The article examines once more the results of the Shah-Deniz find for the Russia-Turkmenistan-Ukraine triangle. It first dissects the most recent developments in their interactions over energy supplies and policy. It then examines the question of what the Russian contract for an additional 10 billion cubic meters (bcm) means for Turkmenistan, for the Baku-Ceyhan pipeline, for the Shah-Deniz project and for the TCGP itself.
After the gas find earlier this year at Shah-Deniz, an offshore Azerbaijani field, led Ashgabat to protest the diminished quotas allocated to it in the Trans-Caspian Gas Pipeline (TCGP) project, Turkmenistani President Saparmurad Niyazov has been casting about in search of a buyer for the natural gas that he has to sell. As analysed earlier in this series, he found one at least temporarily in Russia. It appeared last month that Ukraine might be another, but that has not yet come to pass.
Ukraine and Turkmenistan disagree
President Leonid Kuchma did not make his planned visit to Ashgabat in early September, but a Ukrainian delegation headed by Volodymyr Lytvyn, the chief of the presidential administration, did make the trip in mid-September. Ukraine was counting on an agreement to receive 10 bcm from Turkmenistan during the last quarter of the current year, but no agreement to this effect was reached.
The Ukrainian Fuel and Energy Ministry has estimated that the country needs about 25 bcm of gas during the last quarter and has looked towards Uzbekistan to make up part of the shortfall. However, it is unlikely that Uzbekistan can supply as much as 12% of the amount required.
Turkmenistan is insisting on a price of $42 per thousand cubic meters (tcm), the amount tentatively agreed upon during Deputy Prime Minister Yuliya Tymoshenko's visit to Ashgabat in late July. But this agreement was on the price of gas for Ukraine as delivered to Turkmenistan's border with Uzbekistan.
At the time, Tymoshenko estimated the final delivery price to Ukraine, through Russia, at $103/tcm. Further, according to her, Turkmenistan would accept payment of the $42/tcm half in cash and half in commodity deliveries.
Tymoshenko's calculation that Ashgabat's gas would cost no more than $50/tcm on Ukraine's border with Russia could be sustained only by her assumption that Ukraine receives $2 billion per year from Russia for transit of Russian gas through Ukraine to Europe; at present, Russia pays Ukraine's transit fees not with cash but with gas itself.
Russia in the Ukraine-Turkmenistan equation again
The Russian transport company Itera informally agreed that Turkmenistan's gas could arrive in Ukraine at the price of $50/tcm, including transit through Russia, but only after contractual formalities were concluded between Ukraine and Turkmenistan.
Itera did not include in its price the fees it would charge to Ukraine for transporting Turkmenistani gas through Uzbekistan and Kazakhstan before it gets to Russia in the first place. These fees, Itera said, would be subject to negotiation, pending completion of the Ukraine-Turkmenistan agreement: which has now fallen through.
Moreover, Lytvyn said in September that the price of the gas would rise to $113/tcm by the time it reached Ukraine through the Russian pipeline system. (During 1998-1999, Ukraine transferred half the gas it bought to Itera in payment for the transportation. In this manner, gas that cost $36/tcm at the Turkmenistan-Uzbekistan border in fact rose to $72/tcm at the Russia-Ukraine border.
Turkmenistan stopped gas supplies to Ukraine in May of 1999 and did not resume deliveries until Ukraine settled its debt.) It would appear that this harder line towards Ukraine is a general artefact of President Niyazov's recent success in negotiations with Russia.
For a Georgian government delegation visited Ashgabat at the end of the second week in September but failed to agree in negotiations over Georgia's debt of just under $350 million for gas supplies during 1993 and 1994. Turkmenistan rejected two different proposals from Georgia that would have provided for delivery of consumer goods in partial payment and rescheduling of the cash remainder.
What it means for Turkmenistan
Even after Russian President Vladimir Putin's visit to Ashgabat in May, the dispute over the price to be paid by Russia for Turkmenistani gas remained. Various reports placed Russia's bid at between $32 and $34, with Turkmenistan's offer at $40 to $42. Russia will, under the terms of the agreement concluded, continue to pay only 40% of the total price in cash, with the remainder in goods. Besides the need to fill an increasing domestic gas shortfall, Russia probably wanted to keep its hand in the Turkmenistani market.
So Niyazov won a breathing-space. In early September, Russia agreed to pay $38/tcm for 10 bcm in additional gas during 2000, above the 20 bcm previously contracted. That is an increase of $2 over the price negotiated for the earlier deliveries. Ever since negotiations over the TCGP were frozen earlier this year, Turkmenistan and Russia have been at odds over the price for such sales.
The Russian media, meanwhile, are interpreting the failure of negotiations between Ukraine and Turkmenistan as a strategic signal from Ashgabat to Moscow that the TCGP will not be built. Some commentators have gone further, making assertions that Ukraine will be forced to sell the country's gas transport and delivery system to Gazprom. As explained in an earlier article in this series, some form of management of the transportation, storage, and distribution system in Ukraine may be offered to Russia in payment for the country's energy debt. However, elite opinion in Kyiv would label turning over ownership as a traitorous act.
