TURKMENISTAN: THREE ENERGY OFFICIALS DESCRIBE

UNCLAS SECTION 01 OF 02 ASHGABAT 000693 SENSITIVE SIPDIS SCA/CEN; EEB ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: N/A TAGS: PGOV EPET EINV TX SUBJECT: TURKMENISTAN: THREE ENERGY OFFICIALS DESCRIBE ENERGY DEVELOPMENT PLANS ¶1. (SBU) SUMMARY: The heads of Turkmenistan's Oil and Gas Ministry and Gas and Oil Concerns met with SE/EE Morningstar's delegation, and shared their understanding and interpretation of Turkmenistan's energy development strategy. The group reiterated the government's intention to use foreign energy service companies to develop onshore fields in a piecemeal fashion rather than employ an integrated approach. The agency heads were receptive to the idea of company proposals that contain financially beneficial provisions outside of production sharing, and shared a few examples they had recently considered. It will be up to private companies to develop new types of service and service-risk agreements that will make their operations here more profitable. Government representatives are not going to show them the way. END SUMMARY. YOLOTAN--SHORT TERM INVESTMENT? ¶2. (SBU) On May 29, the SE/EE Morningstar delegation met with the heads of Turkmenistan's Oil and Gas Ministry, State Gas Concern, and State Oil Concern to get their take on sectoral development and the potential for a larger foreign company role. Oil and Gas Minister Annaguly Deryayev said that the Turkmen government views the onshore investment period as very short-term, leading it to use service companies instead of major energy companies to develop onshore resources. He assessed that $8-12 billion in investment would be required to develop South Yolotan. (NOTE: Although he provided no further information regarding the investment figure, the number may be the government's assessment of the amount of investment that will be required to raise South Yolotan's production to 20 bcm per year, which has been stated as a near-term goal to fulfill Turkmenistan's obligation to deliver 17 bcm per year to the future Turkmen-China pipeline. END NOTE.) EXPOUNDING ON NEAR-TERM GOALS ¶3. (SBU) Turkmen State Gas Concern Chief Baymurat Hojamuhammedov said his Concern was looking for service companies and investment. He noted that they expected 3-4 years of investment returns. Foreign service companies, he said, had the technology needed for onshore development, and the Concern was currently negotiating with a range of companies. He also noted that his Concern was playing an active role in helping Turkmenistan to realize its export pipeline diversification policy (but he did not expand). Turkmen State Oil Concern Chief Orazdurdy Hajymuradov said his Concern was responsible for producing oil only onshore. The Oil Concern was focusing its work with foreign service companies on boosting production at existing wells, to include refurbishment and modernization of well structures. EXPLORING ALTERNATIVE AGREEMENT STRUCTURES ¶4. (SBU) The delegation asked the trio if there was interest in mutually beneficial deals with major energy companies that were based on service, were long-term, and perhaps involved joint operations. Perhaps such deals could transition further down the road to include the companies receiving royalties on the production or favorable tax conditions, but would not involve any production sharing. Would such offers be of interest to Turkmenistan? Hojamuhammedov said the description sounded most like a risk-service agreement. He noted that the Gas Concern had been interested in a deal with the British-based BG Group along these lines, but only the State Agency for the Management and Use of Hydrocarbons has the necessary authority to negotiate such a deal. He said that the Concern ASHGABAT 00000693 002 OF 002 had considered other proposals that did not include production sharing. By example, he said the Concern had considered a deal with Shell to process sulfur at one point, and Chevron was now in talks with the Concern. ¶5. (SBU) Hojamuhammedov said that he welcomes foreign companies to come and propose unconventional deals. The U.S.-based company, MI Swaco Drilling is in negotiations with the Gas Concern now to develop a joint service company, and another similar proposal is in consideration to develop a joint gas processing facility. Hojamuhammedov indicated that Turkmenistan has an overall strategy for developing the sector, but that the strategy will be realized through different companies fulfilling specific tasks. He added that the Turkmen Gas Concern had hired the British consulting firm Gaffney, Cline and Associates to advise the Concern on its approach to gas development. ¶6. (SBU) COMMENT: The meeting underscored the government's determination to develop onshore resources using only service companies. It does appear that the country's energy agencies are reviewing and considering a wide variety of creative project proposals that fall outside of the narrow parameters of typical service or service-risk agreements. Agency heads are not, however, going to provide companies with guidance on the elements of an agreement that would provide additional benefit for companies and yet still be acceptable to the government. It seems that foreign companies will have to take the initiative to propose mutually acceptable alternatives. END COMMENT. ¶7. (U) Special Envoy Morningstar cleared this cable. MILES