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