Kazakhstan and Turkmenistan could be energy suppliers of the future

Oct 31, 2008 01:00 AM

After living in Russia's shadow since the 19th century, the countries of central Asia have in the past decade been increasingly able to assert themselves in their own right, thanks to their energy resources.
Kazakhstan and Turkmenistan have become increasingly important as producers of oil and gas respectively, and great hopes are invested in them as future suppliers to the world.

Kashagan in Kazakhstan is the biggest new oil field to be discovered for 30 years. Turkmenistan's gas production has quadrupled over the past decade to reach 67 bn cm in 2007, according to the BP statistical review of world energy, making it a more important gas producer than the Netherlands.
At the same time, the eastward shift of the world's economic centre of gravity has enhanced central Asia's influence. Once seen as prohibitively distant from the important markets, the region is now strategically located between the traditional customers of Europe and the fast-growing economies of Asia. Oil and gas will increasingly be able to flow not only north to Russia but east to China, and possibly west across the Caspian through the Caucasus to Turkey and the European Union.

Central Asia's newly raised significance is reflected in the recent attempt by Gazprom, Russia's state-controlled gas company, to court Kyrgyzstan, a country with no real oil and gas production or proved reserves to speak of.
As is often the case, it took a crisis to wake the world up to the importance of central Asian energy supplies. In January, Turkmenistan cut gas supplies to Iran because it had not been paying its bills. Hit by a bitterly cold winter, Iran cut its gas supplies to Turkey, which in turn cut its supplies to Greece.

A commercial dispute in the Caspian region that most Europeans would never have noticed became an important issue in the EU. The Caspian Sea still presents a daunting barrier to oil and gas exports to the EU. Building pipelines across the sea is unlikely to be possible while Russia and Iran object, and the suggestion that platforms in offshore Azerbaijan and Turkmenistan could be connected across the border in the Caspian are not generally seen as practicable.
Oil can be shipped across in barges and put into the Baku-Tbilisi-Ceyhan pipeline for export to the coast of Turkey, but capacity is limited and that method is economically viable only at fairly high oil prices. However, European gas markets have had a powerful effect on central Asian suppliers because of the link through Russia. Gazprom, which has a monopoly on Russia's gas exports, buys gas in central Asia and sells it in the EU.

One result of the dispute between Russia and Ukraine in the winter of 2005-06 was that Ukraine's gas purchases were put on a normal commercial basis, albeit at prices still well below market levels. That gave Turkmenistan the cue likewise to shift away from the traditional payment in kind it had received from Gazprom, and more recently it has been negotiating hard with the Russians to push up its prices. The price of Turkmen gas to Gazprom has almost quadrupled in four years, from about $ 42 per tcm in 2004 to $ 150 today.
Andrew Neff of IHS Global Insight, a consultancy, says: "For all that everyone complains about Russia sticking it to its neighbours, the central Asians have been sticking it to the Russians as well."

Even so, the same gas has been selling in the EU in recent weeks at more than $ 500 per cm. With a real export alternative to Russia available -- most likely China -- central Asian export prices could rise closer to international levels. The combination of a rich resource base with growing export opportunities is sustaining interest in the region, even as the falling oil price casts a shadow over the global industry.
Under Gurbanguly Berdymukhamedov, the president who took over in 2007 following the death of his autocratic predecessor Saparmurat Niyazov, Turkmenistan has been opening up its oil and gas industry. Kazakhstan has been tightening the screws on foreign companies in recent years, particularly at Kashagan, where the government forced a restructuring of the consortium to compensate for huge cost overruns.

More recently, however, there have been indications it is taking a more accommodating stance.
Alexander Gladyshev of KMG Exploration and Production, the listed arm of Kazakhstan's national oil company, says: "A new tax code is expected by the year end. So, within the next few weeks, the uncertainty over tax, which was a major issue for investors and companies, is expected to be removed."
That expected boost to confidence may not be enough to outweigh the damage done by the financial crisis. But however turbulent the next few months and years turn out to be, the fundamental forces of development seem set to deliver a bright future for central Asian oil and gas.

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