VZCZCXRO9789
PP RUEHAG RUEHDBU RUEHDF RUEHIK RUEHLN RUEHLZ RUEHROV RUEHVK RUEHYG
DE RUEHAH #0729/01 2041202
ZNR UUUUU ZZH
P 231202Z JUL 07 ZDK
FM AMEMBASSY ASHGABAT
TO RUEHSD/SECSTATE WASHDC PRIORITY 9042
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLM/AMEMBASSY COLOMBO 0440
RUEHKA/AMEMBASSY DHAKA 0462
RUEHIL/AMEMBASSY ISLAMABAD 2150
RUEHBUL/AMEMBASSY KABUL 0899
RUEHKT/AMEMBASSY KATHMANDU 0217
RUEHNE/AMEMBASSY NEW DELHI 0947
RUEHCG/AMCONSUL CHENNAI 0137
RUEHKP/AMCONSUL KARACHI 0186
RUEHCI/AMCONSUL KOLKATA 0108
RUEHLH/AMCONSUL LAHORE 0122
RUEHBI/AMCONSUL MUMBAI 0147
RUEHPW/AMCONSUL PESHAWAR 0460
RHMFIUU/CDR USCENTCOM MACDILL AFB FL//CCJ2/HSE/CCJ5//
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC//DHO-2/REA/NMJIC-J2//
RHEHNSC/NSC WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 05 ASHGABAT 000729 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EUR/RUS, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ENRG EPET EINV RUS TX
SUBJECT: TURKMENISTAN ENERGY: "YOU DON'T HAVE TO BE 
GAZPROMISTAN" 
 
REF: A. ASHGABAT 0699 
     ¶B. ASHGABAT 0690 
     ¶C. ASHGABAT 0554 
 
ASHGABAT 00000729  001.4 OF 005 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  In a lively exchange of views between 
USDEL and First Deputy Minister of Economy and Finance 
Jeparov, the U.S. side championed multiple export routes for 
Turkmenistan,s hydrocarbon resources, explained the economic 
disadvantage of &selling at the border,8 identified major 
problems Turkmenistan needs to address to facilitate 
significant Western investment, and emphasized U.S. interests 
in Turkmenistan,s energy are strategic. 
 
¶3.  (SBU) SUMMARY CON,T:  Jeparov admitted Turkmenistan does 
not fully comprehend how to calculate energy transit costs, 
evidenced lack of understanding of market forces on national 
economies, and asked the United States to consider a double 
taxation treaty with Turkmenistan.  However, he showed real 
openness to U.S. views.  This important meeting emphasized 
the need for us to intensify our efforts to educate 
Turkmenistani officials about Western models of business and 
investment.  END SUMMARY 
 
¶4.  (SBU) SCA PDAS Steve Mann, EUR DAS Matt Bryza, and EEB 
Rob Garverick met for nearly two hours on July 12 with First 
Deputy Minister of Economy and Finance Tuwakmamet Jeparov and 
Chief Specialist Galina Romanova.  Both are open-minded and 
intellectually able young stars of the ministry.  Minister 
Hojimyrat Geldimyradov, who in past meetings has deferred to 
them, was unavailable, likely because of the on-going 
sessions of the Russia-Turkmenistan Joint Economic Commission 
and concurrent cabinet of ministers meetings. 
 
MAKE IT EASIER ON WESTERN INVESTORS 
 
¶5.  (SBU) Mann said the answer to President Berdimuhamedov,s 
question, &Where,s the new pipeline?8 is another question: 
 &Where,s the gas?8  To convince large Western energy 
companies to invest in Turkmenistan, they need long-term, 
stable access to significant hydrocarbon deposits.  They also 
need a positive business environment that supports and 
facilitates investment.  Mann suggested that Turkmenistan 
needs, for example, to bring its visa regime into compliance 
with international standard procedures, and allow an 
international school to operate successfully.  Noting that 
Turkmenistan currently invests $1.5 - 2.0 billion annually in 
the oil and gas sector, Mann asserted that U.S. estimates 
suggested that eight to ten times that amount would be needed 
to achieve Turkmenistan's full export potential. 
 
