ASHGABAT (TCA) — Turkmenistan’s dream to become a world energy player seems to have gone up in smoke just when it could have grasped a glimpse of reality. A trade conflict with Russia’s gas giant Gazprom has prematurely locked its gas outlet to the north, leaving only China as its customer. Ashgabat’s lack of market insight in the midst of a continental price slump appears to be the main cause of Turkmenistan’s inability to cash in on its monoculture.
An intergovernmental agreement inked back in 2003 and valid for 25 years stipulated gas supplies by Turkmengas, Turkmenistan state monopoly, of minimal 70 and maximal 80 billion cubic metre per annum. Shortly before, the core pipeline across Uzbekistan and Kazakhstan and ending up in Gazprom’s gas processing complex in Orenburg had been renovated and its capacity more than doubled, which would allow the supply volume and on top of them extra volumes from Uzbekistan and Kazakhstan.
Fixed and spot prices
The price agreed upon was 400 US dollar per thousand cubic metre – a competitive price but for the impoverished republic of Turkmenistan it meant the salvation of its basic socioeconomic conditions. It all went wrong in the wake of the global cash crisis in 2007/’08, when growth in gas demand in western and central Europe stagnated. As early as the beginning of 2008, when the first drop in oil and gas prices took place (they were soon to recover but that was far from clear at the time), Gazprom gave its Turkmen suppliers a choice: either they would lower the sales price or else Gazprom would bring the volumes of its purchases down. Initially, the proposal was turned down by Ashgabat, and despite a renegotiated price, down to $240 per thousand cube in the course of 2010, supplies from that year on amounted to no more than 11 billion cubic metre.
But one crisis followed the other, and the oil price slump of 2014 sealed the fate of Turkmenistan as a core supplier of Gazprom. In 2015, no more than 4 billion cubic metre were bought. In the meantime, Gazprom had switched the pricing of its sales to Europe from long-term fixed price contracts to spot price setting. The government of Turkmenistan, worried about the way in which volatile income on its gas sales could negatively affect the country’s already fragile socioeconomic stability, refused to cooperate.
A far-fetched pipe-link
Turkmenistan claims to have “lost” up to 400 million in US dollar in 2015 because of Gazprom’s “insolvency”. But it is in no position to push that claim through. A bad sign is that India has recently made it known that it is not planning to make longer-term delivery contracts with any gas supplier including Turkmenistan in which sales prices are fixed, once a new pipeline from Turkmenistan either crossing the explosive territory of Afghanistan or that of eastern Iran, would be in place. Today, those pipelines only exist on paper – as does a far-fetched pipe-link across the Caspian, the southern Caucasus and Turkey to southern Europe.
This leaves China, which is already investing considerable sums in the development of the Galkynysh gas field, located near the spot where the borders of Turkmenistan, Afghanistan and Iran come together, as virtually the sole customer for Turkmenistan’s gas. In December 2009, the contracts to develop the field were awarded to China’s CNPC, South Korea’s Hyundai Engineering and Petrofac of the UK.
Heavily leveraged
China, however, is hardly likely to offer Turkmenistan a deal that ignores market trends. It is the only operator having invested money into the project. Apart from Russia and Iran, China remains the only destination within reach for Turkmenistan, namely through the gas pipeline across Kazakhstan originally meant to transport Kazakh gas to the People’s Republic but still used less than 50 per cent below capacity, meaning free capacity of close to 30 billion cubic metre per annum.
To double delivery, another pipeline is under construction from Turkmenistan into Uzbekistan, where it forks into two branches, one across Kyrgyzstan and another one across Tajikistan, both of which end up in western China. The link should allow the Turkmens to sell another 40 billion cubic metre per annum to the Chinese. But considering that this pipeline is almost completely paid for by Peking, Ashgabat is hardly in a position to raise its voice where price-settings are concerned.
Benchmarked in US dollar
Gazprom is likely to base its sales prices to other customers, including China, on market prices that are benchmarked in dollars and if Turkmenistan fails to comply with that regime in a competitive manner, it can produce as much gas as it wants but to no sale.
Through last winter, the benchmark price to Europe dropped from $6.49 per million British Thermal Units in September to $4.79 in February this year. A small part of the decrease has been offset by the recent depreciation of the greenback against the euro and the pound, but $5 per million BTU or $175 per thousand cubic metre is a price everybody will have to consider in the best case. Such are the realities the Turkmen party will have to live with – or choke in its own gas.
