Turkmen exports -- high hopes, high hurdles

Feb 27, 2004 01:00 AM

Ukraine and Turkmenistan presidents Leonid Kuchma and Saparmurat Niyazov in late January decided to postpone expected signing of a widely advertised 25-year deal on massive supplies of Turkmen gas to Ukraine.
Reason was said to be a pure technical adjustment. But prospects for new gas developments in Turkmenistan are definitely not as bright as claimed by the Turkmen leader Turkmenbashi.

Originally, the $ 50 bn agreement, which would provide Ukraine with around 1 tcm of Turkmen gas over the years 2007-2032, was to have been signed during a Kuchma visit to Ashgabat last October for 12th anniversary celebrations of Turkmenistan's independence from the former Soviet Union (FSU). The visit was rescheduled to February to coincide with Niyazov's 64th birthday, due to be celebrated nationwide on 19 February. Now, the ill-fated visit, pointless without the long-planned ceremonial signing of the historic gas accord, has been officially delayed to April (perhaps, for another national holiday).
A Turkmen government statement said both presidents had stressed that experts had not yet "worked out all the alternatives available for transportation of Turkmen natural gas [to Ukraine]" and were "still at work."

Had problems emerged? Not at all! It was just because proposals were being prepared "taking into consideration the participation of both Russia and Kazakhstan in future projects..." added the statement.
Really, nothing serious -- except that the only available way to deliver Turkmen gas to Ukraine lies across Uzbekistan, Kazakhstan and Russia through highly congested and inadequate gas pipelines jealously controlled by Russia's Gazprom. And none of these transit countries, which have their own vested interests in using the narrow gas-export bridge between Central Asia, Russia and more distant Europe, has been officially approached on the matter by either Ashgabat or Kiev.

It is an open secret Turkmenistan is eager to build up its gas exports to Ukraine, its major consumer and a fairly reliable buyer. In turn, Ukraine -- currently covering 45% of its gas needs with Turkmen imports -- is vitally interested in concluding a new long-term supply deal to ensure continued Turkmen imports after 2006, when a current five-year agreement (signed in May 2001) ends.
Under the 2002-06 accord and related annual contract, Turkmenistan was last year due to supply Ukraine with 36 bn cm, bought at the Turkmen-Uzbek border for $ 44/1,000 cm, with half the payment in hard currency, the rest offset against goods and services.

Ukraine is keen to secure a new long-term gas supply arrangement with Turkmenistan as it will have to compete for the congested export pipelines with Russia's Gazprom, which last April concluded its own 25-year deal for massive supplies of Turkmen gas, starting this year and quickly expanding to 60-80 bn cmpy after 2006. Details of the new Turkmen-Ukrainian agreement have not been made public but it appears Ukraine, depending on its actual requirement, would like to buy 36-45 bn cmpy.
In late December, when Niyazov and Ukrainian ambassador to Ashgabat Vadim Chuprun discussed preparation of the new 25-year deal Chuprun told the current five-year agreement was being fulfilled successfully. The Ukrainian side was trying to stick closely to its commitments on timely payments, while at the same time implementing a number of large-scale economic projects in Turkmenistan, he said.

Among such new projects that started in late 2003, Chuprun cited construction of fashionable cottages in the resort of Archabil, underground passages beneath the capital city's main highways, a flood-diverting channel in Ashgabat and establishment of a unique architectural-park zone on its banks -- rather modest grounds as yet for seeking Ashgabat's serious commitment to provide massive gas supplies while colliding with Gazprom by striking a separate deal.
Nevertheless, Kiev has something else to offer. Last October, a visiting Ukrainian delegation headed by Naftogaz Ukrayiny CEO Yuri Boyko told Niyazovthe long-term gas agreement was almost ready for signing. Niyazov conceded Ukraine was already providing "valuable assistance" in oil and gas construction in Turkmenistan, cooperation which would increase with signing of the deal. However, Turkmenbashi also noted securing gas exports to Ukraine would necessitate improvement and expansion of the gas transit network, clearly hinting at the desirability of heavy Ukrainian involvement in building a new, alternative pipeline to boost Turkmenistan's gas export capacity.

