New Gas Export Pipelines of Turkmenistan: Breaking Gazprom Monopoly
Tariq Saeedi
November 15, 2009
Two new gas export pipelines of Turkmenistan will come into operation before the end of this year. Together with the existing gas conduit to Iran, they should generate adequate revenues to break the Gazprom bear hug on the economy of Turkmenistan.
The pipe to China, designed for higher volumes, will initially carry 5 bcm (billion cubic meters) of gas. The pipe to Iran, also planned for more volumes, will start with 6 bcm of annual throughput.
In addition, Turkmenistan will continue to pump 8 bcm through the existing Korpeje-Kurtkui pipeline to the northwestern provinces of Iran.
This comes to 19 bcm of gas exports in 2010, bypassing the Russian network.
Is it enough to protect Turkmenistan from Gazprom bullying?
In order to answer this question, we need to determine the income threshold that would carry Turkmenistan comfortably through 2010 without worrying about supply of any volumes to Gazprom.
The current pattern of expenditures, excluding any new projects not related to healthcare and education sectors, suggests that Turkmenistan needs about US $ 3 billion to cover its budgetary obligations without introducing any austerity measures. This is a very rough estimate with an uncertain margin of error. However, this should serve as a useful handle for now.
If the income from export of 19 bcm of gas to Iran and China is in excess of US $ 3 billion, it would greatly help Gazprom see things from Turkmenistan´s point of view.
Obviously, the income depends on the price and the price, at least in the case of Iran, is based on a complex formula.
Turkmenistan and Iran agreed a few months ago that the price of gas should be decided quarterly, taking into account the current prices of crude, gasoline, diesel oil, and some other petroleum products.
Based on the formula, that is not available to the media, the price for Turkmen gas exports to Iran in this quarter is presumably around US $ 175 per tcm (1000 cubic meters).
As the crude has already returned to US $ 80 per barrel and there are signs of further appreciation, one can predict that in 2010 Iran would be paying something in vicinity of US $ 200 per tcm for Turkmen gas.
China, as a prudent buyer, cannot be expected to pay any price substantially higher than Iran.
If US $ 200 per tcm is an approximate price of Turkmen exports to China and Iran in 2010, it will bring in US $ 3.8 billion of revenue, enough to cover all the expenses and sustain the national development plan.
Moreover, one needs to take into account that natural gas is not the only foreign exchange earner for Turkmenistan. Petroleum and petroleum products, cotton and textiles, and an assortment of less prominent products also generate a fair amount of income.
The overall situation is that in the medium-term Turkmenistan can live without Gazprom but Gazprom cannot live without Turkmenistan.
The negotiations between Turkmenistan and Gazprom for resumption of gas supplies have remained inconclusive so far, mostly because of the irrational attitude of Gazprom.
Gazprom has not publicly admitted the responsibility for creating the circumstances that led to a pipeline accident in April 2009, causing extensive damage to an expensive compressor station, several booster stations and 20 production wells, and disrupting the gas flow to Russia. Nor has Gazprom offered to compensate Turkmenistan for any damages.
This could partly be attributable to the Russian mindset, a holdover of soviet times – in their private conversations the Gazprom executives refer to Turkmens as ´Baran´ (sheep).
Nonetheless, one might give them the benefit of doubt and recognize that Gazprom, a mere skeleton of its former self, is not really in a position to pay Turkmenistan for:
The damages to the compressor station, pipeline and wells;
The damages for defaulting on the commitment to buy certain Turkmen volumes throughout 2009 at ´European prices´;
The fines that must be paid in case the pipeline capacity is not used as per contractual obligations;
Any other payments in the category of moral and material compensations.
In a strictly legal sense, the inability to pay is no ground for writing off the obligations.
This, in essence, is the situation as we enter the last half of November, leaving very little time for Gazprom to make up its mind.
As if the situation was not satisfactorily thorny for the Russian giant already, some foolish well wishers of Russia and antagonists of Nabucco planted patently fabricated stories in the media in October 2009, right at the time when Turkmenistan was hosting its first investment forum, that the figures for Turkmen gas reserves had been based on false data and rather exaggerated.
Although Gaffney Cline and Associates, the British auditor that had certified the reserves at Yoloton and Yashlar fields of Turkmenistan, explained that they apply an extensive regime of tests before giving their assessment, and any false data would stand out in their rigorous testing cycle, some damage had already been done. After all, lies travel faster than truth.
If Turkmenistan has not only survived but positively thrived in 2009 despite the inability and unwillingness of Gazprom to buy any gas volumes since April, there is no reason it should fare any worse in 2010 when it will sell 19 bcm to Iranian and Chinese buyers.
In the remaining few weeks before the New Year, Gazprom will need to understand the new realities and come to terms to the fact that Turkmenistan is not dependent on Russia anymore for its economic survival.
