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PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHMO #3369/01 1910910
ZNR UUUUU ZZH
P 100910Z JUL 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1952
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4255
RHEHNSC/NSC WASHDC PRIORITY
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RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 MOSCOW 003369 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GARVERICK, OES 
MIOTKE AND COVINGTON, EAP YAMAMOTO, AND EEB SAEGER 
DOE FOR HARBERT/EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EPET ENRG ECON PREL CVIS RS
SUBJECT: RUSSIA ENERGY: SPECIAL REP. MERMOUD'S MEETINGS 
WITH HALLIBURTON AND EXXONMOBIL 
 
REF: MOSCOW 3161 
 
¶1. (U) SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
¶2. (SBU) Summary:  In a July 6 meeting with Special 
Representative for Business and Commercial Affairs Frank 
Mermoud, Halliburton Russia VP Simon Turton told us he sees 
Russia as the most important growth market for Halliburton. 
Halliburton hopes to triple business to $1.5 billion over the 
next two years, largely through acquisitions of local service 
companies.  Turton said one of his biggest challenges is 
getting Russian visas for his international staff.  In a 
separate meeting with Mermoud, ExxonMobil Russia VP Ed Verona 
told us his company is moving forward with negotiations to 
sell 8 bcm of gas to China from its Sakhalin 1 project 
despite public Gazprom claims that Gazprom should be the sole 
export channel for all gas out of Russia (reftel).  End 
summary. 
 
------------------------------------- 
HALLIBURTON LOOKING TO GROW IN RUSSIA 
------------------------------------- 
 
¶3. (SBU) Halliburton Russia VP Simon Turton told us on July 6 
that Halliburton is moving aggressively in Russia to grow its 
share of the $13 billion oil and gas field services market 
from the current $500 million to $1.5 billion in 3 years. 
Turton said the market, expected to grow to $18 billion by 
2011, is dominated by local firms, with international 
companies having only a 15% share.  Halliburton is targeting 
local firms for acquisition, despite the fact that many such 
deals have failed due to unacceptably shoddy bookkeeping by 
local take-over targets. 
 
¶4. (SBU) Turton described Russia as the most promising market 
for Halliburton, noting that the incentive structure for 
drilling in Russia would keep rigs active, even if a global 
oil price drop halts projects elsewhere in the world.  The 
economic incentive of a given well is largely the same at any 
price above $27 a barrel, since companies get to keep little 
of the price increase above that level as most of it goes to 
the government.  He said a limiting factor in Russia is the 
lack of adequate personnel, causing up to half of Russia's 
500 drilling rigs to sit idle.  Halliburton is working with 
Tyumen State University, which graduates thousands of 
engineers each year, to train workers in applying best 
practices.  Halliburton then recruits the most promising 
graduates to add to its 1600-strong workforce in Russia. 
 
¶5. (SBU) In response to Mermoud's comment on Halliburton's 
decision to move its legal headquarters to Dubai, Turton 
explained that the company is seeking to tap capital markets 
in the Middle East.  He added that the company will likely go 
public in that region and may do so as well in Russia.  He 
said doing business in Russia requires strong local 
relationships, which Halliburton is pursuing. 
 
¶6. (SBU) International management practices and technologies 
are taking root, helping Russia exploit the vast untapped 
potential of East Siberia and Sakhalin.  Russian technology 
is "not bad" but it is unreliable, according to Turton.  He 
said Halliburton has established a technology-sharing 
alliance with Gazprom, even though Gazprom's "old-style, 
bureaucratic" tendencies make it an extremely difficult 
institution with which to do business.  Gazprom will become 
busier in the coming years as it develops gas fields, and 
recognizes that it will need new technologies and equipment 
to do so.  Halliburton, however, closely guards its latest 
and best technologies as a business advantage, preferring not 
to differentiate itself on price, but rather on technology 
and its ability to execute projects. 
 
-------------------------------- 
BIGGEST PROBLEM IS GETTING VISAS 
-------------------------------- 
 
¶7. (SBU) Surprisingly, Turton named a seemingly mundane 
problem as his greatest challenge -- getting visas for his 
 
MOSCOW 00003369  002 OF 002 
 
 
international staff to enter Russia.  He explained that as an 
international company, Halliburton cannot issue the 
invitation letters required of visa applicants. 
 
--------------------------------------- 
EXXONMOBIL LOOKING TO SELL GAS TO CHINA 
--------------------------------------- 
 
¶8. (SBU) In a separate meeting with Mermoud, ExxonMobil VP Ed 
Verona said that despite some public claims by Gazprom and 
others that Gazprom is the sole authorized gas exporter, 
ExxonMobil is pursuing gas sales to China from Sakhalin 1 
under its production sharing agreement (PSAs).  As reported 
in reftel, ExxonMobil believes it is on firm legal ground 
given that the law granting Gazprom a gas export monopoly 
specifically excludes PSAs.  ExxonMobil is planning on 
shipping 8 bcm of gas to China annually via a planned 
pipeline, but it is willing to entertain all "commercially 
acceptable offers," including from Gazprom.  According to 
Verona, however, it would be difficult to come up with a more 
economically attractive option for Sakhalin 1 gas.  He added 
that unlike Shell's Sakhalin 2 (environmental problems) and 
BP's Kovykta (contract performance), the Russian government 
would be hard pressed to find any excuse to force 
ExxonMobil's hand with regard to Sakhalin 1. 
 
¶9. (SBU) Commenting on the large volume of press being given 
to a new law that allows Gazprom and Transneft to run their 
own armed units to protect their infrastructure, Verona 
suggested the idea was not unreasonable.  He said the U.S. 
similarly allows armed guards for a variety of private 
protective details. 
 
¶10. (SBU) This cable has been cleared by Special 
Representative Mermoud. 
BURNS