At present, Turkmenistan is totally dependent for its natural gas exports to Russia, Ukraine and Europe on the Central Asia-Centre (CAC) pipeline, in fact not a single line but a network of five separate lines, commissioned between 1966 and 1987 and laid in two major corridors. The smaller branch (CAC-3) traverses Kazakhstan, and four threads of the larger one (CAC-1, 2, 4 and 5) that accounts for the bulk of CAC capacity pass through Uzbekistan.
Initial design capacity of CAC in its heyday was 90 bn cmpy but sometimes it managed to squeeze through up to 120 bn cmpy. However, wear and tear and lack of maintenance have cut capacity considerably. There has been no reliable recent study to determine current capacity but it could be up to 45-48 bn cmpy if Gazprom officials are to be believed and no more than 40 bn cmpy if the word of Uzbek experts is preferred. To make things worse, not all this capacity is at the disposal of Turkmenistan because downstream, Uzbekistan can exercise its right to put its own volumes in the pipe, exactly what the Uzbeks intend doing this year.

Uzbekistan recently announced its own ambitious plans for exporting natural gas. It also claimed its pipeline needed extensive repair and would sustain no more than half its template capacity or more than 40 bn cmpy. In a flurry of statements late last year, Uzbekistan said that it would sell its own volumes to customers in the northern direction and Turkmenistan would get to use only leftover capacity of no more than 20 bn cmpy of exports through the main, Uzbek-controlled branch.
To overcome the Uzbek impasse, Ashgabat has started seeking ways to bypass Uzbek territory. One way is to improve capacity of the smaller branch passing through Kazakhstan. Experts reckon by changing certain segments of the existing line in Kazakhstan, and also bunching together smaller pipes that may be lying idle in certain locations, it is possible to increase capacity of this CAC branch to 60-70 bn cmpy.
Alternatively, a new pipeline could be built hugging the Caspian coast and bypassing Uzbekistan. Proposed capacity of the line is 30-40 bn cmpy but its designers would be well advised to increase that to at least 60 bn cmpy to make sure all the committed volumes flow uninterruptedly.

Table 1: Gazprom's expected imports of Central Asian natural gas, in bn cm
Exporter 2004 2010
Turkmenistan 5 80
Kazakhstan 7 15
Uzbekistan 5 10
Total 17 105

Source: RusEnergy.com and Centre for Petroleum Business Studies, Moscow

Both solutions are being pursued vigorously by Turkmen officials. The problem, however, is that whichever route is chosen, on its way from Central Asia to Ukraine each has to cross Russian territory. And that is not only a problem of obtaining a right of way or paying a transit fee -- much more important is Gazprom's consent to loosening its gas grip on Ukraine and letting Turkmen gas compete with its own on west European markets.
Moreover, both options have to take account of Kazakhstan's own plans for increasing gas exports to some 40-45 bn cmpy by 2015, preferred by Russia but still too large-scale to be given an unrestricted freeway across even an expanded Central Asia-Russia bridge. After all, Gazprom has its own priority interest in securing massive imports of Turkmen, Uzbek and Kazakh gas through the available and expanded Central Asian gas-export network (see Table 1).

After break-up of the FSU in 1991, Russia assigned Turkmenistan a modest export quota of 11 bn cmpy for its gas exports to western Europe. However, due to commercial and political contradictions, by 1994 Gazprom stopped shipping the now rival Turkmen gas to the west and by April 1997 suspended its deliveries to Ukraine.
Thus, Turkmenistan's sizeable and well-developed gas export potential appeared completely blocked and only in December 1997 did it manage to start minor gas shipments to northern Iran through the newly-commissioned Korpeje-Kurt-Kui line. Life-saving relief came, however, a year later, when at the very end of 1998 Niyazov and Kuchma signed a first bilateral agreement on supply of 20 bn cm of Turkmen gas to Ukraine. Since then, Turkmenistan has been jerkily building up its gas exports -- destined mostly for Ukraine (see Table 2).

