REGIONAL REVIEW

Turkmenistan reaches out to foreign investors

Capitalizing on its favorable geographic position and abundant reserves, Turkmenistan seeks to expand oil and gas production and increase exports. To achieve this goal, officials are working harder to attract foreign investment

A World Oil Staff Report

With total proved, probable and possible reserves estimated at more than 45 billion toe, Turkmenistan has the world’s fifth-largest natural gas reserves, as well as substantial oil resources. In this exclusive interview, Turkmenistan’s Minister of the Oil and Gas Industry and Mineral Resources, Kurbannazar Nazarov, assesses the country’s energy sector, as well as prospects for foreign investors.

"The government has put substantial effort into encouraging foreign investment in oil and gas." – Kurbannazar Nazarov, Turkmenistan Minister of the Oil and Gas Industry and Mineral Resources

Question: There are many places worldwide for oil investors to participate. Why should they choose Turkmenistan?

Nazarov: We offer foreign companies a unique chance to participate in developing reserves worth billions of dollars. Turkmenistan’s hydrocarbon reserves are assessed at 45.44 billion toe, based on the most advanced, most accurate forecasting methods. Some 160 oil and gas fields have been discovered, of which only 48 have been developed. And just 30% or so of Turkmenistan’s potential hydrocarbon resources have been studied and explored.

The Turkmen government is actively working to create a favorable export environment. We are improving and expanding existing pipeline systems and developing new routes for transportation of hydrocarbons. Reconstruction and construction of new terminals – to store and ship hydrocarbons and their by-products – and formation of a national tanker fleet in the Caspian Sea are in progress.

In addition, Turkmenistan has developed a favorable investment climate, based on a concept of permanent neutrality and the open-door policy set forth by President Saparmurat Niyazov. Those policies result in equitable cooperation with all nations, a stable domestic situation, and an effective legal / legislative foundation that protects Western partners’ rights and investments while ensuring equitable taxation.

Q: What is the current status of the investment process?

Nazarov: The government has put substantial effort into encouraging foreign investment in oil and gas. Various forms of cooperation with foreign companies have been developed and implemented, including joint ventures and production-sharing agreements. Service companies are encouraged to conduct geological surveys and drilling activities; construct and develop oil fields, reconstruct existing production facilities and develop new projects. These projects are financed through direct foreign investment and under long- and medium-term foreign credit facility arrangements.

From 1991 to 2001, the foreign share of investment in Turkmenistan’s energy sector was 43.7%, with 16.2% directly invested. Companies, such as ExxonMobil, Burren Energy (UK), Dragon Oil (UAE), Mitro International Ltd (Panama) and Petronas, operate under production-sharing agreements.

Companies in the service / supply sector operating in Turkmenistan include Western Geco, Halliburton, Schlumberger, Chinese National Petroleum, Mannesmann, Siemens, Bentek and Bateman. In payment for gas supplies to Ukraine, Ukrainian companies are building gas field compressor stations and transportation facilities. They are also participating in development of gas / condensate resources at Keymir, Akpatlavuk and Chekichler fields.

Assisted by European, Japanese, Iranian and other foreign companies, Turkmenistan is modernizing existing facilities and constructing new ones to process oil and gas. Foreign investors contributed to a 150% increase in Turkmenistan’s annual hydrocarbon production over the last five years.

Q: How does Turkmenistan plan to increase production? Does Ashgabat plan to involve foreign firms in this effort?

Nazarov: Turkmenistan has adopted a "Program of Social and Economic Development of Oil and Gas Industry through 2010." The program envisages hydrocarbon production increasing to 28 million t of oil and 85 Bcm of gas in 2005, and to 48 million t of oil and 120 Bcm of gas by 2010. To keep pace with rising production, Turkmenistan plans to increase oil exports to 16 million t and gas exports to 70 Bcm in 2005, and to 33 million t and 100 Bcm, respectively, in 2010. To achieve these targets, additional investment will be required.

Q: How much additional investment will you attract?

