TURKMENISTAN: WINTERSHALL MANAGER PROVIDES RANGE

C O N F I D E N T I A L SECTION 01 OF 04 ASHGABAT 000396

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ENERGY FOR EKIMOFF/THOMPSON
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E.O. 12958: DECL: 03/30/2019
TAGS: PGOV EPET EINV TX RS IR CH
SUBJECT: TURKMENISTAN: WINTERSHALL MANAGER PROVIDES RANGE
OF UPDATES ON ENERGY SECTOR DEVELOPMENTS

Classified By: Charge Richard Miles for reasons 1.4 (b) and (d).


1. (C) SUMMARY: German-based Wintershall's country manager
recently provided a broad picture of the challenges and
intrigues of doing business in the energy sector here. The
manager described some of the complexities of interacting
with Turkmen energy officials, most of whom cling tightly to
old Soviet models of governance. He revealed that the
Chinese company CNPC may not be all that worried about
actually producing some gas in the near term, if it can
potentially trade the delay for additional concessions here.
The Russians are doggedly pursuing additional ventures here,
but in spite of shared historical ties, will be limited in
their involvement, he said. Surprisingly, it appears
President Berdimuhamedov is moving forward on a deal with
Iran that is contrary to the views of senior oil and gas
officials. All of this seems to form a picture in which
partnerships are unfolding in an unexpected way, and both
regional neighbors and international companies continue to
see expanding possibilities. END SUMMARY.


2. (C) A visiting scholar from the U.S.-based Center for
Strategic and International Studies met on March 19 with
Wintershall General Manager, Kal Sandhu, to learn more about
how the offshore PSA-holder is doing. Sandhu said the
company is partnered with Maersk, OMV and an energy
subsidiary of Mittal Steel to explore and develop Caspian
offshore blocks 11 and 12. He added that a three-year
exploration phase is coming to an end for the blocks, where
the water averages about 45 meters in depth.


3. (C) Sandhu said the business environment for his company
is quite different here than it is in Russia. Russia, even
in the early 1990s, knew what it was doing and had a very
fast learning curve regarding how best to develop its
hydrocarbon reserves. The learning curve in Turkmenistan, by
comparison, has been very gradual because of the lack of
education and expertise, as well as for reasons relating to
the lack of trust here. Wintershall relies on support from
Deputy Chairman Tagiyev for resolving issues, so Sandhu puts
effort into maintaining a good relationship with him, he
said. But even at that level, he said barriers frequently
arise because of the deep aversion to risk that is so
pronounced in Turkmenistan. Wintershall would like to offer
expansive education opportunities to Turkmen students, he
noted, but he said the government appears to be wary of
educating the population, even if it would raise prospects
for more energy production.

THE DANGERS OF PRESIDENTIAL HIRINGS AND FIRINGS


4. (C) Sandhu said his contacts in the government have told
him that when the President appoints a bureaucrat to an
office, one cannot refuse the appointment. He added that
firings, in their turn, are also very serious business. The
former Director of the State Agency for the Management and
Use of Hydrocarbons, Baymurat Muradov, was fired from his
position in 2008, and is still at home without work. As a
result of his firing, several of his children were expelled
from university and his relatives lost their government
posts. He said that although no firm information has emerged
about the reasons for Muradov's firing, Sandhu believes that
either Muradov was caught engaging in some form of
corruption, or may have possibly made a faux pas during a
2008 presidential visit to Germany.


5. (C) Sandhu was among the representatives of German
companies that hosted President Berdimuhammedov's trip to
Germany, and said that during some of the formal dinners in

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the President's honor, Muradov was near the President,
actively talking with some of the German representatives in
English but not translating what they were saying. He
speculated that the President was insulted by the perceived
insubordination and removed him, although he had brought
Muradov from the Health Ministry in 2007 because he had been
a competent and loyal Deputy Health Minister. The
Wintershall manager said he believed that all senior
government officials are either jailed or put under house
arrest when they get fired from their positions, because of
the inherent threat that a pool of free, disgruntled elites
would likely pose to the regime. (COMMENT: If it is true --
and we have no proof that it is -- that fired senior
government officials are routinely arrested, this is an
unwelcome holdover or reversion to a Niyazov practice. END
COMMENT.)

TURKMEN GOVERNMENT STILL FUNCTIONING THE 'SOVIET WAY'


6. (C) Sandhu expressed frustration with the fact that
Turkmen oil and gas bureaucrats still cling to old and
counterproductive Soviet practices. He said that senior
officials, like in the Soviet period, are always ambitious,
and simply order oil and gas production increases while
leaving the ministries to somehow make it happen. In this
system, no one in the ministries can speak truth to power and
say it isn't possible and explain why, he said. The publicly
outlined national oil and gas development strategy sets
ambitious goals for oil and gas production by 2010, 2015, and
2030, but they are not achievable, he said.

IS CNPC PLAYING THE TURKMEN?


