TURKMENISTAN: SOUTH YOLOTEN AND FOUR SERVICE

UNCLAS SECTION 01 OF 02 ASHGABAT 000017

SENSITIVE

SIPDIS

STATE FOR SCA/CEN; EEB; NEA/IR
ENERGY FOR EKIMOFF/BURPOE/COHEN
COMMERCE FOR EHOUSE/DSTARKS

E.O. 12958: N/A
TAGS: EPET PGOV EINV TX
SUBJECT: TURKMENISTAN: SOUTH YOLOTEN AND FOUR SERVICE
CONTRACTS

REF: 09 ASHAGABAT 1481

ASHGABAT 00000017 001.2 OF 002



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: On December 29, 2009, Turkmenistan's state-
owned gas company Turkmengaz signed four servicing contracts
with foreign companies totaling $9.7 billion for the
development of phase one of the South Yoloten gas field.
According to the contracts, the companies will drill for gas
and build gas treatment facilities with the hope of processing
up to 30 bcm of gas. No large western companies received any
of the recently-awarded service contracts. The Turkmen
Government plans to finance the contracts through a loan
provided by the Chinese Development bank and through
Turkmengaz revenues. Reportedly, the projects are due to be
completed in 2014, and most of resulting gas is earmarked for
China. END SUMMARY.


3. (SBU) UAE-based Petrofac International (UAE) LLC, a
branch of the New Jersey-registered Petrofac Limited, was
awarded a $3.98 billion contract to build a gas processing
plant with a capacity of 10 bcm per year, collection pipelines
and other infrastructure. Chinese National Petroleum
Corporation's (CNPC) Chuanqing Drilling Engineering Company
won a $3.13 billion contract for drilling and building ground
facilities to sustain production of 10 bcm of gas per year. A
consortium of LG International Corporation and Hyundai
Engineering Co. Ltd (both South Korean companies) received a
$1.48 billion contract to build a gas processing plant with a
capacity of up to 10 bcm of gas per year. UAE-based Gulf Oil
and Gas FZE won a $1.15 billion contract to drill wells for
production of 20 bcm of gas annually.


4. (SBU) To date, it is unclear which portion of the $9.7
billion in service contracts to the five companies will be
paid through loans from the Chinese and which portion will be
covered by Turkmengaz funds. The Chinese Government provided
a $4 billion loan to Turkmengaz in June 2009. Also,
unofficial information has circulated in Ashgabat that the
Chinese Government will provide the Turkmen Government with an
additional loan in the amount of nearly $5 billion. GOTX
officials alluded to this additional loan in November 2009
(reftel). Given that the GOTX was without gas revenues from
Russia for nine months in 2009, the loans, which can be paid
back with in-kind gas payments, would be timely.


5. (SBU) Except for the CNPC subsidiary, the other contract
winners are energy sector service providers. Gulf Oil and Gas
FZE has only implemented one project in its history, a
facility in Turkmenistan designed to separate natural gas
(associated gas) from oil in the process of oil production.
The joint Korean venture has reportedly has little experience
building gas processing plants, but both LG and Hyundai are
actively pursuing business opportunities in several sectors of
the Turkmen economy.


6. (SBU) According to a Ministry of Oil and Gas official, the
main criteria for the selection of contractors for these
projects were low bids and the companies' preparedness to meet
target production levels by the end of 2014. The official
opined that the gas production facilities, built according to
these contracts, will mostly be dedicated to exporting gas to
China. He also noted that these four contracts make up the
first phase of South Yoloten development and that the second
phase is unlikely to start sooner than five-six years from now
because there will not be sufficient export demand during that
period of time to justify faster expansion. The Government's
previous plan was to bring the first phase production rate to

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40 bcm of gas per year, but the current weak demand for gas in
the international market seem to have forced the Turkmen
Government to decrease its target production volume for the
first phase to 30 bcm per year.


7. (SBU) COMMENT: The announcement that the GOTX will develop
phase one of its potentially lucrative South Yoloten field by
means of service contracts with foreign companies is
consistent with the GOTX's policy to develop its "low hanging
fruit" in onshore gas fields with service contracts. Some
international oil companies (IOC) have interpreted the
announcement to mean that the GOTX will never enter production
service agreements (PSA) for onshore developments.
Nevertheless, in order to develop subsalt
hydrocarbon resources that are harder to exploit, it is
plausible that the GOTX may offer production
sharing conditions to IOCs, even if the GOTX insists on
avoiding the term PSA. Or they may give service providers
a shot at the subsalt as well. END COMMENT.

CURRAN