In my most recent installment in this series, I indicated that recent developments pointed towards the need to review Turkmenistan's options for export of its natural gas. That is the subject of this article.
It will be recalled that Turkmenistan had planned to supply Turkey with natural gas via an undersea pipeline continuing overland through Azerbaijan and Georgia. That was before the discovery of the Shah Deniz field offshore from Azerbaijan, which led to disputes between Azerbaijan and Turkmenistan over the allocation of the volume of the projected 30 billion cubic meters (bcm) per year pipeline. President Saparmurad Niyazov of Turkmenistan tried to play the Trans-Caspian Gas Pipeline (TCGP) consortium against Russia, but in the end the consortium's main players closed their office in Ashgabat and departed, leaving Royal Dutch Shell, a latecomer to the initiative, to keep the project going. Shell has long-term strategic interests in energy development throughout Turkmenistan and was very interested in the TCGP prospect, in addition to its other ventures.
Other than the TCGP and Russia, Turkmenistan's choices for gas export are generally two: across Asia into China, out through Iran, or across Afghanistan into Pakistan. It will be understood that each of these options has drawbacks that promote severe and justified skepticism.
1. The China Option
As regards the first, a feasibility study conducted by China several years ago determined that the line was not profitable. China has still not been able to bring on-line the Aktyubinsk fields in western Kazakhstan that it bought several years ago, for reasons covered earlier in this series. Similar difficulties, ranging from economic diseconomies to the prospect of ethnic conflict in Xinjiang, would plague any attempt to build, operate and manage a pipeline from Turkmenistan.
This has not stopped China from establishing a minor presence in Turkmenistan, having signed an agreement to go around the country refurbishing the Soviet-era petroleum industry infrastructure. However, such a program seems to be merely a good-will gesture to stay on President Niyazov's good side, much like the gift to him of a check in the amount of US$55 million, openly reported in the press and publicly confirmed, from Jiang Zemin during his visit to the country last summer, made in gratitude for being received in Ashgabat.
2. The Iran Option
The second route, out through Iran, continues to encounter the same difficulties as most projects designed to take Central Asian energy through Iran. These difficulties include financing in the first instance. However, as non-U.S. energy companies are signing increasing numbers of agreements with Iran, for exploration and development of Iranian natural resources, the American sanctions can no longer suffice as an explanation for why the Central Asian projects have been unsuccessful. In fact, the oil-swap deals with Kazakhstan, in which U.S. companies are specifically allowed by an act of Congress to participate, for which the bilateral agreement dates back to 1997, have been basically dormant for some time as well. The main reason, rather, is disagreements over pricing and quality of the oil between Iran and Kazakhstan.
Indeed, it is typical that Iranian negotiators have little or no leeway in discussions with their counterparts from other countries. This Iranian behavior has been experienced by European and Asian firms as well. It is attributable to the unwillingness of the most powerful ministries in Teheran, and other conservative political forces in the country, to delegate decisional authority to technical and economic elites. Given that President Niyazov imposes analogous strictures upon his own negotiators in most every negotiation (which is why nearly every deal, and certainly every big one, needs his personal imprimatur), it is understandable that discussions between Turkmenistan and Iran on energy cooperation have developed very slowly.
3. The Afghanistan Option
The third possibility is across Pakistan into Afghanistan. This was first raised a few years ago when the Taliban conquered Kabul, and then discarded after the regime failed to obtain international recognition, by reason of its social policy towards women among other things. It has come up for discussion again because of the Taliban's recent military successes against the Northern Alliance. These have compelled Uzbekistan to take a more conciliatory approach to Afghanistan, in the hope that the Taliban diminish their significant logistical and moral support for the insurgent Islamic Movement of Uzbekistan (IMU).
As Ashgabat has always had a much softer line with Kabul, relations even being friendly, the possibility of the gas pipeline has come forward again. However, Iran has in the meantime signed an agreement with Western companies to develop fields capable of supplying Pakistan, and these seem more feasible because the pipelines would not run the risk still inherent in their being laid overland through Afghanistan.
4. Back to "The Devil and the Deep Blue Sea"
Thus the options remaining are reduced to what they had always been: Russia and the TCGP. Ukraine became a player in this mix a few months ago, because it imports Turkmenistan's gas via the Russian pipeline system. The possibility was raised of TCGP gas going through Azerbaijan and Georgia but then, instead of turning south to Turkey, turning north under the Black Sea and ending up in Ukraine. That project is interesting but expensive and time-consuming to build. It does not offer any clear virtues over the original route into Turkey, other than providing another possible consumer if Turkey's requirements are met by Azerbaijani gas from Shah Deniz and other sources such as Iran, not to mention the Blue Stream project from Russia under the Black Sea, on which construction is proceeding apace.
