined. He said the pay zone, the geologic pocket where the gas now lies, is about 4000-4600 meters down. The pay zone itself is 400-600 meters in thickness, he said. Dovletabad's pay zone, for comparison, was only about 40-50 meters in thickness. ¶5. (C) The Government has high hopes for the Yashlar field east of Yoloten, he noted. Two wells are already operating there, and government enterprises have just completed the drilling of two additional wells. Hojamuhammedov said ASHGABAT 00000380 002 OF 003 Yashlar was assessed as having about 3-4 tcm in reserves. Government enterprises have also been overseeing the recent drilling that has been taking place at an old Soviet-era field east of Ashgabat, where exploratory work is underway and some 1-1.5 tcm in gas reserves are expected to be tapped. (NOTE: Probably the Garajaovlak field, about 110 kilometers east of the capital. END NOTE.) He indicated that exploratory work was also being conducted on the Central Karakum fields, where there are good indications of rich reserves. (NOTE: The Zeagli-Darvaza group of fields in the center of the country, south of Dashoguz. END NOTE.) "WE KNOW SUB-SALT IS TOUGH" ¶6. (C) Hojamuhammedov acknowledged that Turkmenistan was entering challenging times in terms of the complexity of sub-salt drilling. He noted that in the mid-1990s, Shell had explored sites at Dovletabad, and Bridas had been at Yoloten doing exploratory drilling as well. However, neither had been able to drill through the salt layer and both had given up their efforts. More recently, exploratory drilling took place on the Osman field, but it resulted in an explosion. (NOTE: According to local press, the president reprimanded gas officials in January 2009 for an explosion that took place on December 27, 2008. END NOTE.) MAKING PROGRESS ON PIPELINE DIVERSIFICATION ¶7. (C) Hojamuhammedov said the pipeline taking Turkmen gas to China will be operational by the end of December 2009. He assessed, however, that it would take about three years to reach the 30 bcm level the Chinese are seeking. Uzbekistan and Kazakhstan are not expected to contribute any significant volume of their own gas into the new pipeline, he said, but he was reluctant to say how much gas the other Central Asian states might put into it. When asked about the recently-publicized deal with the Iranians to help develop Yoloten and to build a second pipeline going to Iran, Hojamuhammedov claimed that Turkmenistan was still in negotiations regarding the potential pipeline's capacity and the terms of a construction plan. Regarding the proposed Caspian littoral pipeline that Turkmenistan, Kazakhstan and Russia agreed to build, he said it was anticipated to be finished in three to four years, and would have a capacity of 30 bcm per year. He was reluctant to provide further information regarding the status of construction. However, he did volunteer that Turkmenistan was developing a plan to build an east-west pipeline that would bring gas produced in the eastern part of the country to the west coast. The existent east-west line, he said, is only used for moving supplies for domestic use across the country. INSIGHTS ON PRICING ARRANGEMENTS ¶8. (C) When asked about how Turkmenistan determines its pricing regimes for export purchases, Hojamuhammedov said that the net back principle is used, so prices are different for different customers due to the varied costs for production and transportation. Turkmenistan used an EU contract format, he said. Prices are generally reviewed on a quarterly basis, or in accordance with the bilateral agreement, he noted. Sometimes they are reviewed only every 6-9 months. The export agreements that have been signed thus far are longterm agreements, ranging from 20-30 years. All buyers have guaranteed that they will purchase the supply they said they would, and there are financial penalties if they do not, Hojamuhammedov said. ASHGABAT 00000380 003 OF 003 ¶9. (C) COMMENT: Hojamuhammedov's comments about the April conference are the first we have heard that shed a little more light on what prompted the government's interest last fall in ensuring the uninterrupted movement of energy supplies once they leave Turkmenistan. Issues last year with energy supply routes through Georgia during the conflict with Russia, the redundant dispute between Russia and Ukraine, and Uzbekistan's stoppage this year of electricity going from Turkmenistan to Tajikistan have all served as ominous warnings of how energy export can experience serious problems in times of turmoil. Although its policy is to "sell gas at the border," neutral Turkmenistan may be seeking assurances that its interests abroad are protected if the energy it exports fails to arrive at its destination. ¶10. (C) COMMENT, CONT'D: This is the first we have heard about the planned construction of a new east-west gas pipeline that could potentially feed the Caspian littoral, the Iranian export line, or any other potential Caspian area lines. It would represent a major capital expense that the Turkmen government would have to bear on its own, unless Russian or other foreign investment could be obtained. The pipeline is no doubt a necessity, since the vast majority of Turkmenistan's gas will be produced in the eastern half of the country in coming years. Given the current longterm production scenario for the country, it is uncertain what gas will fill this line, and may be another example of putting the cart before the horse. END COMMENT. MILES