Kurbannazar Nazarov

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.

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 Exxon-Mobil, 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).

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.

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.