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A new broom

TURKMENISTAN is opening up to the outside world. The more outward-looking leadership style of the new president, Gurmanguly Berdymukhammedov, has raised hopes of new oil contracts for foreign companies and, possibly, a resolution of the long-standing dispute over the legal status of the Caspian Sea.

Russia has consolidated its control over the gas-rich republic's export pipelines, but other countries continue to court Turkmenistan in the hope of securing access to gas supplies. Berdymukhammedov – who won a landslide victory at February's general election – was clearly the ruling elite's choice of successor to former dictator Saparmurat Niyazov, who died late last year.

Berdymukhammedov – who served both as Niyazov's personal physician and health minister – pledged undying loyalty to Niyazov's policies when he assumed power. But he also promised to open up the economy and to ease restrictions on foreign travel and international telecommunications.

Since February, hardly a week has gone by without some high-ranking foreign government or corporate delegation visiting Turkmenistan for talks with the new leader. Berdymukhammedov has also travelled abroad, first to Saudi Arabia during the Haj and then to Russia and Kazakhstan. China is expected to be the next port of call.

Exploiting opportunities

Russia has been quick to exploit the opportunities presented by Turkmenistan's more outward-looking leadership. In May, President Vladimir Putin and Nursultan Nazarbayev, the leader of Kazakhstan, met Berdymukhammedov at Turkmenbashi to discuss two gas pipeline projects that will ensure most of Turkmenistan's gas exports continue to flow north to Russia.

The three agreed to build a new pipeline north, crossing part of Kazakhstan and then entering the Russian distribution network. A separate agreement, also supported by Uzbekistan, called for the modernisation and expansion of the existing Central Asia-Centre pipeline to Russia – the only large gas-export route out of the region.

For Putin, who is approaching the end of his last term in office, the agreements marked the fulfilment of one of his main foreign-policy goals: to reassert Russian influence over Central Asian gas reserves. Niyazov, who frequently quarrelled with Russia's Gazprom over gas prices and even cut off supplies to Russia on two occasions, was considered an untrustworthy, albeit important gas-trading partner.

Putin said the new line would deliver up to 20bn cubic metres a year (cm/y) of extra gas to Russia by 2012, enhancing European energy security. Russia's policy is to boost imports of Central Asian, mainly Turkmenistani, gas to offset a decline at its big fields in western Siberia, ensuring its long-term export commitments to Europe can be met.

The Turkmenbashi agreement was regarded as a setback by the European Union, which has urged Turkmenistan to diversify its export routes by committing gas to a new pipeline across the Caspian Sea to Azerbaijan for onward transport across the Caucasus and Turkey to southern Europe.

But Jonathan Stern, head of gas research at the Oxford Institute for Energy Studies, describes the trans-Caspian proposal as a "red herring" that would face probably insurmountable economic and political obstacles. Russia has already said Caspian Sea trunklines are environmentally unacceptable and, as a littoral state, would seek to block any proposal on environmental grounds.

According to Julian Lee, an energy analyst at the Centre for Global Energy Studies, "it is preferable for Europe to see Turkmenistan's gas flowing north to Russia than to see it going east to China".

Berdymukhammedov, meanwhile, is keeping his options open on future routings. Turkmenistan has not ruled out the trans-Caspian pipeline option, he told reporters after the Turkmenbashi summit.

And China could yet emerge as a serious competitor for Turkmenistan's gas, says Stern. The Chinese have offered to fund construction of a pipeline that would probably form the first leg of a Central Asian gathering network carrying gas to China. In contrast to the Western majors, which are demanding equity in gasfields before committing funds to pipelines, the Chinese are providing soft loans to support exploration and drilling in the east of the republic.

Turkmenistan is also keeping its options open on a project to build a pipeline south to Afghanistan and Pakistan, which will be on the agenda when Berdymukhammedov meets Khamid Karsai, Afghanistan's leader, in the next few months.

Berdymukhammedov has attempted to allay concern that Turkmenistan is incapable of producing enough gas to fulfil its ambitious export plans. Organisational changes in the industry are in progress: a new state agency for the management of hydrocarbons resources has been set up to replace the Competent Body that oversaw the sector during the Niyazov years.

Gas production is targeted to rise by 20% this year to 80bn cm. Exports, which, except for 8bn cm delivered to Iran, all go to Russia, will increase by 25% to 58bn cm.

Niyazov's claim last year that over 3 trillion cm had been discovered at South Iolotan, in the east of the republic, was greeted with disbelief by many in the West. But a promising discovery this year at the neighbouring Osman block has increased confidence that a large new gas reservoir may lie in the area. Turkmenistan announced plans this spring for a big increase in exploration activity over the coming 20 years.

Although Berdymukhammedov appears as reluctant as Niyazov to allow foreign companies equity in onshore gasfields, he is keen to invite outsiders to tap oil and gas reserves in the Caspian Sea. Russia and Kazakhstan are already active players in the Sea and are eager to expand into Turkmenistani waters.

Lukoil appears close to finalising a deal for two offshore blocks, adding to a Caspian portfolio that includes projects off Azerbaijan, Russia and Kazakhstan. TNK-BP and Chevron have also visited Turkmenistan this year to discuss opportunities.

Positive development

Another positive development in the Caspian is the ending of a six-year chill in Turkmenistan's relationship with Azerbaijan, which began with a squabble over ownership of reserves on the oil-rich Apsheron sill. Niyazov's claim that part of the Azeri block being developed by a BP led group off Azerbaijan was in Turkmenistani waters was fanciful. But a field further east named Kyapaz by the Azerbaijanis and Serdar by Turkmenistan may straddle the two republics' as-yet-undefined offshore boundary.

An agreement on ownership of Kyapaz/Serdar could pave the way for Turkmenistan to compromise its tough stance on offshore boundaries, a sticking point in negotiations of a Caspian Sea Convention between all five coastal states. Azerbaijan, Kazakhstan and Russia have signed bilateral and trilateral treaties defining offshore boundaries in the north, using median-line principles. But Turkmenistan and Iran insist the Caspian must be divided into five equal sectors.

But unlike Niyazov, Berdymukhammedov has engaged in the Caspian debate, attending a Caspian Summit in Tehran in June. He also participated in an informal meeting in St Petersburg in June of the CIS, an organisation Niyazov usually ignored.

With diplomatic relations restored, Azerbaijan may, with time, become less resistant to allowing Turkmenistan to transit gas across its territory to Turkey and Europe. Malaysia's Petronas has made a promising offshore gas discovery that could possibly feed gas into the South Caucasus Pipeline, from Baku to Erzurum, in eastern Turkey. The trans-Caspian pipeline may yet return to Central Asia's energy agenda.


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