Oil & Gas News
Tuesday, 15 December 2009
Turkmen Gas: Export Strategy and Trans-Caspian Opportunities
Special Counsel, Baker Botts (UK) LLP
Partner, Baker Botts (UK) LLP
In the first part of this Article "Turkmen Gas - Export Strategy and Trans-Caspian Opportunities", Turkmenistan's gas export strategy was considered with particular emphasis on the historical context, and the country's relationship with Russia.
In Part Two of this Article, we assess the current state of the Turkmen - Russian relationship, and consider the possibility of Turkmenistan committing to a Trans-Caspian export link and supplying gas to Europe via the Nabucco pipeline, or other competing projects.
New President, New Focus
In consequence of its over dependence on the Russian export route for its gas, from the time of its independence Turkmenistan has experienced a steady decline in gas output and exports. A new gas deal in 2003 agreed with Uzbekistan and Russia aimed to increase Turkmen gas exports over a 25 year period, but further consolidated the country's dependence on Russian export routes, giving Gazprom an effective monopoly over future Turkmen gas exports. By 2005 the commercial terms on which Turkmenistan has been able to trade its gas directly had changed, so that all of the gas exported by Turkmenistan via Russia is purchased by Gazprom at the border.
2006 may prove to have been the watershed in the evolution of Turkmenistan's gas exports. In that year, Turkmenistan demanded a price hike for its gas sales to Russia, from $65 to $100 per 1,000 cubic metres (at a time when Gazprom was selling Turkmen gas to Europe at around $260 per 1,000 cubic metres). 2006 also saw the death of President Niyazov (Turkmenbashi) and the election of President Berdymukhamedov, who commenced an incremental and more open assessment of the opportunities for diversification of hydrocarbon exports. In hindsight, 2006 may have been the time when the EU and the US should have seriously renewed their efforts with respect to the Trans-Caspian export route for Turkmen gas.
Since 2006 Turkmenistan has established some clear internal oil and gas industry development priorities, including new onshore and offshore E&P projects; the accelerated development of the Turkmen sector of the Caspian; and the development of additional refining capacity and a serious petrochemicals sector.
Notwithstanding the gradual refocusing of its attention towards alternative export options, Turkmenistan has maintained a strong relationship with Russia, and has continued to develop long-term gas supply contracts, entering into two significant agreements in July 2008. The first agreement established twenty-year gas pricing principles, pegging the price paid by Russia for Turkmen gas to the average wholesale European and Ukrainian prices received by Russia, resulting in a rise from around $150 per 1,000 cubic metres in 2008, to approximately $225 per 1,000 cubic metres for 2009. The second agreement secured for Turkmenistan Russia's financial and technical assistance for the development of transportation infrastructure and gas field development in Turkmenistan.
The new pricing principles agreed with Russia have been seen as a strategic decision by Russia to pay effectively market (premium) rates for Turkmen gas, in order to tie-up Turkmen gas production in direct competition with alternative "non-Russian" gas export projects, such as Nabucco. Similarly, around this time, Russia offered to purchase Azerbaijani export gas at "European market prices".
Recent Diplomatic Events
The explosion on the Central Asia Centre Pipeline (CACP) (Dauletebad - Darylik section) near the Turkmen-Uzbek border in April 2009, which halted 95% of gas exports from Turkmenistan to Russia, triggered a rapid deterioration in relations between the two countries. Turkmenistan was quick to blame Russia for causing the explosion due to Gazprom's offtake behaviour, whilst Russia asserted that poor pipeline maintenance in Turkmenistan may have been the cause. This incident follows an escalation of rhetoric, at a time when Russia has experienced falling European gas demand. With the pipeline now repaired, gas flows have still to be substantially resumed, a situation arguably to Gazprom's advantage, but which has resulted in a loss of revenue to Turkmenistan estimated to be up to $1 billion per month. With the crash in gas demand from Gazprom's customers, Russia has sought to re-engage with Turkmenistan regarding the terms on which Turkmenistan sells its gas, requesting a reduction in either the fixed volumes or the price of the gas under the Russian export contracts. Negotiations are ongoing.
Arguably this incident has given Turkmenistan a pretext to move closer to a Trans-Caspian Pipeline option, which scenario is broadly consistent with President Berdymukhamedov's recent pronouncements (and those of the Turkmen Government generally), tacitly criticising Russia and calling for an energy market protected from political risks. The President's address at the April 2009 international conference on energy supply stability in Ashgabat, attended by US, EU and Russian delegations, emphasised the need for energy diversification and partnership, the inclusion of new countries into the geography of export routes, and the creation of a new system of ties with Europe.
Earlier in April 2009, President Medvedev of Russia had also proposed a new deal with Europe, for a new "Energy Charter", to replace the Energy Charter Treaty, signed but never ratified by Russia, and long dismissed by it as biased in favour of European consumers. In similar terms to the position being taken by Turkmenistan, President Medvedev set out Russia's proposals for a system fairly balanced among producers, transit countries and consumers.