7. (C) Sandhu said that from what he has heard, CNPC is
almost exclusively focused on its construction contract for
the Turkmenistan-China pipeline, and that it had been
concluded with the government as a domestic, rather than an
international contract, meaning that any disputes would be
resolved in Turkmen courts. The PSA agreement that CNPC
signed in late 2007 for its expansive work along the right
bank of the Amu Darya, however, was concluded as an
international contract with Turkmen State Gas Concern.
Having an international agreement gives CNPC the capacity, if
needed, to seek international arbitration to resolve serious
disputes, he said.


8. (C) Sandhu assessed that since it appears that CNPC is
not moving very quickly on the exploration and development of
the PSA, it is not going to produce sufficient gas to meet
the terms of the agreement in the coming 1-1 1/2 years. When
CNPC fails to produce its share of the gas to go into the new
pipeline, the terms of the contract stipulate that the
production shortage will come from the Turkmen State Gas
Concern, he said. Sandhu predicted that when the Chinese
come to Turkmen Gas and begin clamoring for additional
supplies that Turkmengas cannot deliver, heads will role at
Turkmengas. He assessed that the Chinese would then seek
additional concessions as remuneration for Turkmenistan's
failure to provide the agreed-upon quantity of gas.

RUSSIA -- THE DEVIL THEY KNOW


9. (C) The Wintershall manager opined that the Turkmen
prefer doing business with the Chinese and the Russians these
days. He said the Turkmen still identify with the Russians
in many respects and understand the Russian bureaucracy. The
Chinese, he said, have learned how to predict what the
Turkmen will want, and they give it to them. Some Turkmen
officials have commented that they do not trust Iran or

ASHGABAT 00000396 003 OF 004


Azerbaijan, however, and Sandhu expressed the belief that
many Turkmen bureaucrats are reluctant to do business with
those two countries.


10. (C) It could be the Russians, however, who cause
problems for the Turkmen in the coming year, if the
Turkmenistan Government doesn't understand that global gas
prices are expected to drop this year, he said. The Russians
could cut back their purchases of Turkmen gas, which would
result in contract penalties. However, Sandhu speculated
that receiving penalty fees instead of gas payments would
still represent a loss of income for Turkmenistan. Sandhu
said that although the Turkmen and Russians get along, it
does not appear that the Turkmenistan Government wants Russia
to establish itself in the upstream, since it dominates the
downstream, meaning pipeline infrastructure. He asserted
that Gazprom would be denied an equity gas role in the
upstream.

DUTCH COMPANY LOST PSA AFTER IRAN DEAL PUBLICIZED


11. (C) Sandhu said that a Netherlands-based oil company
had been working for several years on a proposal to develop
the relatively deep offshore block 27, located in an area of
the Caspian that both Turkmenistan and Iran claim. (NOTE:
Berlanga Holding BV has a representative office in Ashgabat.
The energy exploration and development company has been
around since 1994, and seems to operate only in Central Asia.
It has major holdings in Kazakhstan, and has been seeking
projects in Uzbekistan and Turkmenistan for the last several
years, according to its website. END NOTE.)


12. (C) Sandhu revealed that Berlanga Holding Turkmenistan
BV had been negotiating for a PSA in the southern block when
President Berdimuhammedov made his official visit to Tehran
in February. As the trip concluded, Iranian press announced
a major bilateral deal to develop South Yoloten. Sandhu said
that Berlanga was immediately told its proposal for block 27
would be rejected, because of Turkmen concerns that work in
the block would irritate its new energy partner. State
Agency for the Management and Use of Hydrocarbons Director,
Yagshygeldy Kakayev, and Deputy Chairman for Oil and Gas,
Tachberdy Tagiyev, had not wanted to sign the deal with Iran,
but Sandhu said they had indicated to him that it was the
President's will, so it would happen regardless of their
views.

FOREIGN COMPANIES TO PROVIDE SOME NEW GAS


13. (C) Sandhu said that onshore company Burren Energy and
the offshore foreign PSA holders, who are focused on oil
extraction, are getting closer to a point where they will be
able to deliver their associated gas to Turkmengas. He said
that in about five years, Burren and the offshore fields
could be producing as much as 15 bcm per year that would feed
the growing Russian demand, if there are no problems.
Petronas was expecting to deliver 6 bcm per year to
Turkmengas by 2011, and anticipated it would go up to 14 bcm
per year by 2014. Dragon Oil is planning produce at least
several bcm per year by 2011, and Burren is expecting to
produce about 2 bcm per year, he said. He observed that the
gas infrastructure in the Turkmenbashy area is in very bad
condition, and will need to be refurbished.


14. (C) COMMENT: Sandhu's comments provide yet another
window on the complexities of the oil and gas sector here,
with regional partners competing for their piece of the pie
and an incapable and risk-averse government struggling to
"fulfill the plan." Although his comments parallel those of

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others who doubt production will be sufficiently ramped up in
coming years to meet the country's export obligations, both
commercial entities and regional neighbors are still
optimistic and willing to continue circling Turkmenistan as
they wait for opportunities to present themselves. END
COMMENT.
MILES