EurasiaNet Business & Economics - Russia Bows to Turkmenistan’s Gas Pricing Demand

BUSINESS & ECONOMICS

RUSSIA BOWS TO TURKMENISTAN’S GAS PRICING DEMAND
Sergei Blagov 9/06/06

The cost of controlling Central Asia’s gas market is getting pricey for the Russian conglomerate Gazprom.

At a September 5 meeting in Ashgabat, Gazprom CEO Alexei Miller caved in to the pricing demands of Turkmenistan’s fickle dictator, Saparmurat Niyazov. The Russian company agreed to a roughly 40 percent price increase for Turkmenistan’s natural gas -- $100 per 1,000 cubic meters (tcm). The deal covers purchases through 2009.

For months Gazprom had resisted Niyazov’s sudden effort to jack up the gas price from $65/tcm to $100/tcm, prompting the Turkmen government in July to lambaste Moscow’s energy policies. At one point, Ashgabat characterized Russian officials as "dogs and agitated monkeys." [For background see the Eurasia Insight archive]. Gazprom, in the end, proved unwilling to risk any disruption in Turkmen gas supplies, and thus acceded to the $100/tcm price.

Failing to reach an agreement with Turkmenistan could have led to a geopolitical disaster for Russia, as Moscow’s energy strategy in Central Asia is in large measure dependent on its continued control of Turkmen gas supplies. Without Turkmen imports, Russia would be hard-pressed to meet its own energy export commitments to Western Europe and elsewhere. [For additional information see the Eurasia Insight archive].

Following the announcement, Niyazov appeared to gloat. Pointing out that Russia resold Turkmen gas in Western Europe at over 100 percent markup, he characterized the $100/tcm as a reasonable price for Gazprom to pay. "We are not greedy people," Niyazov said at a news conference.

Despite the drastic price hike, Russia, via Gazprom, got what it needed – the extension of its effective monopoly over Turkmen energy supplies. Niyazov indicated that Russia would enjoy preferential access to the "untapped" Yolotan gas field, and expressed a desire to potentially quadruple the capacity of an existing gas pipeline running along the Caspian coast. Russian experts are scheduled to travel to Turkmenistan in October to make a preliminary assessment of the expansion plan.

In addition, Niyazov reportedly assured Moscow that Turkmenistan would not participate in a potential trans-Caspian gas pipeline, and thus divert its energy away from Russia. "First of all, we will be supplying gas to Russia," Niyazov said. "Do not think that Turkmenistan wants to go elsewhere with its gas." [For additional information see the Eurasia Insight archive].

For Gazprom, however, the pricing deal marked the end of an era in which the Russian conglomerate could dictate the price it was willing to pay. "Until recently, Gazprom was the winner in the political and economic struggle in the post-Soviet space. However, the recent negotiations with Turkmenistan assigned all that to the past," said a commentary published by the Russian news website Lenta.ru.

Gazprom sought to put a positive spin on the outcome of the negotiations. "We are very pleased by the results," Miller said. "We will always honor our obligations." Miller added that the company and the Turkmen government had agreed to review the gas price every three years.

Economic analysts said they didn’t expect Gazprom’s bottom line to be seriously hurt by the Turkmen gas deal. The real losers will likely be the CIS countries that are dependent on Russian gas supplies, especially Ukraine.

"I forecast that the average price for CIS countries will have increased by 20 percent by the end of this year, and 15 percent more in 2007," Natalya Milchakova, an analyst for the Otkritiye brokerage house, told the Russian daily Nezavisimaya Gazeta. "Subsequently, this year, Ukraine will probably buy gas from Gazprom at the price of $114-115/tcm." Other analysts suggested that the cost for Ukraine could reach as high as $160/tcm. The Ukrainian government, according to Nezavisimaya Gazeta, calculated in its 2007 budget that the country would pay $135/tcm.

Although Gazprom’s profits may not take a significant hit in the near term, some analysts suggest that Niyazov’s negotiating success could spark other suppliers to seek more for their natural gas. In other words, a Pandora’s Box of price hikes may have been opened.

History would seem to indicate that Niyazov himself will not be satisfied for long with the $100/tcm price. In April 2003, Russia and Turkmenistan signed a 25-year supply contract in which Ashgabat agreed to supply over the term of the deal up to 2 trillion cubic meters of gas at a price of $44/tcm. [For background see the Eurasia Insight archive]. However, Ashgabat almost immediately started seeking price increases. In late 2005, Gazprom agreed to buy 30 bcm from Turkmenistan at $65/tcm during the first half of 2006.

Turkmenistan has cagily maintained its negotiating leverage with Russia by seeking expanded energy ties with other consumers, especially China. Last April, Niyazov and Chinese President Hu Jintao signed a framework agreement on oil and gas cooperation, under which China agreed to purchase 30 billion cubic meters of gas for 30 years, starting in 2009, when a Turkmen-Chinese gas pipeline is due to start operating. [For background see the Eurasia Insight archive].

According to a report posted by the Russian news website Polit.ru, Moscow decided to meet Niyazov’s pricing terms after the signing of several agreements in late August aimed at expanding ties between Ashgabat and Beijing. [For background see the Eurasia Insight archive].

Editor’s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.

Posted September 6, 2006 © Eurasianet
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