"NOT BECAUSE WE LOVE YOU -- IT'S HOW MARKETS WORK" 
 
¶6.  (SBU) Opening by saying that he was pleased to be in 
Turkmenistan again, where he first visited almost a decade 
ago when working on the original Trans-Caspian Pipeline 
negotiations, DAS Bryza explained that we consider three 
important relationships when looking at Caspian energy 
discussions.  First is with Turkmenistan, because we are 
concerned about its prosperity and independence, and want it 
to receive the fairest, highest prices for its energy 
resources.  Second, the United States maintains important 
relations with its friends in Europe, both NATO members and 
others alike.  In seeking a fair price for its gas, Bryza 
explained that Turkmenistan should receive the equivalent of 
the European price less a fair transit price, net-back 
 
ASHGABAT 00000729  002.6 OF 005 
 
 
pricing is the most fair, transparent, and efficient way to 
set pricing.  Third, U.S. relations with Russia are important 
to us.  We want fair competition, not confrontation with 
Russia. 
 
¶7.  (SBU) Bryza noted Gazprom does not use transparent 
net-back principles to set prices for Central Asian gas. 
While consumers in Europe pay $285 per thousand cubic meters, 
Turkmenistan receives only $100, which means someone else 
gets the remaining $185 difference.  We want Turkmenistan to 
receive the highest possible price for its gas, not because 
we love Turkmenistan or are generous, but because that is how 
markets work.  When markets function efficiently, national 
security and prosperity are strengthened.  If Turkmenistan 
gains direct access to the European market, Russia will have 
to pay Turkmenistan more for gas.  Noting that Central Asian 
gas will ultimately find its way to Europe anyway, Bryza 
stressed that now was the time for Turkmenistan to seek 
direct access to the European market before Gazprom 
monopolizes the transit infrastructure. 
 
¶8.  (SBU) Bryza recounted that a Central European Prime 
Minister had recently told him his country wants Central 
Asian gas, but Azerbaijan told this Prime Minister it had no 
available quantities, and Russia told him that it had "bought 
all Turkmenistan's gas forever."  Acknowledging 
Turkmenistan's requests for concrete proposals for new 
pipelines, Bryza repeated PDAS Mann's assertion that this 
will happen only when Western companies see the advantage of 
investing in Turkmenistan.  Bryza assured Jeparov that when 
this happens, we will use all of our diplomatic influence in 
Europe and the Caucasus to make it possible for Turkmenistan 
to receive the highest possible price for its gas.  This is 
part of our strategic vision for international relations. 
 
IS A TRANS-CASPIAN PIPELINE TOO EXPENSIVE, "GRANDIOSE"? 
 
¶9.  (SBU) Jeparov noted that in gas policy, President 
Berdimuhammedov is committed to continue former President 
Niyazov,s diversification policies. China's agreement to 
construct a gas pipeline already represented an alternative 
route, and a Trans-Afghanistan Pipeline could provide 
significant transit revenues for that country.  A 
Trans-Caspian Pipeline to Europe via Turkey could be 
realized, but Jeparov asked what concretely constitutes 
energy security for Europe. 
 
¶10.  (SBU) Jeparov commented that while there was currently 
no direct pipeline from Central Asia to Europe, the 
Trans-Caspian proposal was perhaps a &grandiose8 project 
that was more expensive than existing arrangements.  Not 
true! interjected both Mann and Bryza.  Jeparov said 
Turkmenistan currently receives (from Gazprom) $100 per 
thousand cubic meters at the border, and it is difficult to 
calculate what appropriate transit fees should be.  He agreed 
that monopolist transport was economically inefficient, but 
Russia offers guaranteed market access that Jeparov suggested 
actually supported European security, because this gas 
ensures uninterrupted Russian supply to European consumers. 
Additionally, he noted Turkmenistan's large potential gas 
reserves in the South Yoloten field and the recently 
announced new oil field in western part of the country (NOTE: 
Presumably the Akpatlawuk field. END NOTE), both of which 
could allow for multiple export routes in the future. 
 
