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Turkmenistan: Naughty and not nice

Russian plans to rely more heavily on Central Asian gas in the coming years have taken a knock. At the start of 2005, Turkmenistan halted gas exports to Russia after failing to wring higher prices out of Gazprom.

A truce was negotiated in mid-February, when Gazprom's leader, Alexei Miller, visited President Saparmurat Niyazov in Ashkabad and won assurance that Turkmenistan would stand by the terms of its contracts and agreements with Russia. But Niyazov has a habit of changing his mind and appears to have no qualms about depriving his impoverished republic of gas revenues or of stopping energy supplies to Russia during the coldest months of the year.

"Cutting off gas supplies in mid-winter is not nice," said Jonathan Stern, director of research at the Oxford Institute of Energy Studies. Stern claims Turkmenistan has overplayed its hand by attempting to coerce Russia into paying a higher price.

Ukraine, Turkmenistan's biggest gas customer, agreed to increase payments for gas to $58/'000 cubic metres (cm) in January. But the new government of Viktor Yanukovich has pledged to scrutinise and possibly tear up the deal if Ukraine is deemed to be overpaying for the gas. Once transport costs are added, Turkmenistani gas will end up costing around $80/'000 cm in Ukraine, Stern estimates. If Gazprom caved in to such a price increase, selling Turkmenistani gas in Russia would be loss-making. Russian domestic gas prices are rising, but even in high-paying regions, have not exceeded $40/'000 cm.

Gazprom is counting on Turkmenistan's gas to fill in a gap in supply until challenging new Russian fields can be tapped in the Arctic oceans and on the Yamal peninsula, in the far north of western Siberia. Yamal gas will be expensive to extract and huge investment will be required in long-distance pipelines to carry supplies to market.

A contract signed by Turkmenistan and Gazprom's foreign trading arm, Gazexport, in 2003, called for gas exports to Russia to climb to 7bn cm in 2005 and to 10bn cm in 2006. Prices were set at $44/'000 cm, of which 50% was payable in cash and the rest in barter goods. Turkmenistan breached this deal when it halted deliveries in January. The gas-supply contract was drawn up at the same time as a long-term gas co-operation agreement between the two countries. This government-to-government deal called for Russian imports of Turkmenistani gas to jump above 50bn cm in 2007, before climbing to 70bn-80bn cm in 2009.

Turkmenistani gas exports move north through the Central Asia-Centre pipeline that crosses Uzbekistan and Kazakhstan on the way to Russia. Built in the Soviet era, the system has fallen into bad repair and will require expansion before much extra gas can be accommodated. Niyazov has said he wants to build a new export line skirting the east coast of the Caspian Sea on the way north to Russia. That project could make sense. Large gas reserves have been found offshore, but as yet there is no transport infrastructure in place to access markets.

Turkmenistan's strong suit is that it owns bigger gas reserves than its neighbours, Uzbekistan and Kazakhstan. But Russia is looking to buy more gas from those republics too. President Vladimir Putin has called for a gas Opec to be formed by Russia and all three former Soviet Central Asian states.

A contract signed by Gazprom with Uzbekistan calls for supplies of 5bn cm in 2005. And Lukoil, which recently finalised a gas exploration and production deal in the republic, has already agreed to sell all output to Gazprom. Gazprom is lifting more gas from Kazakhstan's giant Karachaganak field, admittedly at miserly prices. But sharing export pipelines to profitable European markets with competitors is not on the Russian gas monopoly's agenda.

Kazakhstan has begun negotiations with the Chinese about building a gas pipeline east that would open up a first non-Russian route to export markets, but Stern considers the scheme unrealistic. Apart from the cost of building the Kazakhstani section of the line, investment would also be needed to lay a second string to China's new West-East system, leading to Shanghai. Netbacks on Kazakhstani gas delivered to eastern China would probably be poor, Stern says. Kazakhstan sees itself as a future transit route for landlocked Central Asia's gas. If Gazprom co-operates, the gas Opec could look both east and west.

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