So the dividing lines over the future shape of the export markets of the Caspian and Central Asian states are beginning to be drawn, which are themselves closely linked to the fortunes of projects such as South Stream and Nabucco and their search for gas supplies. The signature by Turkmenistan in April 2009 of a memorandum of understanding with the German company RWE AG, itself a Nabucco shareholder, granting RWE AG access to Caspian Block 23, typifies the turn in focus of Turkmenistan to consider, if not yet to embrace, the Trans-Caspian/European export option.
Trans-Caspian and Nabucco Pipelines - Problems with the Europeans?
When, in 2007, Turkmenistan, Russia and Kazakhstan agreed terms for the Prikaspiiski Caspian Gas Pipeline (a Russian gas export route through which Kazakhstan and Turkmenistan had suggested that at some future point they might seek to export up to 30 billion cubic metres (bcm) per annum), President Berdymukhamedov did not exclude a Trans-Caspian gas pipeline to join with the South Caucasus Pipeline (SCP) in Azerbaijan, although he indicated that of the then available options to Turkmenistan it was the least favoured export option behind those to Iran, China and Pakistan/India. His position perhaps reflected the failure of the EU Members to speak in a co-ordinated and committed manner regarding southern corridor gas export options to Europe, including the SCP from Azerbaijan to Turkey, the Turkey-Greece-Italy Interconnector, Nabucco from Turkey to Austria via Romania, Bulgaria and Hungary, and the rival Russian-sponsored South Stream project.
Nabucco's viability as a project depends on securing first and second-phase gas, and to date it has made no concrete progress signing-up reliable supplies. The constituent shareholding countries of Nabucco have been unable to speak with one voice on their preferred supply strategy, and accordingly have not generated significant sustained EU and US support in progressing supply commitments. Russia has successfully exploited European concerns, and promoted its rival Nord Stream and South Stream projects, and sought to tie-up potential Nabucco gas supplies for itself, through approaches by Gazprom to Azerbaijan and Turkmenistan to secure gas exports at prices more closely linked to the European market.
Although Shah Deniz Phase 2 gas has been touted as a potential Nabucco first phase supply, as yet, the Nabucco project has no commitment from Azerbaijan, Turkmenistan, Kazakhstan, Turkey or Iran to supply gas. The recent agreement of Azerbaijan to supply 0.5 billion cubic metres of gas to Russia from 2010 (with the Russian desire to significantly increase these volumes and to potentially include Shah Deniz Phase 2 gas) is indicative of the gas supply challenges which continue to face the Nabucco project. Although, in some circles Azerbaijan's move is seen as a bargaining chip in order to achieve a better gas sales/transit deal with Turkey and the other Nabucco shareholders.
European and US companies (and governments) have expressed frustration with Turkmenistan over a perceived lack of commitment from the country to the Nabucco project, but there may now be indications that this position is changing. Any supply of gas to Nabucco from Turkmenistan would necessitate a Trans-Caspian link to Azerbaijan (or Russia), and this has always been the principal stumbling block to Turkmenistan's export aspirations. There are however signs that the EU and Nabucco are finally grasping this nettle, and in November 2008 the EU's Second Strategic Energy Review announced the creation of the Caspian Development Corporation which would focus on the development of Turkmen gas export options for delivery to Europe via the southern corridor. In December 2008 the Austrian company OMV and RWE AG established the Caspian Energy Company to assess options for the building of a Trans-Caspian pipeline, and to look for partners for a project which would build and operate such a pipeline. There are also encouraging signs that the differences between Azerbaijan and Turkmenistan on their Caspian Sea boundaries (including their disputed hydrocarbon fields) may soon be resolved, although as yet there appears to be no resolution with Iran.
Perhaps these are encouraging signs, and answer some of the Azerbaijani and Turkmen criticisms of Nabucco, that it has failed to establish a clear project timetable and that project financing is unresolved. The interests of Turkmenistan and the European market may truly be beginning to converge, and, notwithstanding the eventual fate of Nabucco, a Trans-Caspian pipeline may be a logical outcome, and the first building block, of such convergence. Whatever decision is made by Turkmenistan regarding a Trans-Caspian gas export route, such decision will be heavily influenced by the positions taken by Russia and Azerbaijan with regard to their own gas export requirements. These three countries, and to a lesser extent Kazakhstan, will be the principal determinants of the eventual shape of the Trans-Caspian hydrocarbon export market, and its associated infrastructure.
Is There Enough Gas?
In conclusion, there has long been a concern that Turkmenistan may have insufficient gas to meet its commitments and aspirations, and the aspirations of its potential customers in Europe, China, Russia and Iran. These were largely unanswered questions in the self-audited world of Turkmenistan prior to 2008, where a lack of transparent reserves data had hindered Turkmenistan's growth as a major gas exporter. Matters are now changing with a recent Gaffney Cline and Associates audit of the South Yolotan Osman Field in South East Turkmenistan indicating potential gas reserves for the field within the range of 4 to 14 trillion cubic metres, which would make the field the fourth or fifth largest in the world (Gaffney Cline and Associates also indicating potential for overall Turkmen gas reserves to be in the region of 28 trillion cubic metres). These potentially significant reserves should enable Turkmenistan to deal more assertively with its existing customers, and to legitimately establish its credentials as a major exporter to both the European and East Asian markets, export routes permitting.10:55