TURKMENISTAN/EU: Pipeline deal hinges on gas reserves

Analysis

Turkmenistan is a significant gas producer and exporter, but its Soviet-era pipeline system means that most exports still go through Russia. The country is keen to diversify its export routes and is pursuing a number of new markets as well as seeking to grow its reserves and production capability.

Status quo. The country is a major energy player:

• Gas reserves. According to BP World Energy Statistics (2007) gas reserves are around 2.9 trillion cubic metres (tcm), which ranks Turkmenistan 13th in the world. The government has repeatedly claimed the true figure to be above 22 tcm. It recently announced a complete and independent audit of its gas reserves, to be undertaken by UK-based Gaffney, Cline and Associates. The audit will be a crucial factor in determining the extent to which Turkmenistan's ambitious export plans can be realised (see TURKMENISTAN: Gazprom remains key to gas exports - April 10, 2007).
• Gas production. In 2006, gas production reached 62 billion cubic metres (bcm) -- an increase of 6% on 2005. Most of this growth went to feed an increase in internal demand, which accounted for some 19 bcm. Of the 43 bcm exported, 6 bcm went to Iran. The rest was sold to Gazprom to supply its markets in Russia and Ukraine.
• Physical infrastructure. At present there are two main export pipelines. The largest by far is the Central Asia Centre (CAC) pipeline, which crosses Uzbekistan and Kazakhstan before linking into the main Gazprom system in Russia. This line is undergoing a major refurbishment along its entire route to bring capacity up to 80 bcm per year. A smaller line links Turkmenistan with Iran and has an annual capacity of almost 8 bcm.
• Contracts and pricing. The major contract for current production was signed with Gazprom in 2003, which included provisions for the renovation and expansion of CAC capacity. Turkmenistan is due to deliver 70-80 bcm per year from 2009 and prices were originally understood to be fixed at 100 dollars per thousand cubic metres. However, following pressure from Turkmenistan and Kazakhstan, Gazprom has agreed to pay "a European market rate" for Turkmen gas. This rate is expected to take account of the costs of transportation and is expected to be in the 200-300-dollar range. This compares with prices of 25-35 dollars that were paid five years ago

New export projects. There are a number of major projects at different stages of development:

• China. A new pipeline linking Turkmenistan with China -- via Kazakhstan and Uzbekistan -- is under construction with a planned capacity of 40 bcm per year. Official announcements state the pipeline will come on stream in January 2009. However, there are some doubts whether this will happen due to delays in Uzbekistan and questions over gas prices, which Turkmenistan may seek to renegotiate from the reported level of 195 dollars per thousand cubic metres (see CENTRAL ASIA: Regional tensions complicate pipelines - October 8, 2007).
• Russia. There are plans to upgrade the Prikaspiisky line, a small line linking Turkmenistan, Kazakhstan and Russia with an annual capacity of less than 0.5 bcm. Under a deal signed with Gazprom, this line is to be upgraded to carry 10 bcm by 2009 and 30 bcm by 2015 bringing total export capacity to Russia to more than 100 bcm.
• South Asia. Plans to build a pipeline to supply India and Pakistan via Afghanistan are still at a relatively early stage.
• Europe. New pipelines to Europe -- in particular the Nabucco line -- have been promoted by a number of European governments and gas companies. Nabucco aims to bring supplies to central Europe from a range of potential sources, including Turkmenistan, Azerbaijan, Kazakhstan, Iran, Iraq and Egypt via a new 30 bcm capacity line crossing Turkey.

Mutual benefits. It is this last project that was at the centre of much of last week's EU-Turkmenistan talks on energy supplies. On the face of it both parties have a lot to gain from moving this scheme forwards:

For Turkmenistan potential advantages include:

• diversification of markets;
• increased sales volumes;
• exposure to higher prices by selling directly into consuming countries; and
• the opportunity to develop closer relationships with key EU/NATO countries.

The main advantages for the EU come from:

• enhanced supply security due to a decrease in dependence on Russia; and
• the potential to create a gas over-supply position that could exert downward pressure on prices.

Obstacles. However despite these clear attractions there are some substantial obstacles that need to be overcome before the project can proceed:

• Project economics. One of the main attractions of Nabucco to Turkmenistan was the opportunity to achieve much higher returns from gas by selling directly to European buyers rather than via Gazprom. Now that Gazprom is offering market-related prices, this financial driver is less strong. Furthermore, it is possible that volumes shipped via Nabucco may end up diverting gas sold by Turkmenistan via Gazprom so overall export volumes remain unchanged.
• Project routing. The most likely route for Turkmenistan gas would be via a new trans-Caspian pipeline. This immediately raises the issue of the status of the Caspian Sea that has been under discussion since the break up of the Soviet Union. Under present arrangements, it is understood that the agreement of all five countries bordering the Caspian (including Russia and Iran) would be required for a pipeline to be built -- Russia in particular is unlikely to be in a hurry to resolve this issue. An alternative routing via Iran also faces major political difficulty.
• Gas reserves. Until the results of the independent audit are known it will not be clear if Turkmenistan actually has sufficient gas to source the Nabucco project and meet the rest of its long-term commitments. If the country appears to be resource constrained, the rapidly growing markets of China and India may be preferred for new projects.
• Buyer position. Gazprom is working hard to pick off potential buyers in Europe by concluding bilateral deals linked to South Stream, a rival project based on a pipeline to Bulgaria (see RUSSIA/EUROPE: Moscow puts South Stream on the map - July 24, 2007). This may lead some potential buyers to be reluctant to commit to significant volumes.

Despite these problems both the EU and Turkmenistan are likely to continue to pursue Nabucco as well as broader energy-related discussions. The obstacles are such that project timescales are bound to become extended and a new export route from Turkmenistan to Europe is unlikely before 2015.