This constellation of political and economic forces makes it therefore understandable, why President Niyazov signed agreements in principle with Russia in summer, according to which he would rachet up his production for export to Russia, by 10 bcm per year from the current level of 20 bcm until it reaches 50 bcm, then maintaining that level until the end of the decade. Moreover, that gas, whether re-exported to Ukraine or consumed domestically in Russia, then frees up Russian gas for export to the hard-currency markets of Western Europe. Turkmenistan still does not get all the hard currency it needs to find its way of its present cash crunch. Still he needs what he can get and, apparently having realized the corner he has painted himself into, seems now willing to take it, at least in the short term, until he can fashion what at least looks like another escape. Yet the implementation of the agreements in principle with Russia are subject to continual bilateral negotiations over price.
Niyazov publicly re-endorsed the TCGP project in August. Then, after a visit from Turkish President Sezer in autumn, he declared that exports to Russia after 2005 remained to be nailed down. Sezer signed accords with Niyazov on economic cooperation, the content of which has not been divulged in detail. Interesting, another press report affirmed an agreement over the volumes of Turkmenistani gas to be imported by Turkey through an eventual TCGP. (Even this report does not specify whether the agreement it was in writing, and whether it was or not is probably irrelevant.) Even so, such a TCGP was, in that same report (which was independent of the attribution to Niyazov of the declaration about the year 2005) stated to be not feasible until 2006.
5. The Influence of Shah Deniz
Meanwhile, engineering and planning of the pipeline to take Azerbaijani gas from Shah Deniz into Turkey is already well under way. Indeed, the volume planned from Shah Deniz, diminished to 16 bcm per year from the 30 bcm originally foreseen through the TCGP, makes it conceivable to use the existing infrastructure if inspection reveals that this has held up well enough over the years. All these events have allowed Azerbaijan, Turkey and the Shah Deniz consortium to make production plans in a business environment of relative certainty, since the Niyazov variable is no longer present in the near-term or the medium-term equation. Contracts are expected to confirm the initial volume of between 2 and 4 bcm to Turkey, beginning in 2002-2003, and rising by 2 bcm per year thereafter to a likely maximum of 16 bcm per year. Statoil and the Turkey company KOC Holding have signed an agreement to establish a jointly-owned gas company in Turkey, where the gas market has now been liberalized and international market prices are to be expected.
At the same time, there is growing explicit recognition in the energy industry that the condensate component of the Shah Deniz field in fact provides (as has been maintained here for some time) enough to meet the 6 billion barrel threshold, upon which BP-Amoco has insisted for estimating as feasible the main export pipeline, now called by some the Baku-Tbilisi-Ceyhan (BTC) line. Statoil, in addition to its participation in marketing Shah Deniz gas in Turkey, also signed onto the BTC project a few months ago. It is therefore rather significant that even the Financial Times, in an article containing direct quotations from Statoil's project director for European gas, asserted that the Shah Deniz field "could contain the equivalent of up to 2.4 billion barrels of oil."
Those words are not attributed to the Statoil manager, Per Lindberg, but the newspaper's phrasing invites the reader to make the inference while declining any responsibility for the information. Still more interesting, this report was published at the end of the third week of November, almost at the same time as a Reuters article cited a source, who "declined to be identified," to the effect that the third test well at Shah Deniz "showed the presence of large quantities of water and an absence of gas in the reservoir which could potentially contain hydrocarbons." The preliminary six-month engineering study for BTC is now under way, and if that is favorable, then a more detailed twelve-month study will follow while financing is identified. Construction would require about three years. That would put BTC on-line in mid-2005.
Other Azerbaijani fields, variously oil and condensate, offshore and onshore, combine to furnish reserves of about 1.4 billion barrels. Consequently it becomes more and more undeniable that the total of currently available reserves in Azerbaijan itself exceeds the 6 billion barrel threshold; and that does not even count the East Kashagan strike offshore from Kazakhstan, which was the subject of great publicity earlier this year. And that is just as well, since East Kashagan, while huge, is high in sulfur and totally lacks infrastructure, such that even projections concerning its development and production will not become a significant factor in serious calculations until probably the second half of the decade at the earliest.
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First published in FSU Oil & Gas Monitor, No. 111 (6 December 2000): 6–8.