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How Shah-Deniz Is Changing the Equation (4/9)

This week I continue my analysis of the fall-out from the gas discovery in the Shah-Deniz deposit offshore on Azerbaijan, which, as explained earlier in this series, has led Turkmenistan to turn away from the Trans-Caspian Gas Pipeline (TCGP) project.

1. Shikhmuradov Departs the Foreign Ministry in Ashgabat

In a widely remarked change, President Saparmurat Niyazov unexpectedly removed Boris Shikhmuradov from the office of foreign minister, a post he had occupied since 1993. Niyazov prepared this move over the last couple months. Berdyev had been a newly-appointed deputy foreign minister and served in that capacity for less than a month before being promoted. Shikhmuradov's removal also comes several weeks after a proclamation by Niyazov required all government officials to demonstrate fluency in the Turkmen language or face dismissal and another decree that students entering higher studies will be vetted three generations back into their genealogy, in order to be certain that only those who are qualified to defend Turkmenistan's interests will be admitted.

The pretext for the firing was the foreign minister's his "poor preparation" of a meeting of the Cabinet of Ministers (perhaps his failure to provide documentation in Turkmen), but it is likely that the apparent failure of the TCGP project and his general Western orientation were the liabilities, moreso than his apparent failure to master the Turkmen language and heritage as half-Armenian. Shikhmuradov has been given the post of Rector of the Institute of Sports and Tourism (in a country, it must be said, not widely known for either), while continuing to serve President Niyazov as an advisor. The new foreign minister, Batyr Berdyev, is a career diplomat said to have closer ties with Moscow and Teheran and the pro- Iranian faction among Turkmenistan's leadership.

2. Turkmenistan's National Accounts Balance with Russia's Help

With the assistance of Gazprom and Itera, the company responsible for transporting the gas, Ukraine's outstanding debt to Turkmenistan, which led to a suspension of exports in 1997, has been partly paid, and an understanding reached on the status of the remainder. Yet when Turkmenistan's deputy prime minister Yolly Gurbanmuradov announced in Ashgabat that he had signed with a Ukrainian representative, a protocol for 20 bcm in 2000 and 50 bcm annually for a decade subsequent, at a price of $42 per thousand cubic meters (tcm), Ukraine's president Leonid Kuchma immediately stated that even framework agreements in principle should be signed only between himself and President Niyazov, and that any other agreement was void.

The 50 bcm figure exceeds even Turkmenistan's projected exports to Russia, which in April were set "in principle" at 20 bcm in 2000, then 30 bcm in 2001, and 40 bcm in 2002, reaching 50 bcm only, and still rather optimistically, in 2003. Moreover the $42 per tcm price could only be a signal from Turkmenistan to Russia of its desired compromise, as by the time the gas reached Ukraine it could cost Kyiv up to $100 per tcm; and certainly Kyiv has no authority to negotiate with Ashgabat the price that Gazprom will pay for Turkmenistan's gas.

Although its budget seems to have balanced for the first half of the year, the country remains highly dependent on gas exports for balancing its national accounts, and highly dependent on Russia as a purchaser. Russia's renewed patronage meant a jump of over one-third in production as compared with the same period in 1999. Turkmenistan exported $400 million worth of natural gas to Russia in the first five months of this year, almost nine-tenths of total gas exports, with almost all the rest going to Iran.

3. The Political Economy of Iranian Energy Development

A wild-card has recently been thrown into the pack, as buyback contracts have come under criticism in Teheran for not contributing significantly to technology transfer or even necessarily creating jobs. According to this type of contract, the investor who puts up capital receives a fixed profit margin from the sale of the energy produced. Moreover, the energy must be produced until repayment is achieved. In this set-up the foreign company has no long-term interest in the energy field because all the risk is assumed by the Iranian state, which effectively uses the foreign investor as a service company.

At a 1998 conference at the Royal Institute of International Affairs in London, a former deputy foreign minister of Iran, Abbas Maleki, estimated that the country needed $40 billion is foreign investment by the year 2008 to promote economic development, mainly by increasing energy production. Maleki, head of the International Institute for Caspian Studies in Teheran, asserted that the government had authority to negotiate "time-limited concessions." However, the 1979 constitution of the Islamic Republic of Iran outlaws foreign concessions. That is why buyback contracts were introduced in the mid-1990s. Yet they have already brought Iran about $10 billion in investments, and negotiations are under way for another $10 billion.

