TURKMENISTAN: CHEVRON RECEPTIVE TO PROPOSALS THAT

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000704

SIPDIS

SCA/CEN; EEB
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: DECL: 06/07/2019
TAGS: PGOV EPET EINV TX CH
SUBJECT: TURKMENISTAN: CHEVRON RECEPTIVE TO PROPOSALS THAT
GRADUALLY STEP UP PROJECT COOPERATION

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


1. (C) SUMMARY: The Morningstar delegation's meeting with
Chevron's country manager was an opportunity to exchange
information and brainstorm on creative ways that U.S. energy
companies can try to engage Turkmen officials on innovative
types of agreements. For its part, Chevron is willing to
look at a step by step, gradually intensifying project plan,
but will not give away its unique sub-salt technology. The
company is planning to submit a revised project proposal in
mid-July that it hopes will be more palatable to Turkmen
officials. Turkmenistan is going to need serious help in
developing the Yolotan field. It is likely that its current
strategy to rely on service providers for advanced technology
and expertise will fail, even with Chinese participation.
The big international energy companies will be ready to help,
and Chevron appears prepared to make at least some
compromises to remain in the race. END SUMMARY.

COMPANIES DON'T GIVE AWAY THEIR TECHNOLOGY


2. (C) Special Envoy for Eurasian Energy Richard Morningstar
and his delegation met on May 29 with Chevron's Turkmenistan
manager to exchange information about the near-term potential
of major oil companies operating onshore here. The Chevron
representative said Chevron was considering a Memorandum Of
Understanding (MOU) type agreement that would include the
basic elements of a long-term agreement. It would be an
agreement that still held provisions allowing either party to
back out at any time if they were not happy. However, he
noted that Chevron was unwilling to provide Turkmenistan with
technical assistance without the establishment of a long-term
relationship. Chevron, he said, does not, as a rule, share
its company technology under a service agreement.

POTENTIAL FOR A "STEP BY STEP" AGREEMENT


3. (C) Morningstar commented that perhaps companies should
promote a road map for a step-by-step, gradually expanding
commercial relationship with Turkmenistan. The Chevron
representative offered that the process could begin with an
MOU and eventually transition to a more PSA-like commitment.
But milestones in such an agreement would have to be
negotiated. Morningstar noted that President Berdimuhamedov
had acknowledged that Turkmenistan needs Western technology
to achieve national goals. The representative said that any
initial agreement with the Turkmen Government had to outline
an energy company's intention to operate in the country for
the long-term. Berdimuhamedov had demonstrated a broad
knowledge of Chevron's work in Kazakhstan, which gave the
company confidence that the President was aware of Chevron's
reputation.

THE TURKMEN WILL HAVE TROUBLE WITH YOLOTAN


4. (C) The Chevron representative said the company has
assessed that the majority of South Yolotan's extraction
potential is sub-salt, and is about one third the size of the
Gulf of Mexico gas field in terms of its base size. Turkmen
energy officials know how to do above-salt development, but
they do not know how to develop sub-salt deposits, he opined.
While the Chevron representative did not know how many wells
the China National Petroleum Corporation (CNPC) is operating
on South Yolotan, he did report that CNPC lacks the technical
expertise to develop challenging fields such as Yolotan.
CNPC, he said, asked Chevron for assistance several years ago
with a high H2S (toxic hydrogen sulfide gas) gas field in
China. There had been an accident in which deadly gas had
been released. Nonetheless, he said that CNPC is reportedly
scheduled to drill 12 gas wells in Yolotan and Osman.

ASHGABAT 00000704 002 OF 002



ON THE SHORT TERM AND COOPERATION WITH CHINESE


5. (C) The Chevron representative said that U.S. companies
could partner successfully with Chinese companies, and that
Chevron had done so in the past. The Chinese focus more on
commercial growth rather than on control of resources, as
Russia does, he said, making them easier to work with. He
requested that U.S. policy makers keep up their efforts to
engage with President Berdimuhamedov, and continue to
reinforce the long-term preferences of U.S. energy companies.
Morningstar advised that companies like Chevron should not
reject short-term opportunities, but rather find ways to
convert short-term opportunities into a multi-step program of
expanded partnership with the Turkmen.

CHEVRON'S PLANS


6. (C) The representative said that in his recent meetings
with Deputy Chairman for Oil and Gas Tagiyev, the Deputy
Chairman has hinted more often about his interest in
company-provided financing to cover development costs. In a
production sharing agreement, the total profits received by a
government are generally quite generous, according to the
Chevron representative. In any case, Chevron is prepared to
provide financing or to obtain it for the Turkmen Government.
The Turkmen Government should understand that large company
participation here could also help ensure stable production,
he added.


7. (C) The first proposal that Chevron submitted to the
Turkmen Government was a broad plan to develop South Yolotan
and Osman, emphasizing efforts to boost production at
sub-salt fields only, he said. Sub-salt fields make up 90
percent of Yolotan gas fields, he added. Discussions with
Turkmen energy officials are ongoing, he noted, and Chevron
is prepared to have its representative here working on this
for the next several years. Chevron anticipates submitting a
revised proposal sometime in July. Morningstar asked if
there was a potential risk in carrying out a service
agreement and demonstrating the company's sub-salt
capability. The representative said that in general, the
answer is no, because its capability is demonstrated with
both technology and expertise that is unique to Chevron.


8. (C) COMMENT: The Chevron representative was receptive
to the idea of developing a proposal that provided steps and
milestones for a gradually expanding, long-term agreement.
It would need to be palatable to the Turkmen while still
offering the profit potential that large energy companies
need. At the same time, however, Chevron and other large
energy companies know that the current Turkmen strategy to
meet their production goals -- managing energy development
onshore and trying to acquire technology through service
agreements -- will fail. To some extent, the foreign
companies are anxiously awaiting the Turkmen Government's
moment of realization. In the meantime, however, Chevron
understands that some compromise is going to be necessary in
order to begin operations here. END COMMENT.
MILES