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Central Asian gas increasingly reliant on Chinese market

Central Asian gas exports are challenged by reduced Russian demand and a growing reliance on the Chinese market - just as the latter’s demand growth begins to falter

Last year was certainly a turning point for Central Asian gas dynamics. Turkmenistan and Uzbekistan long reliant on the Russian market and Gazprom, delivered more gas east to China than north to Gazprom for the first time.

In 2008, Turkmenistan delivered in excess of 40bn cubic metres (cm) to Gazprom, more than 60% of its production at the time. But following pricing and volume disputes, flows fell to 11bn cm/year between 2010 and 2014. Uzbek deliveries have also been revised downwards on a near-yearly basis – signalling both Gazprom’s limited need for the gas and Uzbekistan’s struggle to meet its export commitments.

In February 2015, Gazprom announced its intention to reduce gas purchases from Turkmenistan and Uzbekistan. It will import 4bn cm from Turkmenistan and 1bn cm from Uzbekistan this year. Central Asian gas purchases have long been more of a strategic than commercial interest for Gazprom. Declining demand in Europe and increasing domestic competition mean that it has sizeable spare production capacity of its own. Cutting back on Central Asian purchases makes economic sense.

Central Asian gas production

Gazprom is King

Despite rising flows to China, Gazprom remained the key hard-currency gas market for both Turkmenistan and Uzbekistan. Even if the border price paid by China is more attractive, a proportion of revenues continue to pay down multi-billion-dollar export-backed loans. Meanwhile, the effect of international sanctions means that Iran – Turkmenistan’s other export market – largely pays by barter. We expect Gazprom to continue to maintain a presence, however small, in the Central Asian gas market. 2015 volumes will likely become the norm for the foreseeable future (see Figure 1). These are effectively the minimum needed to keep the legacy Central Asia-Centre (CAC) pipeline network open as a viable export route.

Diversification to China means Turkmenistan is better placed than in 2009, when a falling oil price and collapsing European demand led Gazprom to make drastic cuts to Central Asian imports. Central Asia exported its first gas to China in late 2009 and volumes continue to rise. Line C of the Turkmenistan-China network was commissioned in mid-2014 and should be fully operational by early 2016. Rising gas deliveries strengthen the mutual reliance between Central Asia and China. In 2014, Central Asian gas represented 14% of China’s gas supply mix. The pivot east was always expected to accelerate over the next three years, with the capacity of the Turkmenistan-China Gas Pipeline being expanded to 85bn cm/year and Gazprom contracts up for re-negotiation. However, the scale of dependence on the Chinese market could be of concern to Central Asian suppliers.

The slowdown in the pace of China’s demand growth is compounding this anxiety – from an average of 16% per year between 2010 and 2013 to less than 6% in 2014, according to official data. Alongside softening economic growth, this decline is driven by high city-gate prices in China and environmental policies that focus on cutting emissions from coal-fired power stations, rather than promoting gas switching.

China’s demand dynamics are not the only factor that will restrict short-term flows from Central Asia – price competition is also critical. In the current oil price environment, Central Asian piped imports struggle to compete with spot LNG and, crucially, long-term LNG contracts into coastal China. Not only are Central Asian deliveries oil-indexed, but they also have high fixed transportation tariffs to and across China.

Central Asia again risks becoming overly reliant on a single market, in the same way it depended on Gazprom before 2009. In contrast, China benefits from an increasingly diversified supply portfolio, to be joined by Russian piped gas by the end of the decade. Its dependence on Central Asian gas will decline in future, just as the latter’s need for additional export contracts reaches its height.

Central Asian gas production by market

Further delays

In Central Asia, long-held plans for export diversification remain stalled. Irrespective of ongoing political efforts, in our view neither the Trans-Caspian nor Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is likely to proceed, with long-standing commercial and strategic challenges yet to be overcome.

Regional governments are increasingly turning to gas-feed industrial projects for nearer-term monetisation. In the past year, Turkmenistan has signed contracts for four petrochemical and gas-to-liquids (GTL) plants that will require more than 9bn m3/y of feed gas. This growing trend illustrates an alternative approach to adding value from natural gas.

Central Asian oil and gas infrastructure

Nevertheless, the projects’ long lead times mean they will not effect regional gas dynamics until 2018 at the earliest.

In the near term, Central Asian gas exports are threatened by reduced Gazprom purchases and a growing reliance on the Chinese market, just as the latter’s demand growth begins to falter. Furthermore, a low oil price creates a more challenging competitive environment for piped supplies to eastern China. Central Asian gas production is still growing, but we expect limited export upside will provide a demand-led constraint for at least the next four years.

Ashley Sherman is an Upstream Analyst for Wood Mackenzie's Russia and Caspian Research service, based in Edinburgh, Scotland.

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