TURKMENISTAN: PSA HOLDER BURIED HILL DELAYING

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000082 SIPDIS STATE FOR SCA/CEN; EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 01/16/2019 TAGS: EPET PGOV EINV TX SUBJECT: TURKMENISTAN: PSA HOLDER BURIED HILL DELAYING DRILLING IN CONTESTED SERDAR/KYAPAZ FIELD Classified By: Charge Richard M. Miles for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The UK-registered Buried Hill energy company completed its seismic work in the contested Serdar/Kyapaz field in Block III, and reported the government was pleased with the results. The company is moving forward with plans to undertake exploratory drilling of three sites there, but has again moved its timeline for starting the work to late 2009. The company's general manager cites the fall in world oil prices as the main reason for the delay, but described plans for building infrastructure and getting a rig established. All companies in the hydrocarbon sector here have had to make changes in order to weather price fluctuations, and perceive it as a storm that will pass. In the meantime, however, companies are re-negotiating their own prices, and putting off significant expenses. Government agencies are getting an education in market fluctuation and response, and ultimately may not see the production that they are hoping for this year. END SUMMARY. ¶2. (C) Poloff met with Buried Hill General Manager Eldar Iskanderov for an update on how the Canadian/Omani offshore production sharing agreement (PSA) holder's work is progressing in the Western Caspian. Buried Hill's PSA is Block III, where the disputed Serdar/Kyapaz field is located. In 2008, the company concluded its seismic exploratory work and presented its findings to the government. Representatives at the State Agency for Management and Use of Hydrocarbons were pleased with the seismic results, and pressed the company to begin initial drilling operations as soon as possible. They reached agreement with company representatives to begin drilling three exploratory holes in the first quarter of 2009. ¶3. (C) Due to the global decline in oil prices, however, Iskanderov said the plan now is to wait until the last quarter of 2009 to allow oil prices to stabilize. The steep decline in world oil prices caused various companies, whether upstream or downstream, to seek adjustments for fees and charges, which are set partially based on a percentage of the sale price of the given product. Thus companies producing oil, for example, earning substantially lower profits, have been re-negotiating the fees that their subcontracted service companies charge. This process has set off a chain reaction among companies that play a role in refining and producing oil, as well as for the governments that control the resource. Iskanderov said that all companies working in the hydrocarbon sector in Turkmenistan have been affected by these events, as well as the Turkmenistan government. The government's oil export profits have fallen, it is grappling with the companies' financial re-negotiation efforts, and it is finding that companies have been limiting or delaying their capital expenditures on projects here as they wait for prices to level out. ¶4. (C) Still, as Buried Hill waits out the market, it has also been considering plans to expand its business interests here. The company recently moved into a new building and occupies some 20,000 square feet of office space. Although the company envisions the Ashgabat office eventually employing 200 people, the staff is currently at 37, although Iskanderov envisions the staff growing to about 70 when drilling operations begin. The company will likely rent Maersk's drilling rig, but the severe shortage of drilling rigs in the Caspian continues to be a concern for all offshore companies. Buried Hill plans to construct all other necessary infrastructure itself, in what will be a five or six year effort. A supply base for steel piping and other needed construction materials is planned for Turkmenbashy. There is also some consideration of a possible onshore ASHGABAT 00000082 002 OF 002 proposal, which Iskanderov called "low-hanging fruit," but the company has not yet identified a site. ¶5. (C) Iskanderov talked a bit about why he thought Buried Hill has enjoyed a level of success in Turkmenistan. He said that when the company, which is owned in part by former Canadian Prime Minister Jean Chretien and the brother of an Omani sultan, approached the government with its desire to do business here, company representatives told the president, "Tell us what you need and what you want us to do." The government responded by pointing them toward exploration, and gave them a list of blocks to choose from. The other thing the company learned from its experience with the government is that every proposal should clearly represent at least one benefit for the government, and that it "resists what it does not understand." ¶6. (C) COMMENT: The instability in global oil prices is clearly having an impact on what hydrocarbon companies are doing in Turkmenistan right now, and the government is likely feeling the pain as it adjusts to the changing situation and the need to weather it out. Buried Hill's twice-delayed timeline for initiating drilling activity in Block III is but one example of how foreign companies are slowing their expenditures. Other companies may also be slowing down their development projects, to greater or lesser extents, and could collectively impair the sector's ability to meet the president's production goals this year. END COMMENT. MILES