Table 2: Natural gas exports from Turkmenistan -- 1992-2003
Year, Exports (bn cm), Y-o-y growth (%)
1992 51.8
1993 55.9 7.9
1994 26.1 -53.3
1995 22.6 -13.4
1996 24.3 7.5
1997 6.5 -73.3
1998 2.9 -56.1
1999 9.7 241
2000 33.7 247
2001 37.4 10.9
2002 39.3 5.2
2003 43.4 10.3

Source: Turkmenneftegaz and International Energy Agency

At the threshold of the new millennium Gazprom had to change its arrogant stance toward Central Asian gas. Facing stagnant output and otherwise inevitable development of high-cost gasfields in the Arctic, the gas giant had to resort to cheaper gas imports from the south and, in fact, to compete with Ukraine and Itera, which has developed into a major independent buyer of Turkmen gas.
This January, Russia started importing Turkmen gas under a 25-year agreement signed in April 2003 between Gazprom's trading arm Gazexport and state owned Turkmengaz, aiming at up to 80 bn cmpy by 2009. Under initial terms of the deal, Gazexport is to buy 5-6 bn cmpy this year, rising to 6-7 bn cm in 2005. Despite the looming shipping problems, Ashgabat last June said it would accelerate gas shipments to Russia, pumping up to 80 bn cmpy as soon as in 2007.

Also, in a bid to regain its former monopoly, Gazprom is seeking to take over gas shipments from Turkmenistan, replacing Itera with its new partner -- Eural TG (ETG). At end-2003, Gazprom completely cut Itera off from Turkmen gas supplies under the pretext of full pipelines. Hungarian intermediary ETG has taken its place to become the monopoly's new partner. As Itera is denied access to Gazprom pipelines, most observers believe ETG will this year take in the most CIS gas markets.
Itera intended delivering no less than 4.8 bn cm of Turkmen gas to Georgia (1.1 bn cm), Armenia (0.7 bn cm), and Azerbaijan (3 bn cm) this year. To this end, in late November it applied for up to 7 bn cm of Turkmen gas to be pumped through Gazprom's network in 2004. But in late December, Gazprom deputy CEO Aleksandr Ryazanov refused the request, referring to "lack of spare gas transportation capacities in Uzbekistan".
"In 2004, 48 bn cm of gas is to go through Uzbek pipelines, which have barely enough capacity to cope with 46 bn cm," he said. It is noteworthy that 36 bn cm of this volume will be handled by ETG.

Being unfavourably sandwiched in between the world's two gas-richest countries, Turkmenistan has to fight on both fronts at once. Neighbouring Iran occupies a noticeable place on Ashgabat's gas export agenda -- both as importer and, potentially (or rather hopefully), as a gas transit country. So far, however, Turkmenistan cannot boast too many victories on the southern front.
At end-December, Niyazov issued a resolution under which state firm Turkmenneft is to conclude a $ 3 mm contract with Iran's Oil Industries Engineering and Construction Co (OIEC) for modernising the Chaloyuk gas measuring station on the Korpeje-Kurt-Kui gas pipeline. The line, designed to ship up to 13 bn cmpy, is reported to have current available capacity of 8 bn cmpy. The contract covers design, construction, installation, fine-tuning and launch of additional equipment at the measuring station, and training of personnel.

Under the same resolution, state oil and gas holding Turkmenneftegaz is to pay half the project cost, including an advance payment worth 15% of contract value ($ 450,000), with gas supplies to Iran under a 25-year contract valid until 2018 and dating back to 4 July, 1995. Iran is currently third biggest buyer of Turkmen gas (after Ukraine's Naftogaz and Russia's Itera).
According to the Ashgabat-based national statistics institute, Iran imported nearly 5 bn cm of Turkmen gas in the first 11 months of 2003, 14.5 % up on 2002. In full-year 2003, Iran intended receiving 6.5 bn cm from Turkmenistan, with the figure expected to exceed 7.2 bn cm this year.

Existing Iranian pipelines are also viewed by Ashgabat as a transit bridge for its gas exports to Trans-Caucasus. According to gas distribution company ArmRosGazprom -- owned by the Armenian government (45%), Gazprom (45%), and Itera (10%) -- recently, long-mooted Armenian imports of natural gas through Iran will finally be decided this year. The project, on the drawing board for over a decade, would cost an estimated $ 100-120 mm and ensure 1-1.5 bn cmpy of gas.
A series of agreements signed between Yerevan and Tehran in 1992, 1995 and in December 2001 provides for construction of a 141 km line to link Armenian and Iranian gas grids and streamline current flows of Turkmen gas, which reach Armenia across several countries. According to Sofreco, a French consultancy which won an EC tender for a study on closure of the Metsamor nuclear plant, by 2020, Armenia will increase its imports of Turkmen gas nearly fourfold from a current 1.5 bn cmpy to 5.6 bn cmpy and -- in the case of a Metsamor shutdown -- to 6.2 bn cmpy.