Nazarov: We anticipate that from 2001 through 2005, oil and gas industry investment will increase three-fold. Direct investment in exploring, developing and producing hydrocarbons will represent 45.5% of that total. From 2006 through 2010, we expect a three-fold increase in aggregate industry investment, with foreign investors’ collective share increasing 530% over the previous period, to 83.8% of total investment. Foreign investment will focus primarily upstream, as export pipeline systems are developed. The government expects investment in oil and gas to increase 650% from its current level, reaching $10.4 billion in 2010.

To ensure an effective investment policy, a government-initiated "Program to License Hydrocarbon Prospecting and Development" was developed in 2001. This program envisages licensing based on direct negotiations, as well as the incorporation of a "mutual-benefit" clause. At October’s international investment conference on Turkmenistan energy projects, several dozen offshore and onshore blocks will be offered to foreign companies. These projects would include fields under development and territories being explored.

Q: Who may apply for licenses under this program?

Nazarov: Foreign firms with participation of domestic companies are eligible for licenses. We expect the program to be realized by 2010. Potential investors may obtain details from the Licensing Department of the Competent Authority on the Use of Hydrocarbon Resources.

Q: The Turkmen sector of the Caspian Sea is one of your most attractive regions for new projects. What activity is taking place there?

Nazarov: Currently, 10 oil and gas fields are under development in an approximately 78,000 sq-km area. To date, 110 exploratory wells have been drilled, and total footage exceeds 430,000 m (1.41 million ft). Two foreign investors operate in this region-Dragon Oil in the Cheleken Block and Petronas in Block 1.

Q: What are the next steps for this region?

Nazarov: Western Geophysical has completed shooting 2-D seismic in the Turkmen sector of the Caspian Sea. Interpretation of those results provided us, for the first time ever, with highly accurate information on deep geological boundaries. This made it possible to develop a technical basis for assessing and classifying regional hydrocarbon potential.

In turn, that made it possible to identify the most promising areas, prepare seismic data packages and hold presentations in Austria, the UK and the U.S. One can certainly expect work on new oil and gas deposits in the Turkmen sector of the Caspian to begin in the near future. Dragon Oil drilled its first exploratory well this year and has begun work on a second well (see sidebar).

Dragon Oil exemplifies chances for success in Turkmenistan A long-time player in the region’s energy sector, Dragon Oil saw its prospects in Turkmenistan improve significantly with changes in the republic’s business environment. Most notably, the 1997 Law on Petroleum paved the way for Dragon’s 25-year production-sharing agreement with the Turkmen government. In the Cheleken Block of the Turkmen shelf in the Caspian Sea, Dragon Oil is taking advantage of regulatory reforms to improve oil production at two existing fields. "The new legislation has simplified the operating structure, creating a much more efficient and clearer environment," noted Dragon CEO Ian Baron. "Much of the red tape associated with the sector in Turmenistan has disappeared, making it a much more attractive working environment." Dragon Oil is an independent oil and gas production company, whose shares are traded under a dual primary listing on the London and Dublin Stock Exchanges. The company is based in Dubai and 66.7%-owned by Emirates National Oil Co. (ENOC), an arm of the Dubai government. The remaining 33.3% is held by retail and institutional investors. Dragon’s operations focus on the Turkmen sector of the Caspian Sea, where the firm holds re-development rights to two major oil fields, Lam and Zhdanov. Discovered during the Soviet era, they are largely undeveloped and together hold certified proven-plus-probable oil reserves of about 600 million bbl and 2.3 Tcf of gas. These huge reserves, plus the extensive infrastructure that already exists, offer a rare opportunity to develop the reserves and obtain immediate cash flow. This will hold true, Baron notes, if Dragon can increase output while reducing unit production costs. Output stands at 7,900 bopd, but it could rise to some 70,000 bopd as new wells are brought onstream. To export its output, Dragon is looking to a southern route through Iran (where it has a swap agreement) but has not ruled out other options. In June 2001, the company completed drilling of its first well – LAM 22-101 – to a 3,791-m depth. Flowrates hit 2,000 bopd (250 t/day), plus 19 MMcfgd. In early August, Dragon announced that it had spudded a second well in Lam field, to be drilled to a 4,050-m depth. Although Dragon is now focused almost exclusively on Lam and Zhdanov fields, the firm will seek other opportunities in Turkmenistan, the Caspian and the Middle East, said Baron. "We believe we have a recipe for success and are keen to work closely with industry partners to share it."