The success of Turkmenistan is the success of the entire Central Asian region in breaking the Gazprom monopoly on export routes.
The pipe to China, designed for higher volumes, will initially carry 5 bcm (billion cubic meters) of gas. The pipe to Iran, also planned for more volumes, will start with 6 bcm of annual throughput.
In addition, Turkmenistan will continue to pump 8 bcm through the existing Korpeje-Kurtkui pipeline to the northwestern provinces of Iran.
This comes to 19 bcm of gas exports in 2010, bypassing the Russian network.
Is it enough to protect Turkmenistan from Gazprom bullying?
In order to answer this question, we need to determine the income threshold that would carry Turkmenistan comfortably through 2010 without worrying about supply of any volumes to Gazprom.
The current pattern of expenditures, excluding any new projects not related to healthcare and education sectors, suggests that Turkmenistan needs about US $ 3 billion to cover its budgetary obligations without introducing any austerity measures. This is a very rough estimate with an uncertain margin of error. However, this should serve as a useful handle for now.
If the income from export of 19 bcm of gas to Iran and China is in excess of US $ 3 billion, it would greatly help Gazprom see things from Turkmenistan´s point of view.
Obviously, the income depends on the price and the price, at least in the case of Iran, is based on a complex formula.
Turkmenistan and Iran agreed a few months ago that the price of gas should be decided quarterly, taking into account the current prices of crude, gasoline, diesel oil, and some other petroleum products.
Based on the formula, that is not available to the media, the price for Turkmen gas exports to Iran in this quarter is presumably around US $ 175 per tcm (1000 cubic meters).
As the crude has already returned to US $ 80 per barrel and there are signs of further appreciation, one can predict that in 2010 Iran would be paying something in vicinity of US $ 200 per tcm for Turkmen gas.
China, as a prudent buyer, cannot be expected to pay any price substantially higher than Iran.
If US $ 200 per tcm is an approximate price of Turkmen exports to China and Iran in 2010, it will bring in US $ 3.8 billion of revenue, enough to cover all the expenses and sustain the national development plan.
Moreover, one needs to take into account that natural gas is not the only foreign exchange earner for Turkmenistan. Petroleum and petroleum products, cotton and textiles, and an assortment of less prominent products also generate a fair amount of income.
The overall situation is that in the medium-term Turkmenistan can live without Gazprom but Gazprom cannot live without Turkmenistan.
The negotiations between Turkmenistan and Gazprom for resumption of gas supplies have remained inconclusive so far, mostly because of the irrational attitude of Gazprom.
Gazprom has not publicly admitted the responsibility for creating the circumstances that led to a pipeline accident in April 2009, causing extensive damage to an expensive compressor station, several booster stations and 20 production wells, and disrupting the gas flow to Russia. Nor has Gazprom offered to compensate Turkmenistan for any damages.
This could partly be attributable to the Russian mindset, a holdover of soviet times – in their private conversations the Gazprom executives refer to Turkmens as ´Baran´ (sheep).
Nonetheless, one might give them the benefit of doubt and recognize that Gazprom, a mere skeleton of its former self, is not really in a position to pay Turkmenistan for:
The damages to the compressor station, pipeline and wells;
The damages for defaulting on the commitment to buy certain Turkmen volumes throughout 2009 at ´European prices´;
The fines that must be paid in case the pipeline capacity is not used as per contractual obligations;
Any other payments in the category of moral and material compensations.
In a strictly legal sense, the inability to pay is no ground for writing off the obligations.
This, in essence, is the situation as we enter the last half of November, leaving very little time for Gazprom to make up its mind.
As if the situation was not satisfactorily thorny for the Russian giant already, some foolish well wishers of Russia and antagonists of Nabucco planted patently fabricated stories in the media in October 2009, right at the time when Turkmenistan was hosting its first investment forum, that the figures for Turkmen gas reserves had been based on false data and rather exaggerated.
Although Gaffney Cline and Associates, the British auditor that had certified the reserves at Yoloton and Yashlar fields of Turkmenistan, explained that they apply an extensive regime of tests before giving their assessment, and any false data would stand out in their rigorous testing cycle, some damage had already been done. After all, lies travel faster than truth.
If Turkmenistan has not only survived but positively thrived in 2009 despite the inability and unwillingness of Gazprom to buy any gas volumes since April, there is no reason it should fare any worse in 2010 when it will sell 19 bcm to Iranian and Chinese buyers.
In the remaining few weeks before the New Year, Gazprom will need to understand the new realities and come to terms to the fact that Turkmenistan is not dependent on Russia anymore for its economic survival.
The success of Turkmenistan is the success of the entire Central Asian region in breaking the Gazprom monopoly on export routes.
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