CHEVRON AND THE GOTX TRY TO REACH MIDDLE GROUND

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000127 SIPDIS STATE FOR SCA/CEN; EEB; ENERGY FOR EKIMOFF/BURPOE/COHEN COMMERCE FOR DSTARKS/EHOUSE E.O. 12958: DECL: 01/26/2020 TAGS: EPET ECON PGOV EINV BTIO TX SUBJECT: CHEVRON AND THE GOTX TRY TO REACH MIDDLE GROUND REF: ASHGABAT 30 Classified By: Charge Sylvia Reed Curran for reasons 1.4 (b) and (d). ¶1. (C) Chevron's representative in Turkmenistan met with Charge on January 26 to discuss recent Government of Turkmenistan (GOTX) reaction to Chevron's latest proposal. The company rep stated that Deputy Chairman Baymyrat Hojamuhammedov asked Chevron in December for a draft MOU to increase production in underdeveloped natural gas fields (reftel). He then recounted that during a January 16 meeting, Hojamuhammedov first launched into a discussion of how to dovetail a high level USG visit with a Chevron deal, before reviewing the MOU. Hojamuhammedov no longer wanted to have Chevron work on underdeveloped gas fields that still had real commercial potential. Instead, he told the Chevron rep that the GOTX envisioned a deal to revive older, non-operational gas fields in lieu of working in fields that were simply underdeveloped. According to the company rep, the GOTX knew "full well" Chevron considered these fields to be "commercially dead." ¶2. (C) The rep told Hojamuhammedov that Chevron anticipated an MOU to develop operational fields that could produce up to 30 billion cubic meters of gas a year. In addition, the company expected to sign a confidentiality agreement with the GOTX, and the two sides would then carefully select mutually beneficial gas fields together. He also asserted that Chevron would reserve the right to dig deeper into existing wells (subsalt drilling) that the company thought had untapped production potential. He described Hojamuhammedov's reaction as initially dismissive, until Hojamuhammedov stated that the GOTX did actually want to work with Chevron. Reportedly, Hojamuhammedov asked the Chevron rep if the company would consider a risk service agreement (RSA) for production at the undeveloped Yashlar gas fields in southeastern Turkmenistan (about 30 km from the South Yoloten fields). Hojamuhammedov then reportedly asked Chevron to produce economic data to support such a project over the next couple of weeks. The Chevron rep answered that his company would provide such data, as Chevron considered long-term RSAs acceptable agreements for doing business in Turkmenistan. ¶3. (C) According to the company rep, both the head of Turkmengaz Muhammedov and the head of the State Agency for the Management and Use of Hydrocarbon Resources Kakayev have been supportive of Chevron's MOU. At the same time, both cautioned Chevron to be flexible in its approach to a deal with the GOTX. The local rep opined that the GOTX studied deals that Azerbaijan and Kazakhstan made with international oil companies (IOC) and concluded that both countries were "ripped off" by the savvy foreign firms' production sharing agreements. He stressed that the GOTX's insistence on service contracts only for IOCs stems from its belief that IOCs are too big to be trusted. (NOTE: The GOTX's one present exception to this rule is the Chinese National Petroleum Company, which does have a production sharing agreement to develop onshore gas resources. END NOTE.) He told Charge that legal and tax issues also prevented the company from entering a standard service contract in Turkmenistan. He cited the case of a service contract the company had in Kuwait that was not renewed due to such legal and tax issues. He planned on explaining these limitations to the GOTX at the next meeting with Hojamuhammedov, which he hoped would take place in about two weeks. ¶4. (C) COMMENT. Chevron continues to look for a way todo business here, since the Turkmen have stood their ground on only awarding service contracts for onshore development work done by foreign energy companies. Chevron feels that a risk service agreement would allow the company to build a ASHGABAT 00000127 002 OF 002 long-term business relationship with the GOTX that could generate more lucrative deals in the long run, especially since the company will not enter a service contract. END COMMENT. CURRAN