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DE RUEHAH #0729/01 1610859
ZNR UUUUU ZZH
P 100859Z JUN 09
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 2944
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE PRIORITY
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RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 5288
RUEHBJ/AMEMBASSY BEIJING PRIORITY 3022
RUEHKO/AMEMBASSY TOKYO PRIORITY 2887
RUEHIT/AMCONSUL ISTANBUL PRIORITY 3532
RHMCSUU/CDR USCENTCOM MACDILL AFB FL PRIORITY
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UNCLAS SECTION 01 OF 03 ASHGABAT 000729 
 
SENSITIVE 
SIPDIS 
 
SCA/CEN; EEB 
ENERGY FOR EKIMOFF/THOMPSON 
COMMERCE FOR HUEPER 
 
E.O. 12958: N/A 
TAGS: PGOV EPET EINV TX
SUBJECT: TURKMENISTAN:  KAKAYEV DESCRIBES DEVELOPMENT 
STRATEGY FROM ANOTHER PERSPECTIVE 
 
¶1.  (SBU)  SUMMARY:  The Morningstar delegation's May 29 
meeting with State Agency for the Management and Use of 
Hydrocarbons Chairman Kakayev provided some insights into 
Turkmen thinking regarding the current energy sector 
development strategy, the export pipeline question and 
commercial proposals that fall outside of standard 
definitions.  He expressed confidence in the current 
development strategy for Yolotan, which he said would bring 
production up sufficiently to cover the country's gas 
obligation to China.  Kakayev asserted that there should be a 
balance between the development of infrastructure, extraction 
of resources, and transportation options, and Turkmenistan 
will not increase production capacity before there is a 
destination for the gas produced, he said.  His general 
comments show a flawed strategy that is unlikely to fulfill 
national needs.  Passively waiting for Western interests to 
build a pipeline to give Turkmenistan access to Western 
markets, for example, and putting minimal effort into 
boosting production, means the country could lose out on key 
opportunities to develop a western route.  END SUMMARY. 
 
¶2.  (SBU)  State Agency for the Management and Use of 
Hydrocarbons Chairman Yagshygeldy Kakayev told members of the 
SE/EE Morningstar delegation that the Agency is empowered to 
license foreign companies to work in Turkmenistan through 
direct negotiations, and is currently overseeing the 
activities of seven production sharing agreements.  (NOTE: 
That includes the three onshore and the four offshore PSAs. 
END NOTE.)  He explained that one of the reasons Turkmenistan 
is agreeable to PSAs offshore but not onshore is that 
Turkmenistan has decades of experience performing onshore 
exploration and development, and has the necessary equipment. 
 It has little, however, in the way of offshore development 
experience.  As a historic example, Kakayev said the Soviets 
had only explored one field in the Caspian Sea, which is in 
the Azerbaijan-claimed area of the sea. 
 
SEEKING TECHNOLOGY AND INVESTMENT 
 
¶3.  (SBU)  He acknowledged that development of the South 
Yolotan field would demand huge investment and an infusion of 
technology, and said the Turkmen government was now 
negotiating the financing of a joint development project for 
Yolotan.  (NOTE:  He may have been referring to the reported 
Iranian proposal, which provides for the development of an 
unidentified portion of the field and for the construction of 
a new 10 bcm export pipeline to Iran.  END NOTE.) 
 
STATE AGENCY OPEN TO INVENTIVE PROPOSALS 
 
¶4.  (SBU)  He said that the Turkmen government wants to bring 
in foreign companies that will invest in the field and bring 
in the necessary technology to develop it.  He added that the 
government was open to either foreign company-managed or 
joint government-company projects.  It would also be possible 
for a foreign company that invests in and develops a field to 
participate in a joint production effort.  However, for 
Turkmenistan, a service agreement means that a company will 
not receive a portion of the field's resources, he said. 
Kakayev noted that large international oil companies don't 
want to participate in projects that lack the promise of 
reserves or are short term in nature.  Service companies, 
however, are interested in such projects, especially the 
drilling, well services and construction companies, he said. 
 