National information agency Arminfo reports a long-term gas supply agreement with Turkmenistan is virtually ready for signing during a forthcoming visit of Niyazov to Yerevan. However, Ashgabat is not the only third party interested in the Iran-Armenia line. Other parties include Russia, Ukraine, the EU, and China. The European Bank for Reconstruction and Development has said it is ready to finance the project.
Reason for the multilateral interest is possible extension of the line to the Armenian-Georgian border. In that case, project cost would rise to an estimated $ 306 mm, and the line would run 550 km, with 4.5 bn cmpy capacity. At the border, the extended line would naturally join the Soviet-era pipeline system now controlled by Gazprom, which, according to independent Georgian consultants, has started to build up excess transportation capacities in this Caucasus republic.

Not surprisingly, Russian vice premier Boris Alyoshin recently told construction of this was in Russia's interest, given potential for exporting electricity from Armenia and the fact Russia owns several power generation facilitates in Armenia. Gazprom may become operator of a 41 km Armenian section of the line, he added.
"Therefore, there is undoubted commercial interest here".
Furthermore, in its sought-for role as potential gas provider, Ashgabat may simply be squeezed from this project by Iran. After all, it is Tehran (concerned about its own exports) which concluded all related agreements with Yerevan and even agreed a gas sales price -- $ 84/1,000 cm. According to Armenian energy minister Armen Movsisyan, a final agreement on line construction will be signed between the two countries during a visit to Yerevan by the Iranian oil and gas minister this month or next. Hence, Niyazov needs to hurry up, if it is not already too late.

Another export project vigorously pursued by Turkmenbashi is construction of the controversial proposed trans-Afghan pipeline (TAP), aimed at taking Turkmen gas to Pakistan and, hopefully to India. According to its current pattern, TAP would run from the Dauletabad field in Turkmenistan to Herat in Afghanistan, turning right to touch Kandahar before entering Pakistan near Chaman.
In Pakistan, the line may split into two branches, one going to Multan to connect with the main distribution junction, the other to Gawadar seaport where an LNG export plant may be set up to cater for demand in South Korea, Japan, India and other areas worldwide. Rated capacity of TAP could be 30 bn cmpy and capital cost could exceed $ 3.5 bn.

Last December, Niyazov nominated a delegation to participate in the seventh meeting of the TAP project steering committee, which, among other things, was to consider a new independent audit report on Dauletabad's gas reserves, which should feed the line. Although reserves were already audited by Dallas-based consulting firm DeGolyer and MacNaughton in 1996, recent doubts about their sufficiency for the larger pipeline have become another project stumbling block. The Turkmen government has paid $ 250,000 for the new assessment, but no concrete findings having been submitted so far.
The committee was also to discuss a report on a $ 1.5 mm feasibility study of the line, sponsored by the Asian Development Bank (ADB) and prepared by Penspen, a British consulting firm hired by ADB. Unfortunately, the steering committee failed to draw any definite conclusions and set a six-month deadline of June this year for reserves certification and a revised feasibility study of the line. Until then, Turkmenistan is to provide a "letter of comfort" on availability of gas to support the project.

Pakistan would also be able to supply data by June about its gas demand beyond 2010 -- another crucial issue, which blocks the project and may make it redundant. Indeed, at present Pakistan is well supplied with natural gas, which covers nearly 44% of its total energy needs.
The country has almost 750 bn cm of its own gas reserves and produces over 20 bn cmpy, which fully meets its inland demand.