According to both Turkmen and foreign experts, the forecast hydrocarbon resources of the Turkmen sector of the Caspian total 11.0 billion t of oil, excluding areas already under contract. In other words, more than half of our oil resources, plus about 25% of our natural gas resources are located in this region.

Q: Those figures imply considerable resources elsewhere in the country. What are you doing to develop those regions?

Nazarov: We’ve successfully encouraged foreign companies to develop the main oil-producing region – southwestern Turkmenistan – where more than 70% of all development is concentrated. There are vast areas to be prospected. We anticipate that foreign companies’ share of Turkmenistan’s total oil output will exceed 52% in 2005 and be more than 49% in 2010. In the principal gas-producing region, eastern Turkmenistan, a considerable surplus of active resources exists. The primary task there is to access new consumer markets.

Energy-related legislation has matured Turkmenistan has implemented a number of laws of interest to foreign energy investors. One example is the 1992 Law on Subsoil, which vests authority over the subsoil and related resources to the president and government of Turkmenistan. Another item is the Law on Foreign Investment, which provides a legal framework for foreign investment protection. Additionally, the Law on Foreign Concessions provides for the granting of concessions for onshore and offshore areas containing natural resources. It also allows investment in industrial enterprises that explore, develop, extract and use natural resources. Officials are recruiting foreign firms’ help to further develop reserves in the main oil and gas-producing areas onshore southwestern and eastern Turkmenistan. Other relevant legislation includes the Laws on Investment Activity, on Currency Regulation, and on Foreign Economic Activity, all designed to protect foreign investors and safeguard their holdings from nationalization or appropriation. Following passage of the Law on Hydrocarbon Resources in 1997, the government granted concessions to several foreign energy companies to participate in development of Turkmenistan’s oil and gas reserves through production-sharing and joint venture agreements. This law, applies to both foreign and domestic entities, and it regulates energy-related licenses, contract and operations in Turkmenistan. It also regulates the powers, rights and duties of state agencies, companies, enterprises and organizations engaged in oil operations. Oil operations are carried out on the basis of licenses extended through tenders, as well as direct negotiations. The legal mechanism for issuing licenses for the right to conduct oil operations was defined by Presidential Resolution No. 3999, dated December 18, 1998. The terms for conducting oil operations are defined by contract.

Q: What are the prospects for increasing gas exports?

Nazarov: From the day that Turkmenistan became independent, it has been committed to developing a diversified pipeline infrastructure. We are investigating several oil and gas export options, including supplying gas to existing and potential markets in Turkey and, further, to Europe, Afghanistan, Pakistan and India; then to Kazakhstan, Kyrgyzstan and China; and finally on to Korea and Japan.

CIS countries, mainly Ukraine and Russia, are our traditional markets. Currently, Ukraine is our best market. Under an agreement signed in April 2001, Turkmenistan will supply 250 Bcm of gas to Ukraine from 2002 to 2006. By 2010, demand there is forecast to grow by 105 Bcm to 110 Bcm, thus enabling us to increase exports to this market, assuming that pipeline transport capacity also increases.

In addition, there is a demonstrable need for Turkmen gas to supplement Russian gas. We are negotiating with Russian officials on a 10-year intergovernmental cooperation agreement in the gas sector. In early July, delegations from the two countries met in Moscow, in part to discuss joint Turkmen-Russian gas supplies to other countries. Assuming that we develop a mutually beneficial arrangement with Russia, we have a real opportunity to sell Turkmen gas to Europe.