YOLOTAN 
 
¶5.  (SBU)  Kakayev rejected the delegation's research 
indicating that Yolotan will require $190 billion in 
 
ASHGABAT 00000729  002 OF 003 
 
 
investment over the next 20 years.  He also rebuffed the 
proposition that the more gas Turkmenistan produces, the more 
diversified its export pipelines will become, due to 
commercial pressures to move the product to market.  Kakayev 
said that the government had decided to do what it takes to 
raise production from South Yolotan by 10 bcm per year.  He 
said there was no reason to increase it by 60 bcm, because 
there was no way to export such quantities now.  He said that 
the 20 bcm the Turkmen government expected to come from South 
Yolotan in the next few years would be enough to meet the 
Chinese agreement.  (NOTE:  The agreement President 
Berdimuhammedov signed with the Chinese government in July 
2007 stipulated that Turkmenistan would contribute 17 bcm to 
the pipeline that will take some 30-40 bcm of gas to China 
sometime after 2010.  END NOTE.) 
 
¶6.  (SBU)  Kakayev said that Yolotan is not like Dovletabad 
in its geology and structure.  Dovletabad has a smaller "pay 
zone".  Yolotan, he said, is a smaller territory, but the pay 
zone is thicker and Turkmen operators still haven't hit water 
during any drilling operations, which indicates the drilling 
hasn't fully penetrated the pay zone.  He acknowledged the 
thick layer of salt that must be penetrated to access 
Yolotan's gas, and the need for foreign company assistance to 
properly drill through it and manage such operations. 
 
PIPELINES 
 
¶7.  (SBU)  Kakayev said the policy from the beginning of 
independence was to sell Turkmen gas in all directions.  He 
reminded the delegation of failed efforts in 1992 to develop 
an export line through Iran and Turkey, and Unocal's proposal 
to build a line through Afghanistan in the late 1990s with 
Shell and Bechtel.  After those experiences, Turkmen 
officials chose to establish a policy of selling gas at the 
border.  He noted that Turkmenistan is currently receptive to 
Afghanistan and Pakistan building a pipeline to the Turkmen 
border.  Negotiations for a TAPI pipeline have been underway 
since 2002, he said.  In the same way, he noted, Turkmenistan 
is open to a possible Trans-Caspian pipeline.  Kakayev said 
that the Malaysian energy company, Petronas will begin 
delivering gas from its offshore fields in 2010.  The current 
plan is to sell this gas to Gazprom.  The old coastal CAC-3 
pipeline has some remaining capacity that could also be 
tapped, he said, without providing details. 
 
SEEKING BALANCE 
 
¶8.  (SBU)  Kakayev asserted that there should be a balance 
between the development of infrastructure, extraction of 
resources, and transportation options.  Turkmenistan will not 
increase production capacity before there is a destination 
for the gas produced, he said.  The goal, he said, is to 
adjust the pace of development to match the rate at which the 
country is linked up with international infrastructure.  He 
argued that Turkmenistan does not want to assume 
transportation or market risks, although it accepts 
geological, financial and other risks.  He then suggested 
that by building infrastructure just to the border, and 
allowing foreign interests to complete the connection abroad, 
both the risks and profits of energy resources are shared 
equally. 
 
¶9.  (SBU)  COMMENT:  Kakayev's assertion that it makes more 
sense to pace resource development with international energy 
transport development ran completely counter to what the 
delegation was recommending, and makes no sense.  Indeed, it 
may simply be a way for the Turkmen to justify their plan for 
slow onshore development using service companies.  By taking 
 
ASHGABAT 00000729  003 OF 003 
 
 
a passive stance on the development of international 
transportation routes (with the exception of seemingly 
all-expense paid ones such as Turkmenistan-China), the policy 
will impair Turkmenistan's ability to access westward transit 
routes.  Westward routes are more likely to be developed 
because of commercial interests, whereas bilaterally-agreed 
transit routes such as those that will go to China or 
potentially Iran will make progress due to the political and 
economic interests of the countries involved.  Additionally, 
his comments on where gas produced in the Caspian will go 
seemed to almost suggest he expected the delegation to come 
up with an alternative to the CAC-3.  Without a significant 
boost in production, however, it is unlikely that a Western 
country or company will offer up a no-cost pipeline reaching 
the country's border that will move Turkmen gas westward 
anytime soon.  END COMMENT. 
MILES