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Turkmenistan sees light at the end of the tunnel

Turkmenistan must overcome economic crisis and political hurdles to reverse its gas exports decline

Resumption of gas exports from Turkmenistan to Russia in mid-April was welcome news for an economy unusually dependent on a single product— natural gas —for its export revenues.

On 15 April, following a meeting between Gazprom chief Alexey Miller and the Turkmen president, Gurbanguly Berdimuhamedov, in Ashgabat in late March, it was reported that Turkmen gas had flowed across its borders bound for Russia for the first time since January 2016. That was when exports ceased because of a dispute over price and payments.

It is a tentative rapprochement. A decade ago Turkmenistan was exporting over 40bn m³/yr of gas to Russia, more than its current exports to China. Neither Gazprom nor Turkmengaz has released details of volume or price, though unconfirmed reports claim a volume of 1.1bn m³ up to the end of July at $110/,000 m³. What happens beyond then is unclear; it is, nevertheless, a start.

Despite its proven gas reserves of 19.5tn m³ — a figure which does not do justice to the country's full potential because of a lack of investment — Turkmenistan has been going through an economic crisis precipitated by the oil price collapse of 2014 and its consequent impact on gas prices. The crisis has been exacerbated by declining export volumes.

President Berdimuhamedov is understandably anxious to grow and diversify the country's gas export sales, but the reality is that exports have been declining since 2014.

Turkmenistan is physically able to export gas to Iran directly, and, via Uzbekistan, to Kazakhstan, and then on to Russia and China. But as exports to Russia have only just resumed, exports to Iran ceased in January 2017 and sales to Azerbaijan (swapped via Iran) and Kazakhstan are minimal, the country is increasingly dependent on China.

Turkmenistan aspires to export gas to Pakistan and India through a pipeline nominally under construction via Afghanistan, and to Turkey and the EU through a proposed pipeline across the Caspian Sea that would connect with pipelines running through Azerbaijan, Georgia and Turkey. But both of these projects face considerable hurdles and it is not clear when — or even whether — they will come to fruition.

China to the rescue

Meanwhile, strong growth in sales to China has helped to offset steep declines in exports to other markets, but is creating a worryingly heavy dependency on a single market. In 2012 the 21.3bn m³ that Turkmenistan exported to China was around half of its total exports. The 31.7bn m³ it exported to the Chinese market in 2017 accounted for 94pc.

An additional worry is that the capacity of the infrastructure is approaching its limits, while proposed expansions are facing their own hurdles.

Turkmen gas flows to China through the Central Asia-China Gas Pipeline (CACGP). It has a three-line (A, B & C) system that runs through Uzbekistan and Kazakhstan, both of which also use it to export gas to China. In 2017, Uzbekistan supplied 4bn m³ to China and 1bn m³ to Kazakhstan. Both eventually hope to use the line to export 10bn m³/yr, and while constrained by their own production limitations and domestic requirements, any Kazakh and Uzbek increases could constrict space for Turkmen gas.

The total capacity of the system is 55bn m³/yr and there are plans to increase its capacity to 65bn m³/yr, theoretically by 2020, although that looks unlikely. A fourth strand, Line D, could add another 30bn m³/yr of capacity along a different route through Uzbekistan, Tajikistan and Kyrgyzstan-but work in Uzbekistan was suspended indefinitely in 2017 and shows no sign of resuming.

There is a risk that China could seek to take advantage of its dominance over Turkmenistan's export trade to improve commercial terms, for example, on price. However, for now, there is a strong mutual dependence because of China's urgent need to import more gas. In 2017, Turkmen pipeline gas accounted for 31pc of China's gas imports by pipeline and LNG.

Nevertheless, this heavy dependence on China increases the pressure on Turkmenistan to do what it can to accelerate development of other export options.

Iran arbitration

Until 2017, Iran had been importing gas from Turkmenistan for two decades to supply customers in its north-eastern provinces, which are not well connected with gas production infrastructure in the south-east and central regions.

But in January 2017, Turkmenistan suspended exports because of a payment dispute relating to gas supplied in 2007-08. In August last year, it was reported that both countries had filed law suits against each other with the International Court of Arbitration — with a verdict expected to take up to two years. Until then, no gas is expected to flow, except for the volumes that are swapped to supply Azerbaijan.

TAPI

Turkmenistan began constructing the first leg of the $10bn Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline in December 2015, following a high-profile ground-breaking ceremony attended by president Berdimuhamedov, Afghanistan's president Ashraf Ghani, India's then vice-president Hamid Ansari, and the then prime minister of Pakistan, Nawaz Sharif.

Once completed, the 33bn m³/yr 1,814km (1,120 mile) pipeline would carry Turkmen gas to Afghanistan (5bn m³/yr), Pakistan (14bn m³/yr) and India (14bn m³/yr). However, the project faces multiple challenges, not least the security situation along the route in Afghanistan, which is likely to deter many potential financiers.

The project appears to make a lot of commercial sense. Both India and Pakistan need more gas, are struggling to develop their indigenous resources quickly enough, and are importing large volumes of LNG.

Significantly, the project has attracted support from multilateral development banks. The Asian Development Bank (ADB) has been acting as its secretariat since 2003 and has provided funding for feasibility studies. In 2016, the Islamic Development Bank agreed a loan of $700mn.

But the current status of the project is the subject of conflicting reports. Work on the Afghan section is reported to have begun in February 2018. However, reports in October 2018 said that only "preliminary work" had been completed, with the "implementation phase" due to begin in 2019. In December, it was reported that Pakistan had approved the route within its territory, suggesting that no pipe has yet been laid.

Challenges abound

New export infrastructure is only part of the challenge. To increase gas exports significantly, Turkmenistan would also need to increase its production.

The country's large proven reserves of gas have inevitably attracted the interest of foreign companies; but Turkmenistan has long had two policies that have limited its attractions to the international oil and gas majors that could bring the expertise and technologies needed to develop challenging fields.

One is a policy of not signing production-sharing agreements for onshore reserves. The second is a general policy of selling gas at the country's border, leaving other parties to assume financing risk and to construct pipelines outside Turkmenistan.

There is little sign that the government intends to reverse either policy in the foreseeable future — and little prospect of political change. The 2017 presidential election served merely to confirm, indeed entrench, the status quo. President Berdimuhamedov entered his third spell in office facing no limit on how many terms he will serve, and terms are now for seven years. He has little opposition and social discontent looks unlikely to become a force for change because of its small scale and lack of co-ordinated leadership.

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