Turkmenistan gas export options: to diversify or not?

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The dynamic development of the oil and gas sectors in Turkmenistan is restricted by their being relatively closed. Factors affecting development are, primarily, the absence of new geological surveys (especially in the Caspian offshore); limited availability of information on proven gas reserves from independent audits; tense relations with Azerbaijan (including disputes in the Serdar/Kyapaz, Osman/Azeri and Khazar/Chirag fields, and gas quotes in the Transcaspian gas pipeline - TCGP). Same limiting effect have political instability in neighboring countries (this affects particularly the TransAfghan gas pipeline project) and the absence of oil and gas revenue transparency.
Complications arising from these situations have dissuaded some major oil companies, such as ExxonMobil and Shell, from pursuing production activities. As a result, five production sharing agreement projects exist, mostly operated by mid-sized companies.

Currently the most open spheres in the oil and gas sectors are in transportation, equipment supplies and downstream activities. There is a high activity of private companies in the reconstruction of two refineries in Turkmenbashi and Seidi. This allows 75 percent of oil produced to be processed in the country.

This high downstream activity by private companies is explained by such facts as: export not being strictly connected with pipeline issues; proximity of the Turkmenbashi refinery to the main sea port and oil fields; direct connection with the Omsk - Pavlodar - Shymkent - Seidi oil pipeline, which can allow the use of Russian and Kazakh crude oil; the benefit of tax holidays for the companies involved in reconstruction.

Be friends with everybody, but one choice

The newly-elected president has already given notice of "mutual beneficial cooperation with all interested countries", especially with Russia, China, the U.S. and countries of the EU. According to the national Oil and Gas Industries Development Program to 2030, gas production in 2010 should be 120 bcm (exports should be 100 bcm, compared to 46-47 bcm in 2006). The new government is considering three main export routes to reach this goal.

One of these is a "north direction" route through the Central Asia - Center gas transportation system (with a current capacity of 45 bcm). According to a long-term, 25-year agreement with Gazprom, gas exports should be to 80 bcm in 2010. But even with a total reconstruction of that system, exports will be only 70 bcm in 2010, in which case gas transportation volumes from Kazakhstan and Uzbekistan will be increased.  

Since pipeline capacity will be unable to transport the desired quantity of Turkmen gas in 2010, a new pipeline should be constructed. One possibility is a pipeline along the Caspian seashore through Kazakhstan and Russia to Ukraine. The pipeline's length will be 3,000 km and cost an estimated $3 bln. Due to likely delays casued by tensions between competing interests construction of the pipeline would probably not be completed until after 2010.

Another possibility is an "east direction" route to China. Under the terms of an agreement between the two countries gas exports should begin in 2009. However some experts estimate a pipeline construction period of at least 4 years. It is also, at 6200 km and $10 bln, the most expensive option, but could supply 30 bcm of gas annually for 30 years.

The resource base for this proposed pipeline would probably be the gas fields of the right bank of the Amudaria River or the South Yolotan field. Chinese banks and CNPC cooperated with national companies to develop the South Yolotan field (with potential reserves of 7 tcm) with geological surveys and equipment supply.

Another potential resource base for gas exports to China is Turkmen Caspian offshore. For instance, Petronas (the operator in that part of the sea) has an agreement for gas supply to Kaztransgas (Kazakhstan). This could allow a connection to China through the Kazakhstan gas transportation system if a direct link from Kazakhstan to China were developed in the future.

Another approach is a "west direction" route through the TCGP project; here Kazakhstan can join that project. TCGP would be connected with the South Caucasus Pipeline (SCP), which mainly transports gas from the Shakh-Deniz field. A TCGP and SCP connection could be part of the larger "Nabucco" project, which is aimed at diversifying gas supply to Europe from Caspian and Middle East countries.

Since it would only be necessary to construct an underwater pipeline from Turkmenistan (and probably some new pipelines in the country from eastern areas) to connect with the SCP in Azerbaijan, such a connection could reduce the length of the TCGP from 1,600 km to 1,000 km. This would significantly reduce the costs. Previously, the total estimated cost of the TCGP was $3 bln, including total construction costs in Azerbaijan, Georgia and Turkey.
The SCP would benefit from additional gas from the TCGP. It would allow an increase in export capacity of the SCP from 7 bcm (1st Phase) and 20 bcm (2nd Phase) to 30 bcm annually during the next decade. Such an export capacity for the SCP and TCGP would allow gas delivery directly to Greece, Italy and other European countries.

A reduction in the length, cost and construction period (which could allow completion by 2010) of the TCGP makes this route the best option. Making the TCGP a priority will enable Turkmenistan to come closer to achieving its aims for the development of its gas industry by 2010. The EU is also planning to undertake a new 1.7 mln euro study of gas exports from Turkmenistan to determine feasibility and associated project costs.    
A serious change has apparently begun in Turkmenistan's oil and gas industries. An Agency for Supervision of Hydrocarbon Resources has been established under the President of Turkmenistan and Interagency on the Caspian issues in an attempt to attract new investments and companies to develop Turkmen oil and gas resources in the Caspian Sea and interact with other littoral states. These changes may be an indication of how serious Turkmen officials are with developing its Caspian sector with the involvement of all interested parties.  

In the short-term, it is expected that Turkmenistan will remain a gas exporter mainly to Russia. However, gas exports will be diversified to the east or west in the mid-term. Whoever can offer the best terms regarding geological surveys, constructions costs and handling all transit questions has an opportunity to gain access to Turkmenistan's hydrocarbons, especially its gas resources.

Gurbanguly Malikgulyyevich Berdymukhammedov was born in the village of Babarab in the Geoktepe district in 1957. He graduated from the Turkmen State Medical Institute in 1979. He holds a Ph.D. in medical sciences.
He started his work career in 1979 and occupied various positions in the  Ministry of Healthcare and Medical Industry of Turkmenistan. In 1997, he was appointed Minister of Healthcare and Medical Industry of Turkmenistan. On April 2001, by the decree of the President of Turkmenistan, he was appointed Deputy Chairman (Vice-Premier) of the Cabinet of Ministers of Turkmenistan.

On February 11, 2007, he was elected to a 5-year term as President of Turkmenistan.

On March 30, 2007, was elected as the Chairman of Khalk Maslakhaty (People's Council), the supreme representative and legislative body of Turkmenistan.

Hydrocarbon reserves are unevenly distributed throughout the country. Most oil reserves are located in the west, while the main gas fields are located in the east and southeast of the country.

According to BP, proven oil reserves are estimated to be over 100 mmt of oil and 2.9 tcm of gas. Some independent experts estimate proven reserves as high as 500 mmt of oil and 5 tcm of gas. If that is the case, hydrocarbon production in Turkmenistan can be sustained for 10-15 years for oil and 35-40 years for gas.

It is expected that oil production will be increased by the Turkmen Caspian offshore sector, which may contain over half the total oil and gas reserves of the country. Western Geco estimates potential reserves there of 11 bmt of oil and 5.5 tcm of gas. Also, new prospective areas in the east and southeast of the country (Sag-Kenar, South Yolotan and Yashlar fields) will increase gas production. In addition, the Garagum desert (which constitutes 80 percent of the country's territory) holds significant geological potential, especially for gas reserves.
 

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