What Maleki had in mind has become clearer recently, as he has since come out as an overt advocate of a return to the production-sharing agreement (PSA) regime of the pre-1979 era. What is more remarkable is that the chairman of the Energy Committee of the Majlis in Teheran has also become a critic of buyback contracts. In late July, Mostafa Taheri Najafabadi, invoking the specter of foreign domination of the country's energy resources, asserted that Iran should halt buyback deals at once and pursue the projects on its own or face heavy financial losses and renewed foreign domination of its rich energy resources "on our own and step by step," using foreign loans and expertise. He indicated that he would take the matter up with the national oil ministry. These objections to buyback agreements were voiced the day after the announcement that a contract worth about $4 billion was imminent between the Italian firm ENI and Iran's Petro-Pars, with ENI having a 60 percent stake.

4. Turkmenistan and Iran: Competitors for the Natural Gas Market in South Asia

The total reserves in South Pars represent about 6 per cent of the global gas reserves. Phase One of the South Pars development was awarded to an Iranian company and is expected to become operational in late 2001 with an annual capacity of approaching one billion million cubic meters (bcm). After that, Phases Two and Three are expected to begin development. They were awarded to a consortium comprising TotalFina, Gazprom and the Malaysian firm Petronas, The contract with ENI represents Phases Four and Five of the overall South Pars project. It is expected to take five years to be developed, eventually reaching an annual production level of 5 trillion cubic meters plus about 2 million tons of liquefied petroleum gas by the time the seven-year production contract, which has an option for a three-year extension, reaches its maximum level.

For the time being, National Iranian Oil Company (NIOC) still favors buyback deals and opposes a reversion to PSAs. What is going on here is a rearguard action by the conservatives defeated in the recent parliamentary elections, to slow the pace of economic reform in the international realm. This is taking place even as they grudgingly endorsed some time ago the government's domestic privatization plans for about 6,000 enterprises in the state sector, with the goal of promoting domestic capital investment so that Iranian citizens' savings do not go into property or overseas.

The day after Gazprom, LUKoil, and Yukos came together to create the Caspian Petroleum Company in Russia, the Teheran government invited them to conduct exploration work in the shallow-water part of Iran's sector. Perhaps the conservatives in Teheran are angling to get Gazprom into the Persian Gulf. Gazprom has already proposed to Iran the construction of an underwater gas pipeline to India, which would obviate liquefaction and tanker transport as well as the potential political complications of building an overland pipeline through Pakistan (even though Pakistan has recently smiled on this idea after a decade of ambivalence).

Gazprom would have been unable to realize the construction of the Blue Stream pipeline under the Black Sea to Turkey, were it not for the 20 percent equity stake in the project by its Blue Stream partner ENI (for which the Italian company receives a 50% share of its capacity). However, Gazprom's need to use export receipts as collateral for Italian export credits, which were equally critical in moving the project along, will not solve the company's capital hunger.

5. Conclusion

Turkmenistan is finding itself increasingly in a box. One of the two only doubly-landlocked countries in the world (Liechtenstein being the other, "doubly-landlocked" meaning transit through two countries is required to reach the open sea or to be reached from it), Ashgabat finds itself hemmed in on the one hand by Iranian decisions to develop its own resources for export to South Asia and, on the other hand, by Russian isolation, on security grounds, of the Afghanistan regime, upon which Ashgabat would depend for a pipeline to Pakistan and India. This is a principal result of the failure of an agreement between the TCGP consortium and the government of Turkmenistan. A further result is the country's increasing dependence on Russia and its looking towards Iran and China for further economic partnership and support.

Copyright © Robert M. Cutler unless otherwise noted.
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This Web-based compilation: Copyright © Robert M. Cutler
URL:  http://www.robertcutler.org/blog/2000/08/how_shahdeniz_is_changing_the_3.html
First published in FSU Oil & Gas Monitor, No. 93 (1 August 2000): 2–4.

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