Iran is another strategic destination for gas exports. Gas supplies via the Turkmenistan-Iran pipeline are projected to total more than 4 Bcm in 2001, and increase to up to 8 Bcm annually by 2006. This pipeline has the technical capacity to transport up to 13.5 Bcm of gas annually. An extension of this pipeline to Turkey is also under discussion.

East Asia is a promising, long-term market for Turkmen gas. ExxonMobil, Mitsubishi and CNPC are working to introduce Turkmen gas to China. The primary source of such exports is expected to be the Amu-Darya basin of eastern Turkmenistan. As a result of a July 6, 2000, agreement, a joint working group composed of CNPC and Turkmen oil and gas officials has been created to study available options.

Q: What are the most promising oil export markets?

Nazarov: We believe that oil exports can be shipped south, through Iran, to the Persian and Oman Gulfs, and transported from there by tanker to virtually anywhere in the world. Turkmenistan’s geographic position makes it possible to export hydrocarbons and products in other directions as well: west to Black Sea and Mediterranean markets; southeast to northern Iran, Afghanistan, Pakistan, Tajikistan and Kyrgyzstan; and across Russia, to northwestern Europe.

Currently, oil is transported by sea in various directions, as well as via the Volga-Don canal across Russia. In the future, we expect oil to be shipped through the Kazakhstan-Turkmenistan-Iran pipeline.

Q: Can you name some infrastructure projects that Turkmenistan will complete with help from foreign companies?

Nazarov: Turkmenistan is conducting several major projects with foreign investors. At a total cost of more than $90 million, National Iranian Oil Engineering and Construction Co. built the Turkmenistan-Iran gas pipeline and the oil preparation unit at Korpedzhe field. Its investment is secured by gas exported to Iran via the pipeline. Bateman Engineering is also completing a $180-million gas infrastructure project.

In northern Turkmenistan, a series of projects is underway to increase gas export capacity and increase the reliability of shipping through the Central Asia-Center (CAC) gas pipelines. Projects completed include reconstruction of compressor station Serdar; reconstruction of a gathering system, transportation and gas lift supply to Turkmenneft’s wells; and reconstruction of compressor station Goturdepe and of a gas pipeline from Goturdepe to the Jebel station at CAC-III.

Several other projects are also nearing completion. These include one with Germany’s Pall GmbH for supply and installation of filters for gas desulfurization and treatment at Dovletabad field; and one with U.S-based Compressor Controls Corp. for installation of an integrated, automatic system to control compressor units at a gas liquefaction unit at Naipe field. Germany’s Man GHH Oil & Gas will construct a compressor station at Korpedzhe field for utilizing associated gas, with annual capacity of 2 Bcm/year. In April 2001, a tender was announced for renovating technological communications.

Q: How accessible is the service sector to foreign firms?

Nazarov: President Niyazov realized the important role that regulation of contract services may play in accelerating E&P. In June 1998, he determined in the resolution, "On Measures to Regulate Contracting Services in the Oil and Gas Industry," that services will be provided under cooperation contracts with Turkmen enterprises or within JVs. For this, a model cooperation contract has been developed and approved.

Moldova’s Ascom has been a pioneer in our oil and gas services market. Since 1996, it has serviced and operated idle wells in Goturdepe and Barsagelmes fields, and maintained and serviced production and drilling equipment. China Oil Engineering and Construction Corp. has provided well repair services to Turkmen oilmen using advanced technologies since 1997. China Oil has offered its services to increase oil production and recovery factors at Gumdag oil field.

Schlumberger Logelco Inc. has provided services related to geophysical and production projects since 1997. In March 1999, an alliance of Schlumberger and Balkanneftegeophisika was formed to provide oil field services in Turkmenistan.

We encourage select foreign service companies to work with domestic firms in numerous areas. These include drilling; increasing production; utilizing modern, efficient equipment and processes; conducting workovers, running field and geophysical projects; automating fields, and building compressor stations. Additional projects would develop industry infrastructure, and improve social and working conditions.

The role of foreign investors in the services sector will be significant, especially in the initial stages, probably until the year 2005. Then, as domestic service companies are formed, these contractors, in alliance with foreign companies, will provide a substantial share of services.