Buying Turkmenistan's natural gas

Turkmenistan holds significantly large quantities of natural gas (they hold the world’s fourth largest reserves) and these have, over the years, proved attractive to Russia, China and the West. Until fairly recently, despite some bad relationships from time to time, the natural gas that the country produced made its way towards the West through Russia. With only Russian pipes as the conduit, Turkmen gas was under the real control of those who chose whether to pump the gas, or not.

However, when times were flush for the industry (can this be just over a year ago) and in order to ensure supplies for its customers in the West, Russia agreed to a much more beneficial pricing for the Turkmen gas, and was buying some 50 bcm a year. This was all arranged after the Russian Presidency changed hands, and was one of the first items on the new President’s agenda.

Since then things have not really gone well for the relationship as a whole. Turkmenistan has agreed to send natural gas to China, providing it with a second customer, while the price of natural gas has fallen with the recession in demand, around the world. That pipeline is now expected to be in place by the end of next year, and I saw pipelines being laid in China on my recent visit, as they extend the network. The pipeline is expected to carry some 40 bcm (more than Russia will buy this year).


Turkmenistan has also agreed to supply Iran with 14 bcm of natural gas with a new pipeline to carry gas down into Iran being planned for the near future.

Gazprom profits, meanwhile have dropped 62%, as the demand from Europe has dropped dramatically – with Gazprom market share falling to 16%. There was an “accident” to a pipeline between Russia and Turkmenistan, and since then no gas has flowed through the pipelines.

So, in this day of solar car racing (I hear that the route for the new competition has now been agreed), it is perhaps appropriate that the Russians and Turkmen are hoping to improve their relations with an off-road race that has Gazprom and Turkmengas as the main sponsors, of what is known as the Silk Way Rally. President Medvedev will stop by again on Sept 13th intending to renew the deals.

The need for Gazprom to sweeten relationships with Turkmenistan has much to do with the face of the gas pipelines planned to flow into Southern Europe from further East. There are two competing options, the Nabucco pipeline that the Western nations favor, and the South Stream that is being pushed by Gazprom and friends.

Gazprom, working with Italy's ENI , has so far received backing from Bulgaria, Serbia, Italy, Greece and Hungary for the pipeline that would carry gas from Central Asia under the Black Sea to Europe by 2015. Austria and Slovenia are close to signing up to the deal, Gazprom said.

Among those happy to purchase from Gazprom is the UK, that now gets some 16% of what it needs from Russia.

To provide some of these gas needs for Europe (which collectively has been getting about 25% of its gas from Gazprom) Gazprom is building a collector pipeline known as the Caspian Gas pipeline that will carry gas from Turkmenistan and Kazakhstan to the tune of some 20 bcm a year. There was a meeting of officials from Azerbaijan, Kazakhstan, Russia, and Turkmenistan in Aktau, Kazakhstan' today to discuss the project. Iran was somewhat upset about not being invited.

Gazprom has also opened a new pipeline into Lithuania and beyond to Kaliningrad. It will be known as Red Junction, and carry 2.5 bcm per year. First shipments are due in December. Thus it has the customers, and can profit well from the transport of gas through its pipelines.

But with Gazprom happy to promise new and existing customers a secure supply, there have to be some concerns over how much can come from Turkmenistan

Turkmenistan has two options. It can refuse to agree to lower gas prices to Russia. How long can it hold out without gas revenue from Russia? It may use part of the Chinese credits to tide itself over until gas flows to China in 2010. The other option is to agree to lower gas prices to Russia for a short period. At present Russia does not need Turkmen gas to supply the European market. However if EU economies recover in 2010 or 2011 it will need Turkmen gas. Europe faces the risk that Gazprom will not be able to deliver the necessary gas. That would mean high prices for the available gas. Hence the Chinese deal is good news for Turkmenistan. It is bad news for Russia but also the EU.