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Turkmenistan puts its foot on the gas

Turkmenistan is broadening its upstream options, renewing efforts to diversify gas-export routes and drawing in US firms

TAKING a leaf out of the geopolitical strategy book of neighbouring Kazakhstan, Turkmenistan is following a hydrocarbons-development policy to balance markets competing for its gas in Asia, Russia and the West. To achieve its aims, it is further opening its upstream, both offshore and onshore, to international oil companies (IOCs).

The country has large oil and gas reserves: estimated by BP and Cedigaz at 0.6bn barrels and 8.1 trillion cubic metres (cm), although Turkmenistan claims its sector of the Caspian Sea alone contains 80.6bn barrels of oil and 5.5 trillion cm of gas – a figure yet to be independently verified. Either way, these are significant resources, held at a crossroads of markets competing for energy supplies – south Asia, China, Russia and Europe – and the government aims to almost quadruple gas production by 2020, from 70.5bn cm in 2008.

Yet despite strenuous efforts by US companies, until now Turkmenistan has awarded only a few offshore exploration rights to, among others, Germany's RWE, a joint venture of Russia's Itera and Zarubezhneft, the UAE's Dragon Oil, a venture between Denmark's Mærsk, Germany's Wintershall and India's ONGC, Malaysia's Petronas and China National Petroleum Corporation (CNPC).

US making headway

But US companies are making headway. In August, President Gurbanguly Berdymukhammedov named Chevron, ConocoPhillips – jointly with Abu Dhabi-based Mubadala Oil and Gas – and US independent TX Oil as preferred bidders for the rights to two Caspian blocks. Meanwhile, ExxonMobil is reported to be opening an office in Ashgabat, the capital.

The involvement of US firms may come at the expense of Russian companies, such as Lukoil, which has admitted defeat in its efforts to enter the upstream. "Lukoil's people will tell you [Turkmenistan] is not keen to be involved with Russian companies," says one analyst. But beyond the breakdown in trust between Russia and Turkmenistan – the result of a dispute over a pipeline explosion in 2009 – companies such as Chevron have better experience of Caspian developments; the major is the largest private-sector oil producer in Kazakhstan and is involved in Azerbaijan's offshore Azeri-Chirag-Guneshli project.

And there could be other changes afoot. Until now, Turkmenistan's policy has been to use foreign companies to help develop its offshore reserves only. Now the onshore, with its huge gas resources, could also be open for business: Berdymukhammedov has instructed officials to draw up a new production-sharing agreement with Eni for the Nebit Dag oil and gas field in the west of the country. That would be a triumph for boss Paolo Scaroni's lobbying efforts, which followed the Italian firm's acquisition of Burren Energy and its local assets in 2008.

The latest moves suggest the country is keen to hasten the development of its natural resources and it is also looking to diversify the export routes for its gas. In September Berdymukhammedov met his counterpart in Afghanistan, Hamid Karzai, on the sidelines of the UN General Assembly in New York in an attempt to breathe new life into the Turkmenistan-Afghanistan-Pakistan-India (Tapi) gas pipeline.

This southern gas-export route – which consists, for now, of two pipelines to Iran that carried just 6bn cm in 2009 – would stretch 1,700 km, with a capacity of 30bn cm/y. At the same time, Berdymukhammedov is pushing his government to conclude gas-supply agreements with Pakistan and India, which have expressed interest in buying up to a combined 70bn cm/y. But Tapi, on the drawing board since the 1990s, is undermined by Afghanistan's chronic instability, which shows no sign of improving. The pipeline would balance China's influence in Turkmenistan with India's, says Andrew Neff of IHS Global Insight, a consultancy. But it stands "little chance" of proceeding, he adds.

Indeed, China has been the main beneficiary so far of Turkmenistan's attempts to open its upstream and diversify its export routes, with the building of the 40bn cm/y Central Asia-China gas pipeline (running through Uzbekistan and Kazakhstan) and a long-term supply agreement struck with CNPC that should see exports reach 30bn cm/y by 2012.

Meanwhile, Berdymukhammedov is also trying to tie up a $4.1bn loan from China's state development bank to fund gas-processing facilities and, crucially, development of the South Iolotan gasfield, estimated by Gaffney Cline & Associates to hold as much as 14 trillion cm. Even if the field holds 6 trillion cm, which Gaffney Cline says is its "best estimate", South Iolotan would rank among the world's top-five gasfields.

The government has not yet said which firms will help it develop the field, although China is "light years" ahead in the race, says Neff. In addition to the capital, the infrastructure exists to export to China, he points out. The Nabucco consortium, which would like to import Turkmenistani gas through its proposed pipeline to Europe, cannot claim either advantage. CNPC's long-term gas-purchase agreement with Turkmenistan may seal the deal, suggests Neff. When announcing the loan from China, the government did not mention Nabucco.

But nor has Turkmenistan said much of late about its historical partner, Russia. Relations with the Kremlin have been rocky since April 2009, when the government in Ashgabat blamed Russia's state-controlled Gazprom for an explosion on the Central Asia Centre pipeline, which carries gas to Russia – historically, the main destination for Turkmenistan's exports. Gazprom, faced with falling demand from Europe and at home, had allegedly reduced imports at short notice, which, claims Turkmenistan, caused a dangerous build-up of pressure in the pipeline and the resulting explosion.

And Russian imports remain weaker than forecast. Last year, Russia bought just 9.5bn cm of gas from its neighbour, compared with the 41bn cm it was contracted for, and 42bn cm imported in 2008. This year, Gazprom plans to buy just 10.5bn cm – far short of the 70bn cm/y long-term supply agreement signed by the countries in 2003.

"Turkmenistan will extend its hand to anyone who can offer them something and at the moment the Russians can't offer them anything," says Shamil Yenikeyeff, of the Oxford Institute for Energy Studies. "Central Asian countries perceive Russia as a declining power, while China is an emerging power." Bad faith – a legacy of the pipeline explosion – has also undermined the relationship with Russia, he adds.

Indeed, that spat may have been behind Turkmenistan's surprise award in July 2009 of Caspian exploration Block 23 to RWE, a member of the Nabucco pipeline consortium. This was taken as a positive sign by the backers of Nabucco, which is being pushed as a way to break Russia's stranglehold on gas exports to Europe by importing gas from the Caspian and Middle East without crossing Russia. Yet the pipeline's supporters should not get too excited – the project still lacks sufficient gas supplies to fill its proposed 31bn cm/y capacity.

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