Turkmenistan is likely to shut down gas supplies to Ukraine and Russia

Dec 29, 2004 01:00 AM

If nothing changes substantially, Turkmenistan is likely to shut down gas supplies to Ukraine and Russia.
Let’s see the implications and likely scenarios.

On 27 December 2004, the foreign office of Turkmenistan circulated a press release that said in effect that the negotiations with Ukraine and Russia for supply contracts for 2005 had yielded no results so far because of the dispute on the newly proposed prices. The press release warned that in case no solution was found by 30 December, Turkmenistan would be forced to halt gas supplies to both the countries.
Turkmenistan wants to raise the gas export price from $ 44 per thousand cm to $ 60 per thousand cm. The reasons offered for the price hike are:
1. Increased gas prices in the world market, and
2. Up to 10 times increase in the prices of items that Turkmenistan receives from Ukraine and Russia as part payment for gas volumes.

At present Turkmenistan is selling gas to Russia and Ukraine at $ 44 per 1,000 cm, 50 % in cash and 50 % in the shape of goods and services. A large part of the goods and services under this package comprises of pipes, pumps, compressors and chemical reagents that are required to extract, purify, process, pump and ship the gas volumes to Ukraine and Russia.
With artificial increase in the prices of these items, Ukraine and Russia have practically reduced the price they pay for Turkmen gas to around $ 30-$ 33 per 1,000 cm. This in itself is a cause for alarm. However, this is only part of the picture.

During the past 15 months President Kuchma of Ukraine announced at least five times that he planned to visit Turkmenistan to sign a long-term gas purchase agreement. Even some of the details of the proposed agreement were made available to the press. However, every time the visit was postponed at the last moment.
While both Turkmenistan and Ukraine were issuing regular statements to assure each other that the long-term agreement would constitute an important pillar of the bilateral “strategic” relations, why did the much-touted visit not materialize?

Based on the circumstantial evidence, a tentative finger can be pointed at Gazprom.
In July 2004, an announcement came from Kiev that a new company had been formed for transportation of Turkmen volumes to Ukraine. The new entity, RosUkrEnergo, was a surprise for Turkmenistan. Gazprom and NaftoGazUkrainy jointly formed the company with participation of Austrian Raiffeisenbank and it was only through the media that Turkmenistan came to know about the arrangement.
The secretive move did not inspire any confidence on the Turkmen side. As a matter of fact, the transportation of Turkmen gas to Ukraine has traditionally been an opaque process. First, it was Itera, an entity that was believed to be an exotic offshoot of Gazprom. Then the Gazprom itself took over the role of transporting Turkmen volumes to Ukraine.

A representative of NaftoGazUkrainy told in October 2003 that by switching from Itera to Gazprom for transportation of gas, NaftoGazUkrainy stood to save about 3 % on transit costs. Then came UralTranGas, a mysterious company headed by a former BG chief with less than impeccable credentials. And now it is RosUkrEnergo.
If we assume that Gazprom was interested in blocking Kuchma’s visit to Turkmenistan, there can be two possible reasons for that:
-- Gazprom wanted to create a platform in the shape of RosUkrEnergo to transport Turkmen gas to Ukraine and did not deem it fit to involve Turkmenistan in the process.
-- From 2006 on, Gazprom may be interested in buying all the gas from Turkmenistan and then reselling it to Ukraine instead of merely acting as transporter.
This is mere speculation and one cannot say with any confidence whether these were among the motives for Gazprom to keep Kuchma away from Turkmenistan, if indeed it did so.

The present political drama in Ukraine may also be a contributing factor for the present deadlock. Viktor Yakunovich was a preferred candidate of Russia and Putin did not make any secret of this favouritism. On the other hand, USA and Europe openly favoured Viktor Yushenko, another stalwart of Ukrainian politics with repainted stripes.
Russia has a lot at stake in the final outcome. All the energy routes, except for minor branches, pass through Ukraine on their way to Europe. If an unfriendly government is sitting in Kiev, it may create some hurdles for the export of Russian energy resources to Europe, a coveted market that has long been in the crosshairs of Gazprom. If Yushenko ultimately takes over as the next president of Ukraine, the gas crisis could be the first test of his statesmanship.

Ukraine is heavily dependent on Turkmenistan for supplies of natural gas and Turkmenistan is equally dependent on Ukraine for selling its gas. Turkmen gas represents about 45 % of total gas consumption in Ukraine and revenues from this sale come to about 45 % of Turkmen GDP. Let’s see whether they can survive without each other.
Ukraine has bravely announced that it would look elsewhere for natural gas if Turkmenistan kept insisting on increased price. However, that “elsewhere” is nowhere in sight. In 2005, Ukraine is scheduled to buy 36 bn cm of gas from Turkmenistan. If we assume that Gazprom wanted to help Kiev out of the squeeze, it would need to find additional volumes to compensate for the absence of Turkmen gas. Assuming that the 8 bn cm that Gazprom is likely to buy in 2005 from Turkmenistan goes entirely to Ukraine, it would still leave a gap of 28 bn cm.

One must also remember that if Gazprom pays the asking price of Turkmenistan i.e. $ 60 per thousand cm to buy gas on behalf of Ukraine, it would need to add its own profits before reselling it to Ukraine. In this case, Ukraine would end up paying lot more than it should pay directly to Turkmenistan if it agrees to the price hike.
To look for additional volumes, Ukraine or Gazprom would need to tap Uzbekistan, Kazakhstan, and independent producers in Russia. None of them can spare singly or collectively anywhere near 36 bn cm to satisfy Ukrainian needs. It comes back to square one. It is either Turkmen gas or none. Turkmen side seems aware of this equation.

As a legacy of soviet times, Ukrainian economy is based on heavy consumption of natural gas. Right from domestic heating systems to major industries, almost every important object needs natural gas. While Ukraine would find it hard to live without Turkmen gas, Gazprom would also suffer setbacks in its export targets if it fails to come to any compromise on the price structure.
Gas production in Russia declined in 2004 but export obligations have increased. Without Turkmen volumes Gazprom would be hard-pressed to maintain its commitments and credibility before the European buyers.

While Ukraine and Gazprom clearly stand to lose, can Turkmenistan survive on its own?
In the short run, Turkmenistan would be in extremely difficult position without the revenues it gets from selling gas to Ukraine and Gazprom. However, there is a solution that may guaranteelong-term prosperity and independence from the larger-than-life shadow of Gazprom.
Turkmenistan would need to get China into the loop. From Imamnazar it is merely 350 km to the border of Tajikistan. If Turkmenistan can persuade China to put a railway line to cover this distance, the Turkmen gas can be turned into LNG and shipped to China via Afghanistan and Tajikistan on railway wagons. This is a quick and economical solution.

A 150 mm tons LNG plant -- equivalent of a 30 bn cm pipeline -- would cost around $ 350 mm-$ 400 mm and it would take about 18 months to build. Railway tracks can be laid while the LNG terminal is being built. Total cost of the project including liquefaction, storage and loading facility and railway lines should not exceed $ 1 bn. This does not include the regasification arrangements that China would have to make on its own. This project would have additional benefits of bringing stability and prosperity to Afghanistan and Tajikistan.
If Turkmenistan can survive without northern revenues for about 18-20 months, this is the ideal solution. Meanwhile, chances are that Ukraine and Russia would come up with a compromise proposal that would be acceptable to Turkmenistan.

Source: NewsCentralAsia
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