TURKMENISTAN - Dependence On The Russian System.

Turkmenistan depends on the Russian system of pipelines for gas exports. It sells gas to Iran through a pipeline on stream since late 1997 (see following pages).

The Russian system's Central Asia-Centre trunkline, which has the capacity to take up to 80 BCM/y of Turkmen gas, was built in the Soviet era. The trunkline originates at gas fields in Uzbekistan and runs north through Turkmenistan and Kazakhstan to Russia, once the centre of the USSR. Turkmen gas exports to Russia and Ukraine have to pass through the Uzbek border point of Khiva. A new section of the Central Asia-Centre line has been built with a diametre of 1,420mm by the Russian company Zangaz. On stream since 2004, this allows Turkmen gas to reach Russia and Ukraine without having to pass through Khiva.

The Kremlin has significantly enhanced its control over Central Asian energy in recent years, book-ended by a 25-year gas supply deal with Turkmenistan in 2003. But it took three years, including months of very hard bargaining, for Gazprom on Sept. 5, 2006, to accept pricing and transit terms set by Ashgabat. Their dispute was acrimonious and at one point the Turkmen side called the Russian negotiators "dogs and agitated monkeys".

After resisting for about three months, Gazprom on Sept. 5 took a U-turn and accepted a Turkmen demand to raise the price of gas sold to Russia from $65 per 1,000 CM to $100/000 CM with immediate effect. This affected Turkmen gas exports to Ukraine and Iran, as Ashgabat immediately asked Kiev and Tehran to re-negotiate their gas purchase contracts with the state-owned TurkmenNeft.

If Iran and Ukraine agree to pay the new price, which an APS source in Ashgabat says is not likely, then President Niyazov would either order an immediate increase in Turkmen gas production or find a "valid excuse". The source says Niyazov, who personally negotiates gas supply deals, would tell these two customers that Ashgabat's commitment to Gazprom is a top priority. Supplying Iran and Ukraine in addition to the set limit of 60.5 BCM this year would be very difficult, if not impossible, because Gazprom has insisted on getting anything beyond 5.5 BCM reserved for Iran in 2006.

The volume of Turkmenistan's gas production and exports in 2006 thus will depend on Gazprom allowing additional sales and on whether or not Ukraine and Iran will accept paying $100/000 CM. Ashgabat has been demanding that the new price for both markets be applicable to early September 2006, as in the case of Gazprom.

By Sept. 5, Gazprom had seen its own output decline and had been hard pressed to meet its gas export commitments to Europe without the Turkmen supplies. The Russian giant had caved in to "the pricing demands of Turkmenistan's fickle dictator Saparmurat Niyazov", as a Western commentary put it.

The commentator said: "failure to reach an agreement with Turkmenistan could have led to a geo-political disaster for Russia", as Moscow's energy strategy in Central Asia was in large measure dependent on its continued control of Turkmen gas supplies. But it did not take much time for the brilliance of the Russian move to sink in.

By agreeing to the increased gas price, Moscow through Gazprom has gained control of Turkmenistan's entire exportable gas for the period up to 2009. Niyazov indicated that Gazprom was also to enjoy preferential access to the untapped Yolotan gas fields and wanted Russia to quadruple the capacity of the existing gas pipeline running along the Caspian coast - important signals of Ashgabat's commitment to a partnership with Russia even beyond 2009.

The $16 billion deal with Turkmenistan is still eminently profitable for Gazprom. The Wall Street Journal said the terms of the deal translated into a gas price of about $2.75/million BTUs, whereas, "on New York futures markets, the price of natural gas stands at about $6 per million BTUs". The price of natural gas on NYMEX has since fallen in line with declining gasoline and WTI prices (see omt14TurkmExptOct2-06).