Natural Gas and Turkmenistan

President Niyazov of Turkmenistan paid a visit to China at the beginning of April, and out of that came an initial agreement for a pipeline to bring gas from Turkmenistan to China.

Niyazov arrived in China for a rare visit on April 2 amid anticipation that a pipeline deal was in the works. The two countries inked the framework agreement the next day. A text of the pipeline agreement published by official Turkmen news agency TDH states that China will buy 30 billion cubic meters (bcm) of Turkmen gas each year for 30 years, starting in 2009. The initial agreement leaves the nuts and bolts of pipeline construction to be worked out by December 31, 2006. Official reports were mum on financial details, but Russia's "Kommersant" reported on April 3 that Niyazov would use his visit to China to try to convince the Chinese side to finance the pipeline project.

A Turkmen television report on April 8 suggested an earlier start date and provided additional information about the pipeline route. "In the first phase [of the project], we plan, starting from 2008, to deliver some 30 bcm of Turkmen gas [annually] via Uzbekistan and Kazakhstan, to Urumci [western China] and beyond it, to Shanghai [eastern China], and to increase these volumes to up to 50 bcm by 2010," the station reported.

From China's standpoint, this is simply a continuation for China's quest for energy resources, as China is scouring all of Asia for gas. China recently made a big agreement with Russia on a gas pipeline, for instance.

For Turkmenistan, this deal would certainly increase its standing. Turkmenistan has been making noises about increasing the price it charges for gas exports, and this deal would give Turkmenistan some leverage over Russia on price.

This pipeline is an ambitious deal, and it is not guaranteed to happen by any means. However, the volumes of gas being talked about are significant.

For comparison, Ukraine reached an agreement with Turkmenistan in March on gas supplies. This deal was a resolution to the confrontation at the beginning of the year when Russia/Gazprom shut off the gas to Ukraine. Here are some details on that deal:

Ukraine and Turkmenistan have resolved the problem of bilateral settlements for natural gas supplies from the Central Asia republic in 2003-2005 and agreed to hold talks in the near future on supplies in the second half of 2006, the Ukrainian foreign ministry said Sunday.

"The parties reached a consensus during a visit by Ukrainian oil company Naftogaz' delegation to Turkmenistan on March 24-25," the ministry's press service said.

Under a bilateral treaty, Turkmenistan is to ship 40 billion cubic meters of gas at $50 per 1000 cu m in the first half of the year and at $60 per 1000 cu m in the second.

So, the deal with China would involve a similar volume of gas. Turkmenistan can produce only so much gas, though, so any gas going to Ukraine or China means a lesser amount left over for other customers, most notably Russia. Hence, this kind of deal has implications for a scramble for gas down the road. From the RFE/RL again:

Finally, the emerging contours of competition for access to energy resources in Central Asia are another cloud on the horizon for Gazprom. Gazprom's short-term strategy envisages a major increase in purchases of Central Asian gas. Vladimir Milov, from the Institute for Energy Policy, explained in a briefing at the Carnegie Endowment in Washington, D.C., on March 16 that Gazprom will have no means to offset declining domestic gas production beginning in 2008, and by 2010 will be purchasing 100 bcm of gas from Central Asia. Gazprom is counting on Turkmenistan to provide the bulk of that gas, with purchases slated to go to 70-80 bcm a year as early as 2007-08.

Gazprom's future plans assume that Turkmenistan will sell virtually all of its export production to Russia. But the draft agreement between China and Turkmenistan implies that if the new pipeline becomes a reality, it could be a priority commitment for Turkmenistan. The text states that the gas for export to China will come from fields on the right bank of the Amu-Darya River, but it adds, "If additional volumes of gas are required to build the Turkmenistan-China gas pipeline, the Turkmen side can guarantee gas shipments from other gas fields."

Both Milov and Victor warn that Russia, a key supplier of gas to Europe, could face a supply crunch in the not-so-distant future. Goetz stresses that Turkmenistan's negotiations with China point in exactly this direction: "For now, Ashgabat is, so to speak, loyal to Moscow, but if President Niyazov suddenly changes his mind, this could have implications for the entire energy situation, including the situation in Europe."

Now, add to this a deal announced with Iran yesterday.

Officials from Turkmenistan and Iran signed an agreement Tuesday to increase the price and the volume of supplies of Turkmen natural gas to its southern neighbor, the Central Asian nation's Foreign Ministry said.

Under the deal, which cemented agreements reached by the nations' presidents last month, Iran will pay US$65 (euro54) per 1,000 cubic meters of gas as of Feb. 1 of this year, up from the previous price of US$42 (euro35), the ministry said in a statement.

Note the volume involved is quite a bit less than what Ukraine is getting, or what is contemplated in the China deal. But, Iran is paying a higher price. This is pure speculation on my part, but perhaps Iran is seeking to buy up some gas in Turkmenistan so less would be available for Ukraine, and by extension Europe.

One likely possibility is that Iran may eventually be looking to compete in Europe with Russian gas. Perhaps with an eye toward that possibility, Gazprom has taken control of an Armenian pipeline that brings gas to Europe.

On April 6, Gazprom reached an agreement with Armenia on supplies of gas to it until 2009 at a price of $110 per 1,000 cubic meters. In exchange Armenia will yield the Iran-Armenia gas pipeline via which gas is delivered to Europe to Gazprom.
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Analyst Valery Nesterov of Troika Dialog remarks that obtaining the Iran-Armenia gas pipeline Gazprom will control supplies of Iranian gas, reserves of which are estimated at 28 trillion cubic meters, to Europe. Now Iran exports gas to Turkey but potentially it may become a serious competitor for Russian gas in Europe. One of the possible routes for transportation of Iranian gas to Europe passes through Armenia, Georgia and Ukraine. Nesterov says, "Any participation of Gazprom in these projects will enable the company at least to influence the transportation costs and the end price of gas."

Energy is everything. A nation starving for fuel cannot realize its ambitions. In the messy nuclear negotiations over Iran's nuclear program, which heavily involve Russia and China, remember these energy deals hanging around in the background.

Nations do not sell their support in important matters cheaply. I've remarked before that Russia and China have their own reasons for supporting Iran against the West. However, both countries also have reasons to keep an eye on Iranian ambitions.