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A New Chance for the Trans-Caspian Gas Pipeline?

A significant indicator of Turkmenistan's future diplomatic and economic course is whether new President Gurbanguly Berdymuhammedov will undertake a rapprochement with Azerbaijan.

Former president Saparmurat Niyazov, self-styled "Turkmenbashi" (leader of Turkmens), who died in December, was on notoriously poor terms with the erstwhile Azerbaijani president Heydar Aliev, father of the country's current President Ilham Aliev. This antipathy, together with Niyazov's failure to grasp the intricacies of contemporary negotiations on petrochemical-energy development, which he nevertheless insisted on leading from Turkmenistan's side, was responsible for the ultimate failure of the Trans-Caspian Gas Pipeline (TCGP) project in the late 1990s.

That TCGP project would have piped Turkmenistani gas under the Caspian Sea to Azerbaijan, then out to world markets by a Georgian-Turkish gas route parallel to the Baku-Tbilisi-Ceyhan oil pipeline that recently entered service. In the event, the surprise discovery of significant gas reserves (instead of the expected oil with only associated gas) in the Shah-Deniz field offshore from Azerbaijan made Turkmenistan's gas superfluous to the project. The gas-pipeline project from Shah-Deniz to Turkey through Georgia, christened the South Caucasus Pipeline, is now well under construction.

A precondition for any international financing of any new TCGP project is resolution of the territorial dispute between Turkmenistan and Azerbaijan over the mid-south Caspian field that the latter calls Kyapaz and the former calls Serdar. Although Azerbaijan's case for sole sovereignty over Kyapaz/Serdar is well founded under international law, Heydar Aliev offered in 1997 the possibility of joint development of the field to Niyazov, who nevertheless rejected it.

Today, the then-projected TCGP route through Georgia to Ceyhan on Turkey's Mediterranean coast (or a variant going through Georgia and under the Black Sea, or also under the aegis of the Austrian-led Nabucco project via the Turkey-Greece gas connector that the Europeans have been trying to make happen for a decade) could still bring Turkmenistani gas into the European markets, eliminating any need to transit Russian territory.

Azerbaijan, Kazakhstan and Russia have implemented a "modified median line" principle, well established in international law, to the demarcation of sovereignty over resources under the bed of the Caspian Sea. This offers a precedent for the resolution of the territorial conflict between Azerbaijan and Turkmenistan over the Kyapaz/Serdar field, which lies in the middle of the southern Caspian Sea, divided by a median line between the Azerbaijani and Turkmenistani coasts if such a line were to be drawn.

For this, it would not be necessary to resolve boundary questions between Azerbaijan and Iran, between Turkmenistan and Iran, or even between Turkmenistan and Kazakhstan. It would only require Turkmenistan to agree on such a "modified median line" principle to demarcate its boundary with Azerbaijan over use of undersea resources. (This is not legally the same as claiming ownership or sovereignty over the seabed itself.)

Azerbaijan has a historically better-established claim to the entire Kyapaz/Serdar block also because of the physical geography of the region, which places the island much closer to offshore Azerbaijani development than to the mini-archipelago stretching from the Turkmenistan shoreline into the southern Caspian Sea. The application of the "modified median line" would implement the 1997 proposal by the Azerbaijani side to develop the block together with Turkmenistan, a proposal rejected by Niyazov at the time.

Given the engineering and technology necessary for such development, Turkmenistan would need outside help, and Azerbaijan has the most significant infrastructure and experience in the region, including established access to foreign expertise, with which to begin the development.

Exactly that approach was taken in discussions between Kazakhstan and Russia regarding deposits that straddled their common demarcation line in the northern Caspian Sea offshore; and after agreeing on the modified median line principle, these two countries subsequently reached binding written understandings on the development of those deposits, which are now in the process of being jointly developed by companies from the two countries.

So this is an established method in international law with a precedent in the Caspian Sea region. Even an oral endorsement of its acceptance by Turkmenistan, if followed up by concrete action, would signal a willingness to undertake businesslike relations with a view toward increasing outlets to world markets for Turkmenistani gas.

One of the factors conditioning prospects for construction of any gas pipeline westward from Turkmenistan will be the prices offered by Russia to Turkmenistan for gas at its border. These prices have been the subject of perennial haggling between Ashgabat and Moscow, with several contracts being agreed and broken and renegotiated over the past decade and a half. The problem from the Turkmenistan side is that there is at present nowhere else for the gas to go. (Statistics on the small quantity of exports to Iran, the one exception, are notoriously unreliable; figures in the public domain are almost certainly overestimates.)

Prices paid to Turkmenistan for delivery of gas at the Russian border have gradually increased over the years, even before Russia began increasing its own prices for export (or re-export of Turkmenistan's gas) to third countries such as Ukraine and Belarus. Berdymuhammedov has publicly assured Russia that Turkmenistan will honor its contractual obligations to Moscow out to the year 2028, the terminus date of a 25-year contract signed in April 2003. This contract provided for sales to Russia at a price of $44 per thousand cubic meters (tcm).

By late 2005, Gazprom had ceded to Niyazov's insistence for a rate increase, agreeing to a price of $65/tcm for deliveries during the first half of 2006. Almost immediately into the new year, in the wake of the Ukraine gas imbroglio (Ukraine is in fact historically the principal recipient for gas from Turkmenistan even in the Soviet period), Niyazov began agitating for yet another price hike. Moscow resisted until the end of the summer but finally caved in and agreed a price of $100/tcm with Turkmenistan.

At his death, Niyazov had given no impression of relenting in his efforts to drive up the price. The simple fact is that Gazprom has managed its Russian resources so poorly and failed so greatly to make any significant improvements or important capital investments that Russia not only is dependent on gas from Turkmenistan for exports to Ukraine and, through Ukraine, to Europe, but also simply needs Ashgabat's gas for domestic Russian consumption during the cold winter months.

There are other non-Russian outlets theoretically available to Turkmenistan: through Kazakhstan to China, through Afghanistan to Pakistan, and through Iran to Turkey, to name but three. Each of them has, like a renovated TCGP project, its own particular problems.

The Turkmenistan-Iran-Turkey route may have the greatest practical obstacles, despite a recent oral agreement in principle between Turkish and Iranian representatives to pursue the idea. However, Turkey has taken care throughout the current decade to maintain very good relations with Niyazov, who was in turn favorably disposed to the Anatolian Turks, whom he considered brethren; and Ankara naturally has excellent relations with Baku, as well as demonstrated positive cooperation in energy transport.

In this connection, Turkey may be a key to watch.

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URL:  http://www.robertcutler.org/blog/2007/02/a_new_chance_for_the_transcasp.html
First published in Asia Time OnLine, 28 February 2007.

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