Turkmenistan the dominant regional gas player
While the country’s natural gas business continues to thrive, the oil sector is trailing distantly behind
Despite its significant reserves, Turkmenistan’s oil industry has long taken the back seat in its energy sector. The country’s massive, easily tapped gas resources have, since the Soviet era, made the country a pivotal source of natural gas – and an increasingly important supplier to foreign markets.
The scale of Turkmenistan’s reserves, estimated at 17.5 trillion cubic metres (cm) makes it the dominant regional gas player. Natural gas output was 62.3 billion cm in 2013, most produced by the state gas firm Turkmengas. Of this, 22.3bn cm was consumed domestically, with the remainder exported.
Production picked up from 36.4bn cm in 2009 after a peak of 66.1bn cm in the previous year, most of which was exported to Russia. Production dropped in 2009 following a rupture on a trunkline that carries Turkmen gas to Russia for re-export to Europe. This prompted Russia, until then the main destination for Turkmen gas, to reduce its imports from 47bn cm in 2008 to about 9.9bn cm in 2013. In October, Russia’s gas monopoly Gazprom announced that it would not renew any gas supply contracts with Central Asian countries.
The decision seems to be linked to difficulties in trade between the European Union (EU) and Russia (including gas sales) as a result of Western sanctions imposed on the latter over its annexation of Crimea and the Kremlin’s support for separatists in eastern Ukraine. The gradual loss of Russia as a big buyer has forced Ashgabat to seek other markets for its gas, with China taking the lead. A 30-year agreement for supplies eventually reaching up to 40bn cm a year (cm/y) was signed in 2007.
The agreement coincided with the construction of a 7,000 km pipeline between the two countries, via Uzbekistan and Kazakhstan. Ashgabat has since increased exports to China, which reached almost 24.8bn cm in 2013. This volume will rise further, to 65bn cubic metres a year (cm/y) by 2020.
The supplies will mostly come from the supergiant Galkynysh field (formerly known as South Yolotan) and Bagtyyarlyk. China National Petroleum Corporation and Turkmenistan signed a 30-year production sharing agreement (PSA) for Bagtyyarlyk in 2007, the country’s first onshore PSA.
Having secured China as a long-term market, Ashgabat is now seeking to supply up to 33bn cm/y to India and Pakistan via the Turkmenistan-Afghanistan-Pakistan-India pipeline and has also said it wants to pump unspecified amounts of gas across the Caspian Sea to feed the southern gas corridor from Azerbaijan to Europe via Turkey.
Despite Turkmenistan’s success in developing the gas sector, its oil prospects remain bleak. Although the country has managed to increase oil output in recent years, the government’s preoccupation with gas, territorial disputes around offshore fields in the Caspian Sea, state ownership of assets, and the country’s inward-looking policies have discouraged many foreign investors.
Turkmenistan is one of the world’s most politically isolated nations. The late president Saparmurat Niyazov – also known as Turkmenbashi or “leader of all Turkmens” – declared “eternal neutrality” after the country gained independence from the Soviet Union in 1991. But this has translated into economic isolation with limited foreign involvement in the economy.
After independence, Turkmenistan maintained the state ownership of oil and gas assets through the creation of a state-run oil company, Turkmennebit, and the gas monopoly, Turkmengaz.
For all Turkmenistan’s claims about its oil reserves, there has been little, if any, independent assessment of them. Resource estimates are unreliable and vary significantly.
According to the US Energy Information Administration (EIA), almost all the country’s proven and probable oil reserves lie in the Caspian littoral – 1.1bn barrels offshore and 800m barrels onshore. BP estimated Turkmenistan’s oil reserves to be 600m barrels in 2013. Turkmenistan’s government, on the other hand, claims that in the Caspian region alone the country sits on a trove of about 90bn barrels.
Reliable data on the country’s oil production are just as difficult to come by, and often conflicting. The Caspian region accounts for all Turkmenistan’s oil production. In 2013, the most recent date for reliable data, the country produced 231,000 barrels a day (b/d) – about 75% of which came from the onshore. Local consumption accounts for about 60% of the output.
