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Thursday, 3 September 2009
Turkmen Gas - Export Strategy and Trans-Caspian Opportunities - Part 1
Special Counsel, Baker Botts (UK) LLP
Partner, Baker Botts (UK) LLP
In this two-part Article "Turkmen Gas - Export Strategy and Trans-Caspian Opportunities" Turkmenistan's historic and current gas export strategies are examined, and the opportunities for Trans-Caspian gas exports to Europe are considered. Part One of this Article provides an overview and assessment of Turkmenistan's current gas export strategy, and considers some of the competing claims for Turkmen gas.
Recent diplomatic events involving Turkmenistan and Russia, and to a lesser degree Azerbaijan and the European Union, when taken together with recent statements of Turkmen President Berdymukhamedov, suggest a sea-change in Turkmenistan's energy export strategy. Is Turkmenistan finally ready to commit to gas exports to the European market, or are we once more seeing Turkmenistan successfully playing off competing interests for its natural resources?
Whilst Azerbaijan, with the support of the US, was successful in securing a non-Russian alternative export route for its oil and gas through the Baku-Tbilisi-Ceyhan (BTC) Pipeline, and the South Caucasus Pipeline (SCP) respectively, the export of Turkmen gas through a proposed Trans-Caspian link foundered in the late 1990s. Now, however, there are renewed signs that Turkmenistan may be serious about committing to diversify its gas export options.
Turkmenistan has traditionally been a net exporter of gas. Since independence from the Soviet Union in 1991, it has, together with Caspian neighbours Kazakhstan and Azerbaijan, been the focus of sustained US and EU attention in a bid to counterbalance European dependence on Russian gas supplies. Indeed, Turkmenistan is seen by some as a potential keystone supplier of gas to Europe. Various factors have, however, conspired to maintain the gas export status quo. These factors include the proactive geopolitical and energy strategy pursued by Russia and Gazprom, failure to agree the littoral boundaries of the Caspian Sea states, continued uncertainty as to Turkmenistan’s actual recoverable gas reserves, and the difficult environment for foreign investment in Turkmenistan as a result of the idiosyncratic policies of former President Niyazov - the self-styled "Turkmenbashi" (or "Leader of Turkmens").
Limited Options versus Abundant Opportunities
Considering the historic importance of the Caspian region for hydrocarbon production, and the unconfirmed estimates of significant oil and gas reserves in Turkmenistan, Azerbaijan and Kazakhstan, the Caspian region generally (and Turkmenistan in particular) remains relatively under-explored. The principal causes of the relatively poor state of Turkmenistan's oil and gas industry, and its limited options for development, are (i) the political and economic relationship between Turkmenistan and Russia (historic and current), and (ii) at least with respect to gas, the difficulty in finding an accessible market, caused by Turkmenistan’s geographic location. It should be noted that Turkmenistan's position is not entirely unique and that these circumstances are largely also experienced by Kazakhstan and, to a lesser extent, Azerbaijan.
The Turkmen Government's own (unverified) reserves' estimates are 12 billion barrels of oil and 20 trillion cubic metres of gas, which would equate to Turkmenistan having around the fifth largest gas reserves in the world. There are two main gas producing regions in Turkmenistan: in the Eastern/Southeastern Uzbekistan and Afghan/Iran border regions, and in the West/
Caspian offshore area (see Diagram).
Hydrocarbon production is by means of Licences for Exploration and Production, and by Production Sharing Agreement (PSA). All hydrocarbon exploration and production involving foreign company participation is currently undertaken through PSAs. There are currently a small but growing number of foreign investors operating oil and gas concessions in Turkmenistan, including Dragon Oil, Petronas, Eni and CNPC. The list of foreign companies currently seeking to become involved in Turkmenistan is growing almost daily.
Exports to Russia
Currently, around two-thirds of Turkmenistan's gas is sold to Gazprom, and is exported to Russia via the Central Asia Centre Pipeline (CACP) (see Diagram). The CACP has a capacity of approximately 80 billion cubic metres (bcm) per annum, and has been constructed on a piecemeal basis from 1974. 90% of gas exported from Turkmenistan to Russia travels via the eastern branch of the CACP through Uzbekistan and Kazakhstan, where it meets with the western branch taking gas from the Caspian region north through Kazakhstan. The CACP generally, and particularly the western section, is understood to require significant modernisation, and recently suffered an explosion claimed by the Russians to be the result of the "dilapidation of the gas pipeline system". The generally poor state of these main export pipelines, together with capacity constraints in the Kazakhstan sections of the CACP, restricts Turkmenistan's current gas export opportunities to Russia.
One proposal was for a new Caspian Sea border pipeline linking Turkmenistan with Russia via Kazakhstan (the "Caspian Gas Pipeline", also known as "Prikaspiiski") to be constructed alongside the existing 10 bcm per annum onshore pipeline (the western section of CACP) which would increase export capacity on this route by an initially planned 12 bcm per annum, (see Diagram). The Prikaspiiski project was agreed between Russia, Kazakhstan and Turkmenistan in 2007, and was intended to be operational in 2010, however construction has yet to commence. Arguably, the delay can be attributed to the increased diplomatic tensions surrounding the Nabucco project, and potential Trans-Caspian export options, (to be discussed in Part Two of this Article) and may reflect a desire by Turkmenistan not to commit wholly to Russia's gas import embrace.
