IT'S ALL ABOUT THE PIPELINE

Many countries in the region (and, in particular, the Russian Gazprom company) have been waiting impatiently for a statement by new Turkmen leader Gurbanguly Berdymukhammedov on the development of the country's oil and gas sector. It is becoming clearer today that the Russian gas monopoly will probably be the only one to benefit from the change of power in this Asian country, because a number of projects involving Turkmen gas are likely to disappear without even getting underway.

Course to remain unchanged 

To begin with, the ubiquitous Gazprom and Turkmenistan have reaffirmed their adherence to an agreement on the supply of Turkmen gas to Russia until 2028 and have expressed their intention "to develop and comprehensively strengthen the mutually beneficial partnership with a long-term contract".

The following aspects are also curious. First of all, the Russian and Turkmen governments have reached agreement on the construction of a new pipeline to export Turkmen gas. Secondly, Gurbanguly Berdymukhammedov has suggested that the Russians build a Gazprom City in Ashgabat. As is evident, Turkmenistan is still pro-Russian and has no intention of damaging relations with the Kremlin.

However, experts believe that the latest agreements on gas supplies between the two countries have significantly undermined the prospect for the transit of "blue fuel" through Azerbaijan. At issue is the Trans-Caspian Gas Pipeline (TCP) which was supposed to export gas from the eastern coast of the Caspian to Turkey via Azerbaijan. A fact-finding visit to Ashgabat by representatives of MottMcDonald Ltd (UK) / Kantor Management Consultants / KLC Law Firm (both from Greece) / ASPI Consulting Engineers (Azerbaijan) is currently in preparation. The consortium has a contract with the European Commission for the implementation of the INOGATE programme to ensure the security of gas pipelines in the South Caucasus and Turkmenistan. "It is already clear that the option to transit gas via Iran will not be considered within the framework of the project," a source from ASPI (Fineko) declared. The capacity of a future pipeline to Russia will also be studied. 

It should be acknowledged that most bets on the construction of the Trans-Caspian pipeline were and are being placed on Turkmenistan. For instance, in order to impede the Russian "Blue Stream" project, the US Government allocated 750,000 dollars to Turkmenistan in 1998 for the development of a feasibility study of the Trans-Caspian gas pipeline. Another 595,000 dollars was allocated for consultation services on plans to build a pipeline to carry gas from Turkmenistan to Turkey. The pipeline was to be 2,000 km long, run along the Caspian sea-bed (in 200-300 metres of water) to Baku, then through Azerbaijan and Georgia to Erzurum (Turkey). The throughput capacity of the gas pipeline was to be up to 30 billion cubic metres a year. Construction was expected to be complete in 2002. However, despite the signing of numerous intergovernmental agreements and the establishment of a consortium for the construction and operation of the Trans-Caspian gas pipeline (which included US General Electric and Bechtel National, as well as the British-Dutch company Shell), the project never materialized. A dispute which broke out in spring 2000 between the participating countries over the quotas allocated to Azerbaijan to transport its own gas led to a complete suspension of all operations connected with the pipeline.

On the other hand, what happened five years ago is no longer important. There are other considerations now. A little over a year ago, in February 2006, it was Ashgabat which brought Turkey back into discussions about the idea of building a Trans-Caspian gas pipeline. Later, Azerbaijan, too, expressed interest in joining these negotiations while, in early May 200, they were joined by the government of Kazakhstan. Developments unfolded at an increasingly rapid pace - "consent" was expressed not only by the immediate participants in the Trans-Caspian project, but also by other geopolitical players - the EU and the USA. And you don't have to be a Solomon to understand that Ashgabat is interested in any project providing an opportunity to diversify energy supplies. So, what is the problem?

Permanent Russian factor 

There are quite a few aspects to consider. Prior to the break-up of the USSR, Turkmenistan produced about 80 billion cubic meters of gas. This Soviet level of gas production has not yet been restored, but the country is getting there. In the early 1990s, the only trunk pipeline to transport Turkmen natural gas was the Central Asia - Centre (CAC) pipeline built in Soviet times. Later on, Gazprom decided to sell Turkmen gas to the countries of the South Caucasus and Ukraine and to export its own gas to Europe. Of course, a considerable number of gas consumers from CIS countries were unable to pay; thus this policy was unprofitable for Ashgabat. Turkmenistan, however, had to put up with it. Furthermore, in early 2003, Gazprom signed a 25-year agreement with Turkmenistan whereby the parties were committed to a gradual increase in the transportation of Turkmen gas to Russia - up to 90 billion cubic meters a year. Thus, key gas supplies from this country pass through Russia to Ukraine and to European markets. Why? - Because Turkmenistan is more interested in selling gas through a simple scheme to nearby Russia than to rely on old projects such as the construction of a "dubious" pipeline along the Caspian sea-bed.

