Turkmenistan: Playing the Energy Export Field

It appears one of the globe's great energy mysteries will soon be solved: Turkmenistan has selected a British firm to conduct an independent audit of its natural gas reserves. To date, speculation surrounding Ashgabat's holdings has been a major factor driving the Caspian Basin energy development competition among the United States, European Union, China and Russia.

Turkmen leader Gurbanguly Berdymukhamedov has selected the British firm Gaffney, Cline & Associates to survey the Turkmen reserves. For years, the extent of Turkmenistan's reserves has been a closely guarded state secret. [For background see the Eurasia Insight archive]. According to some estimates, the Central Asian nation could possess more than 22 trillion cubic meters of gas. Much of the gas is believed to rest in the still-to-be-developed South Yolotan-Osman field. If high estimates are confirmed by the audit, the competition for access to Turkmen exports could ease, as the country would have adequate supplies to fill its numerous export plans. Alternately, an audit that found substantially less than expected reserves could cause an intensification of international jockeying for Berdymukhamedov's favor.

This year, the Central Asian nation intends to raise production to 82 billion cubic meters (bcm), up from the 72 billion cubic produced in 2007. Roughly two-thirds of Turkmen production is exported to Russia. Under Berdymukhamedov's ambitious development plan, Turkmenistan is slated to start exporting to China in 2009. Ashgabat is also pursuing two other export routes, one via Afghanistan to South Asia and a second traversing the Caspian Sea to hook into a Western-bound pipeline network. [For background see the Eurasia Insight archive].

The audit results could ultimately determine whether the Western-backed Trans-Caspian Pipeline (TCP), along with an associated route known as Nabucco, ever gets built. [For background see the Eurasia Insight archive]. Given its existing commitments to Russia and China, Turkmenistan would need to have the reserves in the upper range of current estimates in order to have sufficient levels of gas to fill TCP. As it stands, Turkmenistan will have to significantly increase production in order to fill its share of a planned expansion of a Russian pipeline network, known as the Prikaspiisky route. [For background see the Eurasia Insight archive].

Turkmenistan's possible participation in TCP is the top item on Berdymukhamedov's agenda for his upcoming visit to Turkey on March 24-28. Berdymukhamedov has repeatedly expressed interest in TCP, but has never made a firm commitment.

Russia has gone to great lengths in recent months to fix its position as Berdymukhamedov's preferred export option. [For background see the Eurasia Insight archive]. The Turkmen leader has repeatedly acknowledged Russia's important role in Turkmenistan's energy sphere. Nevertheless, there appears to be nothing that can dissuade him from playing the energy-export field. "Turkmenistan is ready to cooperate at a new level necessitated by the situation on the world markets," the Itar-Tass news agency quoted Berdymukhamedov as saying during a March 14 meeting of top energy-sector officials. "Today when demand for energy resources constantly grows, it is necessary to develop a more flexible approach to the use of the country's richest resources."

According to official sources, the construction of the Turkmenistan-China natural gas pipeline is advancing at a brisk pace. The contract to build the 7,000-kilometer pipeline, estimated to cost $7.3 billion, was signed in May 2006. [For background see the Eurasia Insight archive]. The formal launch of construction took place in August 2007, and Turkmen and Chinese officials state that the work should be finished in time for the planned opening on January 1, 2009.

In February, Turkmenistan awarded the construction contract for a 188-kilometer Turkmen segment of the pipeline to the Russian firm Stroytransgaz, of which the Kremlin-controlled conglomerate Gazprom is a major stakeholder. The selection appears to be one of many signs of fealty to Moscow made by Berdymukhamedov – even as he proceeds to diversify the country's energy export options. Overall, the pipeline will stretch 1,820 kilometers, passing through Uzbekistan and Kazakhstan before reaching the Chinese border.

China announced on February 22 that it had started the construction of its inland portion of the pipeline from Xinjiang toward the Chinese coast. The Turkmen imports will be used in some of China's most industrially developed areas in and around the Yangtze and Pearl River deltas.

Despite official pronouncements concerning the construction timetable, some local analysts believe the target opening date is unrealizable. One potential pitfall is Uzbekistan. Local observers cite the fact that the results of a feasibility study covering the Uzbek portion of the pipeline have not been publicly announced, a fact that prompts some to wonder if route for the 530-kilometer stretch of pipeline across Uzbekistan has even been finalized. Under an agreement announced last May, the study was to have been completed by the end of 2007.

Another potentially complicating factor is connected to gas prices. The export price of Central Asian gas has experienced explosive growth in recent months. [For background see the Eurasia Insight archive]. In January, the Chinese firm PetroChina reached a deal to purchase Turkmen gas at $195 per thousand cubic meters (tcm). But on March 11, Gazprom agreed to pay "a European market rate" for Turkmen gas. While the Gazprom rate will not match the amount that it sells gas to EU nations, it would appear that the Russian conglomerate will pay Central Asian producers somewhere between $200-$300/tcm. Just five years ago, export prices were in $25-$35/tcm range.

It is unclear at what point the escalating price spiral will stop. Given the price Gazprom has agreed to pay, it would seem inevitable that Turkmenistan will seek to renegotiate the Chinese export price. If such negotiations turn acrimonious, they could lead to construction or supply delays.