TURKMENISTAN: BURIED HILL STILL HOPES TO DRILL IN DISPUTED WATER

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 000207 SIPDIS STATE FOR SCA/CEN; EEB; ENERGY FOR EKIMOFF/BURPOE/COHEN COMMERCE FOR DSTARKS/EHOUSE E.O. 12958: DECL: 02/12/2020 TAGS: EPET ECON PGOV EINV BTIO AJ TX SUBJECT: TURKMENISTAN: BURIED HILL STILL HOPES TO DRILL IN DISPUTED WATER REF: 09 ASHGABAT 976 Classified By: Charge Sylvia Reed Curran for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The Cyprus-registered energy company Buried Hill hopes to drill in Block 3 of the Caspian by the end of ¶2010. The company has completed seismic exploration and a required environmental impact study and is awaiting Turkmen governmental approval before it begins drilling. However, the area that Buried Hill wants to drill is disputed territory with Azerbaijan. Buried Hill's general manager in Ashgabat thought the dispute could be resolved via international arbitration. He stressed the Turkmen government's support for arbitration, while acknowledging that the government of Azerbaijan would have to consent to arbitration. For now, Buried Hill continues to press forward, but it is unlikely the company will receive permission to drill from the Turkmen government unless the two governments can reach a compromise. END SUMMARY. ¶2. (C) On February 12, econoff met with the Buried Hill general manager and Turkmen citizen Eldar Iskanderov, who discussed the international energy company's progress in developing Caspian offshore Block 3. Iskanderov explained that the company is officially based in Cyprus as an offshore company, but its President, Canadian oilman Roger Haines, directs the company from Calgary. Haines formed the company in 2002, and began seriously courting the Government of Turkmenistan (GOTX) for an energy deal in 2004. He added that Buried Hill's "stroke of genius" was playing to President Berdimuhamedov's love of hosting high-level foreign visitors. Former Canadian Prime Minister Jean Chretien arrived in Ashgabat to lobby a deal for the company in September 2007. Three months following Chretien's visit, Buried Hill signed an offshore production sharing agreement (PSA) with the Government of Turkmenistan (reftel). A PSA IN DISPUTED WATERS? ¶3. (C) The PSA Buried Hill entered was for hydrocarbon exploration and production in the field which the Turkmen call "Serdar," located in Block 3. The Government of Azerbaijan (GOA) disputes the Turkmen claim to Serdar, and refers to the area as "Kyapaz." Despite public outcry by the GOA against any Turkmen projects in the disputed area in 2005, the Turkmen decided to sign a PSA with Buried Hill anyway. The Buried Hill general manager did not think that the dispute between Azerbaijan and Turkmenistan was a showstopper. Instead, he asserted that Turkmenistan has taken steps to peacefully resolve any disputes through international arbitration, but to date, has not officially filed for arbitration. He admitted that in order for arbitration to commence, Azerbaijan would also have to consent to arbitration; something it has not been willing to do. ¶4. (C) According to the Buried Hill general manager, the company began 3D seismic exploration in Serdar 10 days after the company signed its PSA, which showed the company's commitment to the project. Collecting and analyzing the seismic data ended in 2008. He stressed that his company had no incidents with Azerbaijani ships or representatives of the GOA during the seismic data collection. He noted that there are many Azerbaijani ships in the vicinity of Serdar which work in the Azeri Chirag Gunashli (ACG) field, but none of them have ever interfered with Buried Hill work in Serdar. At the same time, he acknowledged that the GOA would not view favorably reports of plans to drill in the disputed area. He cited agreements among Caspian states in which Turkmenistan and Azerbaijan reportedly agreed to resolving any disputes in ASHGABAT 00000207 002 OF 002 the Caspian through non-aggressive means. He opined that the two countries would hold to these agreements, and eventually resolve the issue through international arbitration or possibly through bilateral negotiations. NEXT STEPS ¶5. (C) The company employs 100 workers in a state-of-the art office building near downtown Ashgabat. The general manager has been in his position for six years and felt strongly that Buried Hill was committed to future projects in Turkmenistan's energy sector. He added that any future projects would have to wait until Block 3 was successfully drilled, but was confident that the seismic data show real promise for "lots of hydrocarbons." He stated that his company recently submitted its required environmental baseline study and is awaiting GOTX approval. Once approval is given, he added, Buried Hill will seek final approval to drill one hole in Serdar. He hoped the GOTX would give approval to drill, but admitted they could withhold approval until the disputed area is resolved. Should the GOTX approve drilling, he estimated that preparations would take between 6 and 8 months, thus putting the commencement of drilling near the end of 2010. He thought that drilling would cost the company about $312,000 per day. ¶6. (C) COMMENT: The political implications of actually drilling in Block 3 without agreement between Turkmenistan and Azerbaijan are likely to keep the PSA at a standstill for some time. Since few see a quick resolution to the disputed area, it is unlikely that Buried Hill would be able to convince other companies to buy out its PSA, which is the company's likely desired end game. As a result, it seems likely that Buried Hill will be busy keeping up hopes and appearances for the foreseeable future. END COMMENT. CURRAN