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

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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

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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