TURKMENISTAN: UPDATE ON GAS EXPORTS TO IRAN, CHINA

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000873 SIPDIS SCA/CEN; EEB PLEASE PASS TO USTDA DAN STEIN ENERGY FOR EKIMOFF/THOMPSON COMMERCE FOR HUEPER E.O. 12958: DECL: 07/12/2019 TAGS: PGOV EPET EINV TX SUBJECT: TURKMENISTAN: UPDATE ON GAS EXPORTS TO IRAN, CHINA AND RUSSIA Classified By: Charge Richard Miles, reasons 1.4 (b) and (d) ¶1. (C) A recent meeting with two local expatriate contacts provided updates about Turkmenistan's gas export woes, as well as views about the increased prevalence of corruption. One source, the local representative of a foreign energy company, informed that as of July 1, Turkmen gas exports to Iran stopped, following the expiration of the six month gas purchase agreement. The two sides have been unable to reach an agreement on price for the second half of the year, with the Turkmen reportedly asking for a higher price, despite the fall in world market prices. Our contact noted that this position was an indication of the detachment of Turkmen officials from the realities of the world energy market. As another example, he cited a recent meeting between a delegation of European energy company officials and now former Deputy Chairman for Oil and Gas Tachberdi Tagiyev. The Europeans explained that the price of gas at the German border was currently USD 280/tcm, as well as that the Norwegians were selling their gas at USD 170/tcm. Tagiyev was incredulous and questioned the quality of the gas supplied by Norway, saying it was not "Turkmen gas." According to our contact, Tagiyev did not seem disturbed about the commercial loss being suffered by Turkmenistan as a result of interrupted gas exports to Russia. To him, the Turkmen were not suffering a loss because their gas was still in the ground. On the issue of how long Turkmenistan could continue spending freely without gas revenues, our contacts agreed that Turkmenistan had an estimated USD 18 billion in foreign currency reserves held at Deutsche Bank. With current Turkmen spending estimated at about USD 2.5 billion per month, the government would not feel the pinch until the end of the year. They noted that there is still a revenue stream from Russia from payments for gas shipped earlier in the year, but those payments would end this month, after which there would be no revenue from gas. ¶2. (C) The energy company representative mentioned that last week, at a meeting of local representatives of oil companies, the China National Petroleum Company rep said one of the two lines leading to China is complete, currently undergoing 
testing, and would be ready to ship gas in a month. This single line has a capacity of ten bcm per year. The second line is slated for completion in October. Regarding the recent USD four billion loan from China to Turkmenistan, the Chinese had reportedly pointed out to the Turkmen that the USD four billion loan, with work to be completed by Chinese companies, was the equivalent of USD 15 billion investment by a Western company, because the cost of Chinese work would be significantly lower than work done by Western companies. Our contact calculated that the actual return to the Chinese on the loan would approach 30 percent because the agreement provides for 90 percent of the work to be done by the Chinese and the Chinese have the option to hire subcontractors as needed. As such, the loan proceeds would flow back to China. ¶3. (C) Concerning the gas dispute between Turkmenistan and Russia, our other contact, an official with an international organization, shared that the issue between the two sides had taken on a personal character, rather than strictly commercial. Prior to the pipeline explosion, the Russians had faced a series of setbacks and affronts involving the Turkmen: price negotiations stalled; rejection of a proposed barter arrangement of gas in exchange for construction of an East-West pipeline in Turkmenistan; Turkmen "presumption" in announcing truck and tractor purchases that would keep Russian factories open during the crisis; and Turkmen "moral high mindedness" over the pipeline security initiative that the Russians reportedly did not like. After the pipeline explosion in April, the Turkmen accused Russia of causing the ASHGABAT 00000873 002 OF 002 accident, calling for international arbitration and hiring experts to investigate the blast. As a result of all this, price remains a sticking point, but also the Turkmen leader reportedly must apologize to Medvedev for these accusations. Our contact pointed out that, concerning the pipeline blast, no one would know better than Gazprom the capacity of the pipeline and what action might cause a blast, but at the same time it would be difficult for outsiders to prove. ¶4. (C) Our contacts also mentioned their shared view that corruption is increasing. State Agency for Hydrocarbon Management Chief Yagshygeldi Kakayev mentioned to our energy company contact that the budget of the State Agency, which employs 45 people, is one quarter of the budget of the agency's three-person London office. The London office is headed by the president's son-in-law. The President's sister is reportedly heavily involved in the leasing of luxury apartments. She also takes a cut of bribes paid for admission to the state university that currently reach USD 150,000. Our contact commented that when government officials begin to comment about the excesses of the leader and his family, it is a sign that support is waning. Our sources also cited the lesson of a successful Niyazov-era German chicken farm project. The project reclaimed land for grain production, used scrap paper to make egg cartons and supplied the majority of the domestic egg market. But because the project's success made local enterprises and officials look ineffective, the project was shut down and bulldozed, and the local partners and minister of agriculture were jailed. Our contacts wondered if a fear of being embarrassed by foreign companies is an underlying reason for excluding foreign companies from onshore gas projects. The operations of foreign companies could highlight the inefficiency of the state-owned concerns, which for the time being, while suspected, remains undemonstrated. ¶5. (C) COMMENT: The Turkmen lack international exposure and refuse to accept that international economic conditions could impact them, thus their reluctance to reduce the price for gas. They also exhibit no sense of urgency about developing their gas, and instead are willing to leave the gas in the ground for future production. If significant gas export revenues do not resume before the end of the year, however, budgetary realities might force the Turkmen to recognize that they are not exempt from the fluctuations of the international economy. END COMMENT. MILES