Turkmenistan's recent decision to open to international tender for the construction of the internal East-West gas pipeline, connecting Turkmenistan's Eastern and Caspian region gas fields caused further strain to the Turkmen-Russian relationship, and to the historic influence of Russia in the key gas development and export decisions of its neighbour. The original plan had been for Gazprom to build this pipeline and for it to tie-in to the Prikaspiiski pipeline to facilitate additional gas deliveries to Russia.
How Russia Took Control of the Gas
Western interest in Turkmen gas was relatively short-lived following the country's independence, largely as a result of Russia's ability, through national champions Gazprom, Rosneft and LUKoil, to maintain its traditional influence in the region.
Gazprom, Rosneft and LUKoil have been strong and successful players in the competition for the control of strategic oil and gas assets within the Russian zone of influence. In controlling the main gas export infrastructure, Russia's strategy has been to prevent Turkmenistan from selling its gas directly to the European market. The export relationship is chequered, including a significant transit price dispute in 1998, which resulted in gas exports to Russia being suspended. Over time the commercial terms on which Turkmenistan has been able to directly trade its own gas have changed, so that now Gazprom purchases all Turkmen gas exported via Russia at the border.
The failure of Turkmenistan and Azerbaijan to progress a Trans-Caspian Pipeline, initially proposed in 1996, is substantially attributable to Russian political opposition, as well as the unresolved status of the Caspian littoral state's offshore boundaries, a circumstance used by Russia to its advantage. It is also worth noting that the Trans-Caspian pipeline was not, at the time, in Azerbaijan's economic interests either - it being keen to ensure the viability of its own gas export project to Turkey (SCP) ahead of any project to export competing Turkmen gas.
Faced with the circumstances described above, it is unsurprising that Turkmenistan has progressed gas export projects geographically to the east and south, towards China, Iran and Pakistan, and away from the zone of Russian influence in the Caspian, Caucasus and Black Sea. Russian geopolitical influence is weaker in these alternative markets, although Gazprom at one time did seek involvement in the India/Pakistan export project, ultimately pulling out for financing reasons.
The New Challengers
The first non-Russian post Soviet-era gas exports by Turkmenistan were to Iran. Operational since 1997, the 150km pipeline from the Korpedji Field in Western Turkmenistan to Kurt Kui in Iran has an 8 bcm per annum capacity. A second 1 bcm per annum gas pipeline was put into operation in 2000 (see Diagram).
Although Iran has the world's second largest gas reserves, it is a net importer of gas and is keen to increase imports of Turkmen gas for domestic supply to its northern regions. Iran considers itself to be a natural route for Turkmenistan's gas to the European market, and continues to lobby Ashgabat for new export commitments and co-operation. Turkmen gas could be supplied to Turkey via the Iran-Turkey Pipeline (although prone to stoppage and interruption, particularly in winter months), and theoretically then onwards to Europe. Unsurprisingly, the Iranian export route is politically a high-risk option given the internal instability of that country, US and EU sanctions against Iran, and the associated pressure brought to bear on Turkey, Turkmenistan and Azerbaijan against a deepening of their energy dealings with Iran.
Pakistani and Indian Exports
The proposed 1,700 km, 27 bcm per annum Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline has been long in planning and is supported by the Asian Development Bank (ADB). The project proposes that Afghanistan would off-take 2 bcm per annum with the remainder shared equally between Pakistan and India. Construction was originally scheduled to commence in 2010 with the pipeline projected to be operational by 2014; however it is unclear whether all parts of the project will be built, and to what timetable. The TAPI pipeline is supported by the US as an alternative to exports to Pakistan and India from Iran. Turkmen gas exports via TAPI would compete with Iranian and Qatari gas transported via the proposed Iran-Pakistan-India pipeline (IPI). It is hoped that TAPI and IPI would together form the core of a Southern Region Gas System.
The 7,000km Trans-Asia Gas Pipeline from Turkmenistan to China via Uzbekistan and Kazakhstan is currently nearing completion, and will eventually reach Shanghai. From 2010 Turkmenistan will export 30 bcm per annum of gas to China for thirty years, with a further 10 bcm per annum committed for export to China by Kazakhstan. By offering "near-European" gas prices and assisting Turkmenistan to finance gas field development, China is aggressively consolidating its position as a credible gas export partner, and building a sphere of influence in the Caspian region energy market in direct competition with both Russia and the European Union. China's pragmatic and decisive approach, and its deep pockets, have found favour in Turkmenistan, and as the relationship has flourished the countries have agreed a suite of co-operation agreements on energy matters, gas production and gas purchasing.
Part Two of this Article reviews the current, and changing, state of the Turkmen-Russian relationship, and assesses the likelihood of Turkmenistan committing to a Trans-Caspian gas export link to Europe11:02 0 Comments