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Turkmen Gas - Caveat emptor

Of the five nations surrounding the Caspian – Azerbaijan, Kazakhstan, Iran, Russia and Turkmenistan, the hydrocarbon riches of Turkmenistan remain the last great prize, sought and fought over by Russia, China, Iran and Western investors. A recent scandal involving the country’s immense natural gas reserves has brought home the truth of the old Latin adage, “caveat emptor.” Turkmenistan's President Gurbangeldy Berdymukhammedov has dismissed gas officials for allegedly overstating the country's reserves by a factor of two to three times.

While the announcement has startled the Western investment community, which has been assiduously seeking entry into the country since the sudden death of Turkmenistan’s “President for life,” Saparmurat “Turkmenbashi” (“father of the Turkmen”) Nizayov in December 2006, those with longer memories can hardly be surprised, as inflating production figures is a time-honored Soviet tradition brought to its apogee in Central Asia and which apparently has yet to die out.

Before the collapse of the USSR in 1991 Soviet geologists had estimated Turkmenistan's natural gas reserves to be the fourth largest in the world, ranging from 10 trillion to 14 trillion cubic meters (tcm). Such information could not be independently verified however, as the USSR consider its energy reserves a state secret, a policy continued by Niyazov. While Turkmenbashi had often boasted of the country's massive reserves, placing them at even higher levels of up to 24 tcm, his claims were viewed by Western energy firms as blatant braggadocio, with BP calculating them at slightly more than one-tenth that amount.

Determined to settle the matter (and bring in much needed foreign investment), in stark contrast to the secretive Niyazov years, in December 2007 Berdymukhammedov ordered Vice Prime Minister Tachberdy Tagiev to conduct an audit of the country's hydrocarbon deposits. Berdymukhammedov told reporters, "Certifying oil and gas supplies in the country's fields will allow us to clarify our strategy for further developing the use of our hydrocarbon resources and account for the high goals set in the program of development of Turkmenistan's oil and gas industry through 2030 that would promote the development of the mutually beneficial international cooperation in the energy sector." Four months later Berdymukhammedov commissioned an independent audit by respected British firm Gaffney, Cline & Associates (GCA) of Turkmenistan's newly discovered South Iolotan-Osman natural gas field.

Berdymukhammedov was clearly interested in markets beyond Russia and Iran, at the time Turkmenistan’s two export markets. In 2006 Turkmenistan produced 62.2 billion cubic meters (bcm) of natural gas, second only to Russia. With 2005 domestic consumption estimated at 17.07 bcm, approximately 45 bcm, or more than two-thirds of Turkmen production, was available for export.

To expand production however, Turkmenistan needed foreign investment, and Niyazov’s bloviating was not sufficient to attract it. Hence the GCA audit. Berdymukhammedov had high hopes for the audit’s impact, as he said, "The first in the line of deposits to undergo the audits are Southern Iolatan and Osman, which may be entered in the list of the Earth's largest in terms of the size of reserves."

The GCA audit, released 14 October 2008, initially silenced the skeptics, as it estimated South Iolotan-Osman's reserves alone to be between 4-14 tcm of gas, making South Iolotan-Osman the world's fifth- or fourth-largest field. GCA Business Development Manager Jim Gillett noted last autumn, “Production at South Yoloten-Osman can be built up gradually to 70 billion cubic meters a year,” which would in effect more than double Turkmenistan’s current production.

The GCA audit produced a feeding frenzy among foreign energy firms, who jetted into Ashgabat with ever more lucrative offers.  On 22 September U.S., Secretary of State Clinton met at the Plaza Hotel in New York with Berdymukhammedov, in town for the opening of the 64th session UN General Assembly to promote U.S. interest in Turkmenistan’s gas reserves. Clinton’s Assistant Secretary for the South and Central Asia, Robert O. Blake said, “On the energy front, the Secretary said that we want to see Turkmenistan really be a leader in terms of energy security and energy supply… U.S. companies are already doing a lot of business in Turkmenistan, particularly offshore, and are interested, I think, in doing more business to develop some of the onshore hydrocarbon resources there. And so the Secretary conveyed that interest. The Turkmen president said that he's going to be meeting ... with a lot of U.S. oil companies to, again, explore what more they can do in Turkmenistan. So that's certainly a welcome development." Turkmen national TV reported that Berdymukhammedov also met at the Plaza with ExxonMobil chairman of the board and CEO Rex Tillerson, Chevron's vice president for corporate business development Jay Pryor and former U.S. Secretary of State Henry Kissinger, along with officials from Marathon Oil, Kellogg Brown Root and Boeing.

Alas, the love fest was not to last. On 12 October two separate sources -- Russian newspaper Vremiia Novostei, and Germany’s non-governmental organization Eurasian Transition Group reported that the Turkmen government misled GCA by providing them with inaccurate, hyped data. The articles alleged that some potential foreign investors paid Turkmen officials to hand over technical data on the South Iolotan-Osman fields which alerted them to massive discrepancies between the official projections and actual reserves.

The reports cast a pall over Turkmenistan’s inaugural International Investment Forum of Turkmenistan, held in Ashgabat 15-17 October. Nearly 450 international participants from approximately 50 countries attended the conference, including not only high-level representatives of oil majors, but also a wide range of mid-sized companies looking to get involved in Turkmenistan. Berdymukhammedov was due to open the conference, but pulled out at the last minute because he was "very busy," according to Turkmen officials, whose hectic schedule included attending the opening of a local chicken farm the second day of the conference.

Gillet, in major damage control mode, said that the accuracy of an audit depends on the quality of the data provided, defending his company’s reputation by insisting that its auditing methodology would make fraud difficult, stating, "There is a very considerable volume of data to be assessed on a project of this nature. This data comes in a wide range of types and from a range of sources. Therefore, in practical terms, it would be impossible to falsify it all such that it could still appear to be coherent and could mislead an expert team.”

If his actions subsequent to the reports are anything to go by, Berdymukhammedov believed that zealous officials had sullied the country’s reputation. Berdymukhammedov fired the executive managers of state energy companies Turkmengaz, Turkmenneft, and Turkmenneftegazstroi, citing their "irresponsible approach" and accusing them of shortcomings and negligence. Among those getting pink slips were Turkmengaz head Dovlet Mommayev, Turkmenneft chairman Orazdurdy Hojamuradov and Turkmenneftegazstroi’s Atamurad Durdiyev.

What is surreal about the whole event is how little Western investors understood that inflating productions was a time-honored tradition in Soviet Central Asia, as local officials sought to please their Kremlin masters that they had in fact fulfilled or even succeeded their assigned production norms under the various Soviet Five Year Plans. The most notorious of these was the “Great Cotton Scandal” of the late Brezhnev era under Uzbek party boss Sharof Rashidovich Rashidov, which reached all the way up to Brezhnev’s son in law. Rashidov has been posthumously rehabilitated in post-Soviet Uzbekistan as a nationalist who hoodwinked their Soviet masters.

And as for the actual reserves of South Iolotan-Osman fields?

Obviously time for another audit.

And Western energy companies could do worse than to hire a few historians to augment their platoons of geologists lest they are forced to discover anew the truth of George Santayana’s pithy aphorism, “Those who do not remember the past are condemned to repeat it.”

By. John C.K. Daly of OilPrice.com

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