Tuesday, May 29, 2012

tuesdays in turkmenistan: wherein it's 23:15 and still tuesday

There's still time! Time for some sort of Tuesday in Turkmenistan-themed entry before the day runs out. I have time, I do indeed have time. There's simply the matter of proper motivation. As I mentioned last week, I've come into a major tender and proposal cycle with multiple clients, both current and prospective. And I really dislike doing tenders. More than anything, it's the process associated with them and how they strip out the most essential element of any relationship (which is trust) and instead boil the work down to technical qualifications followed by commercial qualifications. And low price wins (assuming technical qualifications have been met). Now, I understand why it works like this. In fact, one could argue it is necessary. Part of the reason it goes through this tender process is because the government is involved, which means there must be oversight. Why is the government involved? Pull up a chair.

Cost recovery. Those two magical words drive the tendering process to the lowest possible bidder. It is relatively standard for governments not called the United States of America to collect royalties on oil and gas revenue that oil and gas companies generate. This is a pretty standard model that allows governments to have a stake in their natural resources without doing the development themselves. Now, Turkmenistan has a few "state concerns" in the O&G industry, but there are also non-state companies doing business as well as semi-state controlled entities from other countries (specifically China and Malaysia). Another part of the standard model is that these non-state, non-Turkmen companies do not have to pay royalties until the "cost recovery" to drill the well is complete. That is basically the cost it took to drill the well. Thus the companies do not pay royalties to the government on oil and gas they sell until they are first able to recoup their own costs from the initial production. Thus, the government, with their interest in collecting as much royalty revenue as possible, wants the cost of drilling the well to be as low as possible. Of course the O&G company also wants that cost to be as low as possible, but they are usually more cognizant of the difference in cost and price. The tender process is not one where that distinction is always so clear. This is where my disdain for the process comes from. It ends up being a bizarre farce instead as everyone manipulates their offering to win the work. It's not necessarily bad or sinister that this occurs, but it is frustrating as things that are seemingly more expensive on the surface can end up saving money in the long run.

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