The second issue is that while oil can be sold on a stock exchange, gas cannot. In other words, Turkmenistan is interested in a fixed relationship with old partners in the form of long-term contracts.

And finally, there is the issue of transportation. It is no secret that, unlike oil, gas can only be transported through pipelines. It is true that gas projects have high potential because gas prices remain at a very high level. This makes the construction of pipelines for several billion dollars still quite profitable. In fact, investors are waiting in the wings. However, pipelines cannot be built overnight. Therefore, Russia has another obvious advantage: the gas pipeline through Russia can be modernized and this is already being done. Besides, the Kremlin has close relations with Ashgabat, so Russia can successfully compete with any other pipeline options today.

Bargaining not ruled out

The only thing Turkmenistan cannot be happy about now is the gas price offered by Gazprom. In late 2006, agreement was reached that the Russian giant would buy about 150 billion cubic metres of gas at 100 dollars per 1,000 cubic metres for a period of three years. This tariff was insisted upon by Saparmurat Niyazov. The Russian gas monopoly agreed: although the new price was considerably higher than the previous one, it is still profitable. Russia is selling its gas to consumers in East and West Europe at much higher rates.

But what if the new gas pipeline to Europe is built? The price difference alone (according to expert assessments, it could exceed the one currently paid by Gazprom by four to five times) could help Ashgabat earn hundreds of millions of dollars in profit. 

Nevertheless, Turkmenistan's negotiations with Russia last year showed that bargaining was quite possible. Therefore, a similar scenario may await the Trans-Caspian pipeline - the Kremlin is almost certain to do everything it can to ensure that Central Asian gas continues to be delivered to European markets through Russia. And this is no longer just about gas. There is the issue of preserving Russia's influence in the Caspian region. And what if Russia refuses to pay? The emergence of a new gas route may force the country to pay a much higher price for Central Asian energy. It is obvious that Moscow will do its utmost to prevent the transition of the Trans-Caspian pipeline from design to execution stage. 

There is a further issue involved. Only a sixth of Turkmen gas (60 billion cubic metres) is used domestically. This is why if the TCP is eventually built, then to ensure its economic viability Turkmenistan will have to fill the pipeline with gas volumes exceeding real production norms in the country.

Who gets the upper hand? 

And what about the "stumbling block" of a quota for the transportation of Azerbaijani gas? Baku still insists on a 50-percent quota for the transportation of gas through the future gas pipeline. Ashgabat is not ready to provide a quota of 5 billion cubic metres. Azerbaijani officials have already expressed their interest in continuing negotiations on the most pressing issues of the Caspian - both on disputed fields and on the possible construction of a sub-sea gas pipeline. But the issue has not been finalized yet.

Another deterrent is the unresolved status of the Caspian Sea. According to representatives of the Russian Foreign Ministry, issues pertaining to the pipeline have to be resolved with the participation of all littoral countries through which the pipeline is expected to be built.

In doing so, Russia insists that the "Caspian is a unique body of water which has to be dealt with carefully, especially when construction of a pipeline is on the agenda". Baku and Astana, however, expect to draw maximum benefit from sub-sea pipelines and question the validity of Russia's environmental statements. As an example, they are pointing to the "Blue Stream" gas pipeline which Russia itself has built through the Black Sea. The dispute shows no sign of abating.

The question on today's agenda is, 'who gets the upper hand?' Will it be Turkmenistan's neighbour, Russia, or the USA, which insists that the Trans-Caspian pipeline is very profitable for both Turkmenistan and for Europe? U.S. News has quoted the former head of Chevron, Edward C. Chow, as saying that "a new era of pipelines is setting in. It is called the hub and spoke. The hub is the Caspian Sea, and the spokes are the multiple pipelines emanating from it, representing potential export routes for the vast oil and gas resources that lie beneath." One such spoke can already be observed on the energy map - the South Caucasus Pipeline (SCP, Baku-Tblisi-Erzurum). "The US government is hoping that this pipeline will cross the Caspian Sea over time. This will mark the beginning of a new epoch of energy investments in the Caspian," Matthew Bryza, deputy secretary of state, told U.S. News. The Trans-Caspian pipeline is expected to be joined subsequently to the SCP, which, in its turn, will be hooked to the Nabucco pipeline (Turkey-Romania-Hungary). In this way a new, powerful structure will be created to transport natural gas - not of Russian origin, but bypassing Russia.

So, Ashgabat, Baku, Ankara, Washington, Astana and Moscow understand only too well that hydrocarbon export routes can become effective pillars of influence in the region. And this means that there may be quite a tough struggle ahead for the Trans-Caspian gas pipeline.