¶11.  (SBU) To attract Western energy majors to Turkmenistan, 
Jeparov agreed that the business climate was important, but 
 
ASHGABAT 00000729  003.4 OF 005 
 
 
he wondered exactly what this term meant.  If it referred to 
the legal base, Soviet-era laws already existed.  He added 
that earlier offers by Turkmenistan to address the gaps 
between U.S. and Turkmenistani legislation had not been met 
with enthusiasm.  For example, the United States had never 
followed up on the need for a double taxation treaty for U.S. 
firms operating in Turkmenistan.  He asked what other 
specific gaps might exist and how they might be specifically 
addressed.  Jeparov explained that previous potential foreign 
investors considering new projects in the Caspian region had 
offered draft laws providing guidance for specific necessary 
changes in legislation, which became the basis for 
Turkmenistan's current law on hydrocarbons. 
 
OTHER AREAS FOR WESTERN INVESTMENT 
 
¶12.  (SBU) Jeparov listed other sectors where Western 
investment would be welcome:  upgrading electricity 
generation and the Soviet-era electrical grid, renovating and 
modernizing existing factories, liquefied natural gas 
production, chemical industries related to natural gas 
production, and agricultural fertilizers for domestic use and 
export. However, Jeparov said his ministry could not help 
improve the visa regime, since that is the Ministry of 
Foreign Affairs, responsibility.  (COMMENT:  In fact, the 
Ministry of National Security (ex-KGB) ultimately controls 
Turkmenistan's visa policy.  END 
COMMENT.) 
 
SOMEONE WILL PAY FOR GAZPROM'S FAILURE TO INVEST 
 
¶13.  (SBU) Addressing transit costs, DAS Bryza stressed that 
we want Turkmenistan to fulfill its contractual obligations 
to Russia, but both we and Europe want diversification. 
European policymakers are concerned about the commercial 
pressures of relying on a sole supplier.  Furthermore, they 
view Gazprom as less and less able to meet its own 
contractual obligations.  According to the International 
Energy Agency, after 2010, Gazprom may not be able to meet 
its commitments, because it hasn't invested in upstream 
production and pipeline infrastructure.  Reductions in 
deliveries over the last two years to Estonia, Lithuania, and 
Italy emphasize this point. 
 
¶14.  (SBU) Infrastructure investments must be made, Bryza 
stressed, and someone will have to pay for them.  First, 
consumers will pay with higher prices.  But producers will 
also suffer because Russia will capture the price increases. 
Turkmenistan needs export options to ensure that it receives 
the full price for its gas.  Bryza showed Jeparov a map and 
table of projected shipping costs prepared by the 
France-based Mediterranean Energy Observatory that projects 
shipping costs for gas to Austria via the Nabucco Pipeline at 
$2.05 per one million British thermal units (BTU) for 
Azerbaijani gas, and $2.12 for gas from Turkmenistan, versus 
$2.90 for the same Turkmenistani gas via Russia.  Gas from a 
Trans-Caspian route would be cheaper, and producers would 
receive the full price less a transit fee.  Furthermore, with 
the advantage of higher prices through non-Russian routes, 
Turkmenistan could negotiate for a fairer, higher price for 
its gas with Russia. 
 
¶15.  (SBU) Jeparov fully agreed with Bryza's overall point, 
but questioned whether the study accounted for the existing 
Soviet-era infrastructure.  Bryza confirmed that the 
projected costs of existing and upgraded current pipelines 
through 2020 were factored in.  PDAS Mann stressed that 
 
ASHGABAT 00000729  004.4 OF 005 
 
 
Jeparov had identified the key point, specifically the 
financial structure of pipelines.  A pipeline is more than 
just pipes, he said.  Due to their different financial 
structures, one could not compare export routes without 
discussing the accompanying financial structures. 
 
