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Home / Issue Archive / 2012 / January #1 / Turkmenistan Cuts into Gazprom's Hoped-for Share of Chinese, Indian Markets New Supply Source Might Also Make a Trans-Caspian Pipeline Viable

№ 1 (January 2012)

Turkmenistan Cuts into Gazprom's Hoped-for Share of Chinese, Indian Markets New Supply Source Might Also Make a Trans-Caspian Pipeline Viable

   It’s hard to imagine that a rugged desert-bound police state with a population of under 6 million could challenge Russian gas behemoth Gazprom and defy the Kremlin in the backyard that Moscow once called its empire. But Turkmenistan has shown it has few qualms about upstaging its former master by courting Russia’s prize export markets, both current and prospective.

By Tom Balmforth

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   Ashgabat continues to flaunt its colossal gas reserves at a Europe that yearns to cast off its reliance on Russian fuel. It is cavalierly stepping up exports to China, the world’s largest energy consumer that Gazprom has been trying to win over for years. And Turkmenistan is also looking to make forays into the emerging gas market of India that Russia is also eyeing up.

   “It is rivalry,” said Valery Nesterov, a senior energy analyst at Troika Dialogue. “It is only going to get more strained, particularly in the future. It’s inevitable. The development of the market in relation to energy market players is constantly in flux... The conditions for Russia to expand its exports are becoming tougher because new major gas players like Turkmenistan are emerging.”

   And as a recent Turkmenistan-China gas accord showed, Moscow is often powerless to respond. Turkmen President Gurbanguly Berdymukhammedov on November 23 signed a deal with Chinese President Hu Jintao to expand an existing gas accord that will see Turkmenistan export 65 billion cubic meters of gas a year to China “in the near future.” The Turkmen deal flies in the face of ongoing Russian talks with China to export Russian gas (68 bcms a year according to Russian officials in October) that have stalled over pricing.

Undermining Russia’s footing with China

   Gazprom reacted to the deal with “alarm,” said Alexander Kokin, a senior oil and gas analyst at UralSib Capital. Kokin estimates that China will need 150 bcms by 2020, some of it provided by LNG from Myanmar. “It’s really a question how the remainder of this market will be divided between Russia and Turkmenistan,” Kokin said. “It stands to reason that the more gas Turkmenistan provides, the less Russian gas will be needed. But the most important thing is that this deal weakens Russia’s position in negotiations with China – it can no longer dictate its terms and will have to cut the price of its gas.”

   The Turkmen-Russia deal came days after Moscow launched a war of words on rising Turkmen gas ambitions that were buoyed by an audit by Gaffney, Cline & Associates that estimated Turkmenistan’s South Yolotan to be the world’s second largest gas field. The British-based auditor estimated that the gas field 350 kilometers south east of Ashgabat holds a volume of between 13 and just over 21 trillion cubic meters.

   Gazprom deputy chairman Alexander Medvedev dismissed the findings as nonsense, saying that they contradict geological studies carried out in the Soviet Union, during an interview with Russian state news channel Vesti 24. The comments casting doubt on Turkmenistan's real domestic gas volumes exploits one of its biggest weakness – the lack of open access to information in the isolated Central Asian dictatorship. Alexander Rahr, director of Germany’s Berthold Beitz Center for Russia, Ukraine, Belarus and Central Asia, said that a major challenge facing Turkmenistan is that it is “so closed” that foreign investors are often hesitant to gamble on the authoritarian police state.

   The Turkmenistan Foreign Ministry hit back at Russia, slamming what it described as Gazprom’s “clumsy attempt to distort reality.” And its subsequent deal with China carried an air of defiance, while some analysts say Moscow is short on ways to counter Turkmenistan. “Russia is, of course, going to try and weigh on the situation, but it is unclear what levers it has in its arsenal over Turkmenistan,” said Kokin. “Its main lever would be the transit pipeline [for Turkmen gas bound for Europe through Russia], but to just crudely switch off access to Russian transit pipelines will never happen because it would clearly overstep the mark of what is allowed between markets.”

