Business & Economics:
TURKMENISTAN: WILL BERDYMUKHAMEDOV COMMIT TO THE TRANS-CASPIAN PIPELINE DURING HIS TURKEY VISIT?
3/20/08

Amid the explosive growth of Central Asian natural gas prices, energy analysts are bracing for a possible blockbuster announcement from Turkmenistan. The upcoming visit of Turkmen leader Gurbanguly Berdymukhamedov to Turkey offers an ideal opportunity for Central Asia’s leading gas producer to make a firm commitment to a trans-Caspian pipeline that is strongly backed by the United States and European Union.

Berdymukhamedov’s visit to Turkey is scheduled to begin on March 24. A Turkmen delegation has been in Ankara to work out the details surrounding the visit. The Iranian news agency IRNA, in a March 18 report out of Ashgabat, quoted Turkmen Foreign Minister Rashid Meredov as saying all arrangement had been finalized. The foreign minister, however, provided no hints about any possible announcements to be made by Berdymukhamedov. In an earlier report, posted on the semi-official Turkmenistan.ru website, Meredov acknowledged that talks were continuing to “finalize interstate agreements to be signed on the result of high level talks.”

The Turkmen leader has spoken repeatedly of his interest in the trans-Caspian pipeline (TCP), but he has yet to make a firm commitment to the project. Turkmenistan’s participation would be sure to upset Russia, which currently controls Ashgabat’s gas exports.

Speculation mounted that Berdymukhamedov might finally give the go-ahead for exports via TPC, when, during a March 14 strategy session involving the country’s top energy officials, he described a “multi-directional approach” to exports as “absolutely pragmatic,” according to a report broadcast on state television. Russia is already slated to lose its export monopoly on Turkmen gas in 2009, when Ashgabat is pledged to start sending 30 billion cubic meters (bcm) of gas to China. The opening of TPC, however, would deal a serious blow to Russia’s position as Western Europe’s primary gas supplier.

On March 19, a top Turkmen energy official revealed that the country expected to increase its output by 50 bcm in the “near future.” The official, Makhtumguly Khydyrov, head of the Oil and Gas Institute in Ashgabat, told the official newspaper Neutralny Turkmenistan that the additional gas would come primarily from the South Yolotan and central Karakum fields. If the production target is realized, it would seem that Turkmenistan would have at least 20 bcm to export via TCP, if the route is built. Azerbaijan’s state energy firm SOCAR recently commissioned a TCP feasibility study, thus it would be likely years before TCP became operational, if ever. [For background see the Eurasia Insight archive].

In recent weeks, Russia has scrambled to maintain its dominant position in Central Asia. Some regional experts are now wondering whether an offer made by the Russian energy conglomerate Gazprom to pay “European” prices for Central Asian energy has kick-started a vicious pricing cycle that will end up causing severe budgetary damage to Moscow.

To date, Russia has reaped enormous profits by exploiting the price differential between low-cost Central Asian supplies that it imports and the world market price that it receives for the gas it delivers to Europe. Those days of easy profits may be gone. The Gazprom announcement, made in an effort to appease Central Asian states and retain their loyalty, seems to have merely emboldened energy officials in Astana, Ashgabat and Tashkent. As a result, Gazprom will likely end up paying far more than it expected for Central Asian gas in 2009, while the conglomerate’s ability to pass the rising costs along to end users will be restrained.

Already, Central Asian leaders are talking tough. On March 18, for example, the Kazakhstani state energy concern, KazMunaiGas, announced an intention to raise its export gas price to $306 per thousand cubic meters (tcm), which would mark a 70 percent increase over the current price of $180/tcm. Russia, which is dependent on Central Asian energy in order to meet its European export obligations, currently receives about $378/tcm from European customers. Gazprom officials have indicated the price could touch $400/tcm in 2009. [For background see the Eurasia Insight archive].

Ukraine, which now pays $179.50/tcm, could be in for a drastic price hike. But the fact that many of Russia’s export pipelines pass through Ukrainian territory gives Kyiv substantial leverage in pricing negotiations. [For background see the Eurasia Insight archive].

In another troubling sign for Gazprom, Central Asian energy companies show no willingness to negotiate long-term supply contracts with the Russian company. It turns out that Gazprom extended its European price offer with the expectation that Central Asian states would agree to supply contracts spanning multiple years. But such expectations will not be fulfilled.

“According to a source in the Kazakh government, Astana, Tashkent and Ashgabat intend to push for preservation of the existing practice of annually resigning gas supply contract, and, subsequently, annually revising prices,” said a commentary published by the official Russian newspaper Vremya Novostei on March 19.

“It means extra costs for Gazprom,” the commentary continued. “It simply does not make any sense for the company to agree to the Central Asian partners’ ultimatum, because, without long-term guarantees of gas supplies, Moscow will always face the threat of Turkmen and Kazakh gas being re-channeled to new export routes, primarily, the trans-Caspian pipeline.”