MANN INTRODUCES INTERNATIONAL PRICING FORMULAS 
 
¶16. (SBU) Gazprom's current advantage is that its 
infrastructure already exists, Mann acknowledged, but it 
needs billions in new investment.  As a result, Gazprom must 
negotiate new terms every one to three years with its 
suppliers and consumers.  The rest of the world doesn,t work 
like that, and instead signs long-term gas sales agreements. 
For example, parties in the Shah Deniz project in Azerbaijan 
agreed on a gas sales formula based on several factors that 
adjusted prices daily over its twenty year life.  The 
advantage of such an approach for both parties is stability 
and a transparent market price.  If the global price 
increases, Mann continued, the seller receives more revenue. 
The most important part of this arrangement, however, is that 
it is stable and internationally recognized.  If in three 
years -- or tomorrow -- Gazprom changes the price it pays, 
Turkmenistan could do nothing because it has no alternative 
route to market.  We want to promote alternate pipelines to 
Europe for Turkmenistan, but Western investors must have 
reliable long-term sources of gas. 
 
"SOVIET LEGACY IS HISTORY, BUT DOESN,T HAVE TO BE YOUR 
FUTURE" 
 
¶17.  (U) Mann stated frankly potential Western investors 
still see Turkmenistan's business climate as very Soviet, 
which is understandable because that is part of 
Turkmenistan's history.  He stressed, however, it does not 
have to be part of Turkmenistan's future.  We are prepared to 
support the development of a new private sector in 
Turkmenistan that benefits Turkmenistan's businesspeople. 
The current visa regime and requirement for letters of 
invitation reflect the heavy hand of security control on 
business, which was understandable in the past.  But no 
business-friendly country in the world has such requirements. 
This really should be changed.  Jeparov said his ministry 
was ready to discuss all issues, except visas, which is 
beyond their competence. 
 
"WHAT IS YOUR INTEREST IN TURKMENISTAN'S GAS TO EUROPE?" 
 
¶18.  (SBU) Jeparov asked bluntly, "What is the U.S. 
financial interest in seeing Turkmenistan sell its gas to 
Europe?"  Bryza replied clearly, "We have no financial 
interest.  Our interests are strategic."  Europe is our most 
important trading partner.  If Europe is financially 
disadvantaged, we are, too.  When Europe worries about 
Russian gas disruptions, as had happened recently to Georgia, 
Ukraine, and Belarus, it was more difficult to stand together 
against Russia, the world's largest oil exporter.  Equal 
relations with Russia, which had the world's largest gas 
reserves, were needed.  Our European allies need energy. 
Gazprom will only grow stronger if it monopolizes the 
European market and infrastructure. 
 
¶19.  (SBU) After a detailed discussion of the advantages of 
the private sector in a global market economy, Mann recounted 
his last conversation with Turkmenistan's former President 
Niyazov in August 2006.  Objecting to Mann's assertion that 
Moscow seemed to view Turkmenistan as "Gazpromistan," Niyazov 
 
ASHGABAT 00000729  005.4 OF 005 
 
 
admitted that Turkmenistan had no alternatives.  Mann stated 
again our strategic interest is that Turkmenistan finally 
realizes its full sovereignty and independence.  A 
Trans-Caspian Pipeline is a means to that end. 
 
COMMENT 
 
¶20. (SBU) Jeparov was clear Turkmenistan remains open to the 
concept of a Trans-Caspian Pipeline but understands very 
little about the basic needs of Western investors and how the 
global economy works.  One of the most important things we 
can do is provide a steady stream of essential printed 
information for broad dissemination throughout the government 
of Turkmenistan.  END 
COMMENT. 
 
¶21.  (U) PDAS Mann has cleared this cable. 
HOAGLAND