Trans Caspian skepticism

   The audit establishing colossal untapped reserves in Turkmenistan has meanwhile spurred a flurry of statements from energy officials reiterating their hopes of the country taking part in the construction of a Trans-Caspian pipeline that would pump a potential 30 bcms of Turkmen gas to Europe, bypassing Russia. The underwater pipeline is crucial to the European Union’s dreams of consuming Central Asian gas through the Nabucco pipeline that is anathema to Russia. In September, the EU tried to accelerate sluggish movement on the pipeline when it mandated the European Commission to negotiate a legally binding treaty between the EU, Azerbaijan and Turkmenistan to build the Trans-Caspian pipeline.

   President Dmitry Medvedev spoke out against the pipeline through the Caspian arguing it would be illegal unless it has the approval of all five coastal countries — Iran, Azerbaijan, Kazakhstan, Turkmenistan and Russia. In an interview with an Azeri news outlet, Konstantin Simonov, head of the Foundation for Russia’s Energy Security, even suggested Turkmenistan could face military action from Russia if it presses ahead with the pipeline.

   But the pipeline is fraught with many other difficulties, analysts say. Not least of these is the formal international recognition of Caspian waters, which is blocked by Iran and Russia who both staunchly oppose the “East-West” Trans-Caspian pipeline. Turkmenistan argues that it can sidestep this problem by pressing ahead bilaterally with Azerbaijan. But Nesterov questioned even Azeri political will in the project and said that it may prefer to support smaller regional pipeline projects that are less politicized. He also pointed to problems linked to Turkey’s shrinking appetite for natural gas after the construction of two nuclear power stations, as well as Europe’s own stomach for bankrolling an ambitious project at the height of the Euro zone crisis.

A political winner to an energy conundrum

   Against this Gordian knot of issues, Nesterov was lukewarm about the prospects of the Trans-Caspian pipeline in the near future, but many see the Turkmen state as a political winnger. A former Turkmen energy official who requested anonymity said that Turkmenistan is playing a multi-layered “political game” that on the one hand seeks to play China, Russia and the European Union off against each other to its own benefit, and on the other strengthens its own authoritarian regime at home. 

   “Turkmenistan’s game is very logical,” said Rahr. “They of course want to get everything from everyone. Their geopolitical position is on the one hand quite difficult – it’s a landlocked country so it’s dependent on other countries for the transit and transport of its energy resources. On the other hand, it has everything that the other countries need, so it’s in a wonderful position to negotiate.”

New strategy?

   For Gazprom, the rise of new big players competing for gas market share, means that the Russian gas major may modify its strategy to free itself from dependence on its gas importers. This is even more so as Russia’s China deal drags on, even though it may still be approved. “Judging by the apparent lack of any progress on the gas pricing issue, it seems Beijing is in no particular hurry to sign any gas contracts with Gazprom,” French bank Societe Generale said in a research note December 8. With the European market currently providing 80 percent of Russia’s gas export revenues, Nesterov suggest the Russian gas major may try and riggle out of its Euro dependence. “In the coming years, Gazprom is going to give a lot of attention to developing exports of liquefied natural gas in order to make up for lost time and to occupy the niche on the global market that it thinks it is worthy of, and in-so-doing remove itself from dependence on importers of Russian gas,” Nesterov said.   

China Focuses on the Use of Cleaner Energy Sources

   The 12th Five-Year Plan (FYP) for the period 2011-2015 has strong implications for natural gas use targeting an 8.3% share in the primary energy mix in 2015  (260 bcm annually based on China’s goal for energy consumption). This is a major upward shift from 85 bcm consumed in 2008 (3.8% of energy use). While the 11th FYP aimed for 5.3% of target share for gas, this level was not attained because of China’s strong growth in energy demand.

Source: IEA, World Energy Outlook 2011

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