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№ 10 (October 2009)

China Trumps Russia in Turkmen Gas Buy

Chinese President Hu Jintao and his Turkmenistan counterpart Gurbanguly Berdymukhamedov, today formally inaugurated the 2,000 km TransAsian Pipeline that will eventually take 40 billion cubic meters (bcm) of gas directly from Turkmenistan gas fields to China.

 

By Chris Weafer, Chief Strategist, UralSib Bank

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This suggests that Russian is losing some of the “privileges” it has assumed in the past and to which Russian President Dmitry Medvedev alluded when he was quoted in September, 2008 to the effect that:  “Russia, just like other countries in the world, has regions where it has its privileged interests. In these regions, there are countries with which we have traditionally had friendly cordial relations, historically special relations. We will work very attentively in these regions and develop these friendly relations with these states, with our close neighbours."

 Consider the following points:

 A New Gas Silk Road. The original deal between China and Turkmenistan was for an export volume of 13 bcm in 2010, rising to 30 bcm annually by 2013. That was recently increased to 40 bcm by 2014. Turkmenistan has substantial gas reserves and extending its existing JV with the Ashkabad government will allow China to greatly increase its imports from the region. That, in turn, will decrease the pressure on China to reach a deal with Russia for the long discussed gas pipelines between the two countries. It also leaves China in a much better negotiating position than it was when the talks between Moscow and Beijing first started in 2004. In many ways, the new Silk Road is a great big gas pipe running all the way from Beijing to the eastern Caspian shoreline.

 Resource rich region. The deal also highlight’s the growing resource based wealth of this still underdeveloped region. In 2006, Turkmenistan sold most of its gas to Russia at not much more than $50 per 1,000 cubic meters. In early 2009 it sold its exports at the European price of over $300 per 1,000 cubic meters. Today’s price is considerably less, due to the lower oil price but it will rise again in 2010. Azerbaijan is another of the Central Asia economies that is benefiting from a huge hike in resource wealth after it commissioned the 1.0 million barrel per day Baku-Ceyhan oil pipeline several years ago. Its gas exports, also now at European prices, will rise substantially in the coming years with the addition of production from the Shan Deniz phase-2 project. In Kazakhstan, the development of the giant Kashagan oil field is now well underway and is expected to produce approximately 1.0 million barrels of oil for export by 2015. China’s expensive new pipeline is not just for 40 bcm of Turkmen gas; it is access key to the regions growing resource base and the world’s next group of frontier markets.

 Muscling into Russia’s near abroad. Russia has always regarded Central Asia, aka it’s “near abroad”, as a region in which it has the privileged interests to which President Medvedev referred in comments made in September 2008. Since 2000, Russia has improved political contacts with the Central Asian states from the frosty relations in the aftermath of the break-up of the Soviet Union. In particular, Russia has successfully managed to keep EU and US influence in the region to a minimum. Today, some of those relations are again showing strains.

 Sharing and caring. China has been pouring an increasing volume of money into the region for several years and today’s pipeline inauguration demonstrated very clearly that Russia is now again sharing its privileged position. The danger for Russia is that, as China increases its financial commitment to the region and Moscow remains embroiled in disputes, such as that between Gazprom and Turkmenistan, it’s once dominant position may eventually be even more fully displaced by China.

  Compensates Turkmenistan for Gazprom decline. For Turkmenistan, this is a very timely deal as it provides the country with an alternative to Russian exports at a time when Gazprom is negotiating to take considerably less gas from the region due to a decline in its export volumes to Ukraine and to Europe. In 2008, Gazprom bought approximately 50 bcm of gas from Turkmenistan and a total of approximately 66 bcm from Central Asia as a whole. For 2010, Gazprom may only look to buy only between 10 and 15 bcm from Turkmenistan and between 30-35 bcm from the region. That leaves a lot of surplus gas for China to acquire and export via this new pipe…and the even greater capacity that will inevitable follow.

 More options for China. For China, this is another, and very significant step, in its efforts to diversify its energy sources. It is a platform that can be expanded to take in considerably more gas and allow China to reduce its dependency on LNG and on Russia. It is a mechanism by which China is increasing its financial investment and trade links in the region. Where money and trade go, political influence is never far behind.

 

 Precarious position for Russia

 Might cut Gazprom options in the future. For Gazprom the danger is that, if demand from Europe and the domestic market increases sharply over the next few years and that demand cannot be matched from Gazprom’s own resources, the previous surplus from Central Asia may not be available, i.e. it may have gone to China. China’s appetite for Central Asia gas puts more pressure on Gazprom to move quickly ahead with major new projects such as the Yamal development.

 Less urgency for Russia-China gas deal. For Russia, the fact that China now has a route into the considerable gas reserves of Turkmenistan, and a link right up to the Caspian, diminishes its bargaining power over the proposed two gas pipelines to take Russian gas to China that have been dragging on since 2004.

 

 China’s privileged position

 CNPC has an existing JV. Although Russia has been the major buyer of Turkmenistan gas until now, China is the only country which has an established development contract with the country for onshore resources. CNPC is developing gas resources in the Bagtyyarlyk region of Turkmenistan and plans to produce 13 bcm of gas annually from these deposits. This gas will be part of the 40 bcm shipped to China via the new pipeline.

 

 Turkmenistan Gas Resources

 Major new deposits identified. Turkmenistan produced just over 67 bcm of gas in 2007 and approximately the same in 2008. Of this, approximately 50 bcm was exported to Gazprom. In recent years, Turkmenistan has identified several major new gas structures and while there is currently a lot of uncertainty over the size of these deposits, nobody disputes that they are considerable and will allow the country to very significantly increase its annual gas production in the coming decades. The official government plan is to raise annual production to approximately 250 bcm, or about half that of Russia’s current production, by 2030.

 China wants to be part of the new developments. Industry observers consider that 250 bcm annual production to be an optimistic guesstimate at this stage as there is simply not enough available data to support the conclusion. But, two major gas deposits have been identified and they will certainly allow for a big step up from existing annual gas production. Especially with CNPC financing very readily available.

 Questions over exact scale. The two major fields that have been identified are the South Yolotan-Osman deposit and the Yashlar deposit. The Ashkabad government claims that the former contains as much as 6 trillion cubic meters of gas while the latter holds up to 1.5 trillion cubic meters. There is currently considerable controversy over these claims, and therefore how much gas they can eventually produce. However nobody disputes that they are very big structures and Turkmenistan gas volumes will rise substantially.

 

 China’s regional commitment

 A total 6,500 km transit. The TransAsian Pipeline traverses Turkmenistan (188 km), Uzbekistan (530 km) and Kazakhstan (1,300 km). It then links into a 4,300 km pipeline inside China to bring the total length to almost 6,500 km. That is an already considerable commitment by China to the region – transit fees alone will be significant.

 China has been pouring in cash. In August of this year, China allocated an additional $10 bln for investment into Central Asia. That is in addition to the approximately $10 bln already invested in Kazakhstan and $3 bln invested in Turkmenistan. China is also making efforts to invest in hydroelectric power projects in both Tajikistan and Kyrgyzstan and in direct competition to Russian companies.

 Also focused on oil. China and Kazakhstan have already commissioned the 190,000-barrel per day (bbl/d) phase-1 of the Atsu-Alashankou oil pipeline and the plan is to expand the capacity to 200,000 bbl/d. The longer-term goal appears to be to try and secure the biggest portion of the output from the 1.0 million barrel per day Kashagan oil field when it comes on stream. That is a prize that Russia has its eye on.

 

 Copyright 2009. Uralsib.All rights reserved.

 

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