The local arm of Dragon Oil, a United Arab Emirates firm, says it had increased its oil output from the Cheleken contract area in the Caspian Sea, from 7,000 b/d in 2000 to 67,600 b/d in 2012 and 73,750 b/d in 2013, with a target of 100,000 in 2015. Eni, which is developing the onshore Nebit Dag Block, produced 10,000 b/d in 2013. Malaysian Petronas Carigali doesn’t reveal its output from the offshore Block 1, which includes the Diyarbekir, Magtumguly and other fields, but IHS Energy, a consultancy, reckons it is pumping around 45,000 b/d.
Turkmennebit doesn’t publish its production figures, either, but Turkmen media reports say the state-owned company produces 160,000 b/d.
The lack of reliable data, coupled with the country’s bar on foreign companies owning fields, puts Turkmenistan at a distinct disadvantage to other producing nations in terms of attracting investors.
Only technical services contracts are on offer, too, with no stakes available for projects located onshore, where prospects are greatest. With the exception of the Nebit Dag and Bagtyyarlyk developments, PSAs are only available for the offshore. But “prospects for offshore oil are dubious and what has already been discovered is already being developed by Dragon Oil and other companies,” said one Western oil executive, who wanted to remain anonymous.
Dragon Oil, Eni, Petronas and Buried Hill, which is exploring offshore Block 3 that includes the disputed Serdar/Kapaz field, all operate under PSAs. “Since there haven’t yet been major discoveries, the conditions they are offering are not competitive compared to many other places where investment could be taken,” the executive said.
Turkmenistan has at least been content to respect its contractual obligations for the offshore PSAs. “You’ve got Petronas, Eni and Dragon Oil operating in Turkmenistan for many years and they have stable contracts,” Dominic Lewenz, head of oil and gas research at Almaty-based Visor Capital investment bank, told Petroleum Economist. On 18 November, Eni announced that the PSA for Nebit Dag had been extended to February 2032 in return for the transfer of a 10% stake to Turkmennebit. (Eni will retain the remaining 90% interest in the PSA and will continue further investments in Burun and other satellite fields at Nebit Dag).
There are other problems for Turkmenistan’s oil, not least that neighbouring Kazakhstan and Azerbaijan have bigger reserves. Disagreements about maritime borders with other Caspian littoral states also hinder the sector.
There should be a sense of urgency, though. Matthew Sagers, head of the Russian and Caspian Energy Service at IHS Energy, told Petroleum Economist that if the country does not tap its offshore reserves, oil production will soon start declining. “The best prospect is the disputed Serdar/Kapaz field which has been licensed to Buried Hill, which will take an agreement with Azerbaijan to unlock,” Sagers said. And with production almost 60% higher than domestic consumption there is no real impetus to further develop the oil sector – especially as the country’s export infrastructure is for gas, not oil.
The barrels that aren’t consumed locally are typically sent via barge across the Caspian, either to Russia for onward delivery via Makhachkala, or to Azerbaijan, for refining or onward export via the Baku-Tbilisi-Ceyhan pipeline.
Turkmenistan had also used oil swaps with Iran to export output from Cheleken, though this has largely stopped since the West tightened sanctions against Tehran, noted Andrew Neff, an analyst at IHS Energy. Dragon subsequently signed a deal to export via Azerbaijan. In November 2013, at the height of acute petrol shortages in Uzbekistan local media reported that Tashkent would increase imports of Turkmen oil. Neither country disclosed any numbers relating to the deal.
None of this has stopped Turkmenistan’s hopes of seeing an oil sector flourish. Local media often highlight Turkmennebit statements about commercial oil discoveries, on- and offshore. The latest announcement was made on 31 October, saying Turkmennebit had flowed 733 b/d from a well drilled at the Altyguyy field.
In 2013 Turkmennebit made a commercial oil find at the North Goturdepe field, flowing almost 6,000 b/d from the offshore well.Such announcements and the government’s belief in huge Caspian oil reserves have emboldened Ashgabat to set an oil output target of 1.34 million b/d by 2030 – “totally unrealistic”, said Neff. “Achieving this level would be optimistic even with massive foreign investment in developing new fields; without that external investment the target is simply unachievable,” he added.