Gazprom resumes imports from Turkmenistan after a long halt

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ASHGABAT (TCA) — The resumption of Turkmen natural-gas imports by Russia will certainly help Ashgabat to increase the much-needed foreign-currency revenues, but the move does not fully solve Turkmenistan’s pressing need for gas-export diversification. We are republishing the following article on the issue, written by Vladimir Socor:

On April 15, Gazprom resumed imports of natural gas from Turkmenistan to Russia via the Central Asia–Center pipeline system, after a complete halt of more than three years (Gazprom.com, Oilgas.gov.tm, April 15). The resumption follows three rounds of negotiations by Gazprom’s CEO, Aleksei Miller, with Turkmenistan’s President Gurbanguly Berdimuhamedov in Ashgabat, in October and November 2018, and on March 27–28, 2019.

Gazprom’s resumption of Turkmenistani gas imports should not be regarded as surprising or unexpected. Gazprom had suspended these imports at the end of 2015, specifically for the period January 1, 2016, through December 31, 2018. And it notified Ashgabat in September 2018 that it was prepared to negotiate the terms of resuming Gazprom’s imports of Turkmenistani gas effective from January 1, 2019.

The contractual basis for this trade remains, officially, the 2003 inter-governmental agreement on cooperation in the natural gas sphere, accompanied by the sale-and-purchase contract between Gazprom and TurkmenGaz. Both documents are valid for a 25-year period (2003–2028). They envisage annual delivery volumes of 40 billion cubic meters (bcm) of Turkmenistani gas, to be taken by Gazprom at Turkmenistan’s border. Gazprom is responsible for the transportation of Turkmenistan’s gas to Russia via the Central Asia–Center pipeline system, which includes two lines via Kazakhstan.

Notwithstanding the apparent legal continuity of the 2003 agreements, their practical operation since April 15 is based on a short-term contract, valid only through the end of July 2019, but open to prolongation. The delivery volume is understood to be only 1.1 bcm for this initial period, though presumably susceptible to expansion in a follow-up period (Kommersant, April 15).

What this suggests is that Gazprom is doing a test run, preparatory to a possible resumption of imports on a larger scale from Turkmenistan. Gazprom had traditionally re-exported a large part of the gas volumes that it was importing from Turkmenistan prior to the halt. It profited from the price differential between the low purchase price at Turkmenistan’s border and the high prices for the same volumes of Turkmenistani gas that Gazprom resold on European spot markets. That lucrative practice, however, depended on high spot-market prices in Europe (see below).

Ashgabat certainly welcomes the resumption of Russian imports of gas from Turkmenistan. However, Ashgabat is interested in a package deal, to include Russian projects in Turkmenistan’s gas-processing industry. This would enable Turkmenistan to export higher-value petrochemical products to Russia, in addition to its traditional role as a raw-material supplier. Miller, however, clarified the Russian order of priorities in his latest public statement in Ashgabat: first and foremost—“the main priority”—Turkmenistani natural gas deliveries to Russia; second, deliveries of Russian steel pipes, for use in international pipeline projects on Turkmenistan’s territory; and in third place, Russian petrochemical industry projects in Turkmenistan (Oilgas.gov.tm, March 28, April 9).

Indeed, the Chelyabinsk Steel Pipe Plant has just signed a contract to deliver 150,000 tons of large-diameter (1,420 millimeters) steel pipes to TurkmenGaz, for $219 million. To finance this transaction, Turkmenistan will take out a loan from the Islamic Development Bank, guaranteed by Russia’s Sberbank. Those pipes are to be used for construction of Turkmenistan’s 215-kilometer section of the Turkmenistan–Afghanistan–Pakistan–India (TAPI) pipeline project (Oilgas.gov.tm, April 5, 8).

Under the 25-year agreements signed in 2003 (see above), Russian imports of Turkmenistani gas averaged 40 bcm annually from 2003 through 2008. Gazprom became the sole Russian importer from 2005 onward. It re-exported a large part of those Turkmenistani volumes to Europe as Russian gas, at steep mark-ups. It also used some of that low-priced gas from Turkmenistan for Russia’s internal consumption, thereby releasing equivalent volumes of Russian gas for high-priced sales in Europe.

The collapse in European demand and market prices from 2009 onward—and the resulting glut on Russia’s internal gas market—caused Gazprom to halt imports from Turkmenistan in 2009, then drastically reduce them to 10 bcm per year from 2010 through 2014, and to only 4 bcm in 2015. Without ever formally renouncing the 2003 agreements with Turkmenistan, Gazprom unilaterally declared a “commercial pause” at the end of 2015, completely halting the imports until the end of 2018, and in practice until April 15, 2019 (see above).

Meanwhile, Gazprom was suing TurkmenGaz in the Stockholm arbitration court for a retroactive revision of the 2003 contract. Although that contract was based on a fixed price, Gazprom deemed that to have been overpriced for the years 2010–2015 (the years of low prices in Europe), and sought $5 billion from TurkmenGaz as compensation for alleged overpayments in 2010–2015. Gazprom eventually withdrew that suit, opting instead for an out-of-court settlement with TurkmenGaz—a decision that presaged a resumption of the imports.

To which extent Gazprom would re-export Turkmen gas or use it in Russia (thus making available Russian gas volumes for export) is not clear. Undoubtedly, Turkmenistan will not be allowed to export gas volumes via Russia to Europe (or other markets) through Gazprom’s pipeline system, as Turkmenistani gas. This would signify Gazprom providing transit service for those volumes. The Russian monopoly would, however, only consider re-exporting Turkmenistani gas in Gazprom’s name, as Russian gas.

This article was originally published by The Jamestown Foundation’s Eurasia Daily Monitor