Table 3: Turkmenistan's major gas export projects
Name/Route/Destination, Length (km), Capacity (bn cmpy), Capex ($ bn), Current status
China-South Korea-Japan 8,040 20 11-23 Speculative
China's Coastal Zones 6,100-6,700 30 10-12 Speculative
Iran-Turkey-Europe/Bulgaria 3,900 22.5/30 7.6 Abandoned
Trans-Caspian (TCGP)/Azerbaijan-Turkey 2,000 10/20/30 2.4-3 Abandoned
Centgas/Afghanistan-Pakistan 1,464 14/20 1.9 Abandoned
Afghanistan-Pakistan-India 2,000 20 2-3 Shelved
Trans-Afghan (TAP)/Afghanistan-Pakistan 1,650 15/30 >3.5 Pending
Korpeje-Kurt-Kui/Iran 200 15 0.2 Active

Source: Centre for Petroleum Business Studies, Moscow

In other words, as expected from the very beginning, this ambitious scheme tends towards joining a notorious list of still-born projects, masterminded and advertised by Turkmenbashi -- mostly for political reasons -- to impress and blackmail Moscow and Tehran in his tough bargaining for export outlets (see Table 3).

Encouraged by the recent long-term deal with Moscow and spurred by Kiev's persistent requests, Ashgabat is rather optimistic about its future gas production. As officially claimed last October, present Turkmen output and processing capacity is 120 bn cmpy. Niyazov maintains that in several years, output should rise more than threefold -- to some 200 bn cmpy.
These boastful numbers are based, in fact, on the declared export plans. Taking into consideration that by 2010 Gazprom wants up to 80 bn cmpy, Ukraine seeks at least 35-40 bn cmpy, Itera would like to continue buying some 10 bn cmpy, Iran could import up to 15 bn cmpy, and the trans-Afghan line -- if it came into being -- would need 30 bn cmpy, and allowing some 20 bn cmpy for domestic needs, it can easily be seen that Turkmenistan should be able to produce some 190-200 bn cmpy to satisfy all these demands (see Table 4).

Table 4: Announced exports of Turkmen natural gas, in bn cm
Importer 2007 2010
Gazprom 70-80 80
Naftogaz Ukrayiny 35-40 35-40
Iran 8-13 13-15
Pakistan 15 30
Itera 10 10
Armenia 2 2-5
Total 140-160 170-180

Source: RusEnergy.com and Centre for Petroleum Business Studies, Moscow

But although Turkmenistan has one of the world's biggest gas reserves (estimated at 2-3 tcm), concern is voiced routinely from different quarters over whether Ashgabat can really deliver all the quantities it has promised to produce. During 2007-32, Ukraine intends buying around 1 tcm, and Russia, under its long-term agreement (2004-28), has already committed to buy another 1 tcm. These supplies alone account for no less than two-thirds of proven Turkmen gas reserves and over 10 % of the country's remaining potential gas resources (estimated at 19.4 tcm).
Even more important is whether Turkmenistan would be able to ship the volumes to different buyers through available export outlets. A minimum 120 bn cmpy transportation capacity would be required to handle all volumes under the various agreements Ashgabat has with Gazprom, Kiev, and Itera.

Since the present condition of CAC (both branches) cannot take more than 40-50 bn cmpy from Turkmenistan and growing gas exports from Uzbekistan and Kazakhstan will inevitably claim an ever larger space in the lines, there is an urgent need to enhance the present network and build more pipes to carry additional load.
Earmarked construction of „independent“ by-pass lines -- finally across the same Russian territory -- won't be possible without consent from Gazprom, which is likely to retain its strategic and operational control of Turkmenistan's northern exports, regardless of chosen options for upgraded or new lines. Therefore, Ashgabat will have to sacrifice accelerated development of its gas sector to a gradual (and much slower) de-bottlenecking of Central Asia's export routes -- in close coordination with its gas-rich neighbours.

As pledged by Russian ambassador Molochkov: "Russia is ready to cooperate with Turkmenistan in improving the gas transportation network and Gazprom would be working actively with Ashgabat to achieve this objective." However, he also said arrangements would have to include Tashkent and Astana as active members of any arrangement that may be in the offing.
Meantime, Turkmenistan last year managed to increase its gas exports to 43.4 bn cm, up from 39.3 bn cm in 2002. Accordingly, gas production rose from 53.4 bn cm to 59.1 bn cm, up 11% on 2001 output -- but still a far cry from the targeted 67.6 bn cm promised by Niyazov last April.

Source: Platts International Gas Report
Alexander's Commentary

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