What it means for Azerbaijan
Gas shortages are playing—at least temporarily—into Russia's hands in Azerbaijan as well. In March of this year, Russia accused Azerbaijan of failing to honour a contract signed in 1996 for the transport of oil to Novorossiisk. Azerbaijan responded to the charge by telling Russia that it did not feel obliged to pump oil through the Chechen bypass that Russia had constructed through Dagestan. But Natik Aliev, president of the State Oil Company of Azerbaijan (SOCAR), said that Azerbaijan would begin to send increased quantities of oil to Novorossiisk and buy Russian gas for the winter.
Last winter, Azerbaijan suffered widespread fuel shortages and electricity blackouts, and it will be two years before the gas from Shah-Deniz is ready for domestic consumption. If Baku buys gas from Russia (or actually from a consortium composed of the Russian state oil pipeline operator Transneft, the Russian gas monopoly Gazprom and the German company Debis, which will among themselves apportion the quantities that Azerbaijan receives), it will free up oil for shipment to Novorossiisk that would otherwise be hoarded for winter consumption. Azerbaijan is subject to fines under the terms of the 1996 agreement if it does not satisfy certain quotas for oil throughput that, according to reports, are unlikely to be met in the near future.
What it means for Baku-Ceyhan: Two views
One interpretation of these developments is that they result from a strategy developed by the Kremlin earlier this year to force Azerbaijan to pump oil to Novorossiisk in order to diminish the quantities available for the Baku-Ceyhan main export pipeline (MEP). According to this interpretation, Azerbaijan is seeking to placate Russia by buying Russian gas to make up for a shortfall in oil throughput to Novorossiisk.
Another interpretation notes that Azerbaijan has for some time sought to transform its power stations from a fuel oil regime to one that uses gas and that Azerbaijan plans to pay for the gas with profits from its petroleum exports. Moreover, Russia expects the Caspian Pipeline Consortium (CPC) to bring its conduit on line over the medium term and plans to maximise Novorossiisk's export capacity accordingly, and this may leave little room for Azerbaijan's quota later.
This remains a fluid and ambiguous situation. Still, major shareholders in the Azerbaijan International Operating Company (AIOC) are confident that the MEP will be built, despite ExxonMobil's recent decision not to participate in it. BP-Amoco and Statoil are solidly behind the project, and there is now an official policy to seek oil from outside the AIOC consortium membership if necessary.
What it means for the TCGP
Meanwhile in Ashgabat, the PSG consortium has announced (yet again) the closure of its TCGP offices. The shutdown date is now set for October 30. Shell is now set to become the project's operator, while PSG will remain in the TCGP consortium. Earlier this summer, before he struck the deal with Russia, Niyazov had indicated to Shell that he was again favouring the TCGP project, and he spoke with the US government's top Caspian representative, John Wolf, about the conditions for its construction.
The thing that Niyazov has still not come to grips with is the fact that Russia will sell Turkmenistani gas for hard currency to Turkey via the "Blue Stream" pipeline under the Black Sea, which is currently being constructed with strong participation by the Italian company Eni. Indeed, Russian newspaper commentators have celebrated the failure of Ukrainian-Turkmenistani negotiations out of the explicit belief that this signifies the success of the Blue Stream project as well as the failure of TCGP.
Yet Shell is seeking to make the TCGP project work. Although PSG offered Niyazov extremely low profit margins for gas passing through the pipeline, Shell has ameliorated these in its latest proposals, and the revenues to Turkmenistan will be greater if the gas goes under the Caspian to Turkey than if it goes round-about through Russia and under the Black Sea. Project costs have also been brought under control by finding new suppliers for the TCGP's infrastructure in the region.
What it means for Shah-Deniz
The Shah-Deniz consortium, led by BP-Amoco, is on target for exporting to Turkey the fuel extracted from Azerbaijani gas. The initial volume is now projected at 2 bcm per year (bcm/y) in 2003, growing by that amount every year until it attains the 10 bcm/y capacity designed for the renovated pipeline that will carry it from Azerbaijan into Georgia. This is one third of the 30 bcm/y volume that had been projected for the TCGP before that project ran into difficulty earlier this year. There is no serious question that the smaller Shah-Deniz pipeline will be built.
Niyazov has tried to add pressure to his relations with Aliev by refusing to negotiate over the Kyapaz/Serdar petroleum deposit. One quarter of this deposit would probably lie in the Turkmenistani sector of the Caspian if the sea were divided by the median-line rule. Turkmenistan has now filed a case before the International Court of Justice to hear this dispute, although Baku offered to form a 50-50 joint venture with Ashgabat to exploit the resources there: and although it would not be cost-effective for Ashgabat to do so alone.
However, Shah-Deniz gas to Turkey remains at present the surest thing in Caspian energy transport: surer even than the CPC line, for which construction is already under way. It is unlikely that Baku will wait for Niyazov to make up his mind on the TCGP, and it is certain that BP-Amoco will not wait. That being so, other export routes for Turkmenistan's gas that have been bruited about over the last few months need to be reviewed, and they will be in a subsequent column in this series.
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First published in FSU Oil & Gas Monitor, No. 101 (26 September 2000): 6–8.