Turkmenistan, Russia Agree to Resume Gas Supplies in 2010, Ending Impasse

A Fresh Start in 2010

From his second visit to Turkmenistan since September, Russian president Dmitry Medvedev is returning with a deal in hand to resume imports of Turkmen gas. Yesterday, Medvedev and his Turkmen counterpart, Gurbanguly Berdymukhammedov, met in the Turkmen capital, Ashgabat, to oversee the signing of an agreement between Gazprom and Turkmengaz, the respective state-run gas firms of Russia and Turkmenistan, that should result in a resumption of Turkmen gas supplies to Russia in early 2010. Gazprom deputy CEO Alexander Medvedev said that the deal should see Turkmen gas begin flowing to Russia "from January 1, 2010, but no later than January 10".

The physical resumption of Turkmen gas flows to Russia will bring to an end an eight-month impasse regarding Turkmen gas supplies, which have been halted since an explosion on the Central Asia-Centre (CAC) pipeline in early April (see "Related Articles"). Turkmenistan blamed the accident squarely on Gazprom, saying that the Russian gas giant failed to give adequate notice of its intention to sharply curtail offtakes, thus leading to a build-up of pressure in the Turkmen section, which caused the explosion. President Berdymukhammedov’s angry rhetoric merely exacerbated the burgeoning commercial dispute, however, as supplies remained stopped even after repairs were quickly undertaken.

Indeed, Gazprom sought to reduce its imports of Turkmen gas in an effort to renegotiate price and supply terms with the Central Asian state, given the new reality in the European gas market. The Russian gas giant had agreed to pay "European"-style prices to Turkmenistan for gas imports in 2009, only to agree before the year started to a fixed price deal with Turkmenistan, reportedly for upwards of US$300–350 per 1,000 cm. Weaker European demand, together with the decline in Gazprom’s oil-indexed gas prices in its contracts with European buyers, soon put the Russian gas giant in the position of having little need for Turkmen gas. Gazprom’s direct gas supply deal with Naftogaz Ukrainy, together with the sharp drop in Ukraine’s own gas demand—which the Russian firm has traditionally met by supplying re-exported Turkmen gas—translated into an unsustainable situation for Gazprom.

Winners and Losers Both?

Rather than continuing to pay for expensive Turkmen gas imports that it had little need for, Gazprom used the opportunity provided to it by the pipeline explosion to seek to renegotiate price and supply terms with Turkmenistan. Although Turkmenistan has been losing perhaps US$1 billion or more per month during the stoppage, it held firm, refusing to bend to Gazprom’s terms, even as the leverage that it had accumulated in recent years vis-à-vis the gas giant evaporated in short order. President Berdymukhammedov used the outage to press ahead with his goal of diversifying Turkmenistan’s gas exports routes, talking up potential Turkmen gas supplies to support the Nabucco pipeline while pushing to speed up construction of the Turkmenistan-China pipeline and a new pipeline connecting Turkmenistan to Iran.

Thus, even as Russia was ready to resume gas imports several months ago, Turkmenistan held out, and with the launch of the Turkmenistan-China pipeline earlier this month, the Central Asian state has shored up its leverage in negotiating a resumption of gas supplies to Russia. The deal signed yesterday calls for Gazprom to import up to 30 bcm of Turkmen gas next year, which is below the 50 bcm/y figure that Turkmenistan had been sending to Russia in recent years, but still higher than the 10–15 bcm/y over the next few years that the Russian press had recently speculated Gazprom would be willing to import from Turkmenistan. "Up to" 30 bcm/y certainly leaves some wiggle room for Gazprom to take less, but presumably, Turkmenistan would be willing to supply more, if the two sides can agree.

Indeed, under the 25-year, 1.8-tcm gas purchase and supply deal signed in April 2003, Gazprom was supposed to be importing 80–90 bcm/y of Turkmen gas by now. However, this was always contingent on construction of new infrastructure to support those volumes, and volumes have never exceeded 50 bcm/y thus far. What is more, supplies have been periodically disrupted due to disagreements on price terms even before 2009, with Turkmenistan successfully ratcheting up its export price several times before this year. An amendment to the supply deal in the agreement yesterday calls for prices to be based on a fluctuating European price formula, which both sides are hoping will end the cycle of price disputes.

Outlook and Implications

President Medvedev said that the agreement signed yesterday will allow the two countries to end the year on a "high note", adding that "those decisions that we have taken today will serve as a solid basis for our energy cooperation". Berdymukhammedov added that the deal will further cement the "strategic partnership" between Turkmenistan and Russia. Aside from the alterations to the terms for gas prices and supplies under the 25-year supply deal, Gazprom and Turkmengaz also agreed to work jointly to implement the 2007 agreement to build the "Pre-Caspian" gas pipeline, the 30-bcm/y pipeline that would run along the Caspian Sea shore from Turkmenistan to Russia via Kazakhstan. The project has been stalled in the context of the impasse over gas prices and supplies this year. Furthermore, the companies agreed to discuss the potential for joint hydrocarbon development on the Caspian Sea shelf.

The resumption of Turkmen gas exports to Russia—assuming physical supplies do indeed begin to flow again in early January—will mark a victory for both sides. Gazprom has not only reduced its import obligation, but also secured Turkmenistan’s agreement on a fluctuating, European-based gas price formula that will ensure that the Russian gas giant can better balance its gas import costs with its export prices. For its part, Turkmenistan may have lost the initial battle, but the resumption of gas exports will bring in much-needed revenue, and by pushing ahead with its diversification strategy, the Central Asian state is poised to reduce its heavy dependence on Russia in the long run.

In fact, the real loser may be the Nabucco gas pipeline project, which stood to gain from the rupture in Turkmen-Russian ties as Turkmenistan showed more interest in supplying this pipeline. The resumption of Turkmen gas flows to Russia and the resumption of friendly Russian-Turkmen relations does not entirely doom Nabucco, of course, but neither does it do that project any favours. Turkmenistan has ample untapped gas reserves, and the country claims it can support gas export supplies in all directions, but a breakthrough in the maritime border dispute between Turkmenistan and Azerbaijan is still needed to support a potential trans-Caspian gas pipeline that would send Turkmen gas westwards, for export via Nabucco. In that sense, the launch of the Turkmenistan-China pipeline and the resumption of Turkmen gas exports to Russia will test just how committed the Central Asian state is to diversifying its export markets, in all directions.

Related Articles

• Central Asia - China: 14 December 2009: Chinese, Central Asian Leaders Celebrate Historic Launch of Gas Pipeline
• Turkmenistan: 1 December 2009: Turkmen President's Visit to Russia Fails to End Impasse in Ongoing Gas Row
• Turkmenistan: 25 November 2009: Start-Up of Turkmenistan-China Gas Pipeline Nears; Gazprom Reportedly to Cut Medium-Term Imports
• Central Asia: 13 November 2009: Central Asian Gas Producers See Progress in New Export Options
• CIS: 20 October 2009: Turkmenistan Eyes Ban on Re-Export of Gas Sold to Russia’s Gazprom
• Turkmenistan: 14 September 2009: Presidential Meeting Fails to Resolve Russia-Turkmenistan Gas Row
• Iran: 11 August 2009: New Turkmen Gas Volumes Tabled for Iran from November/December
• Turkmenistan: 13 April 2009: Turkmenistan Accuses Gazprom of Irresponsible Actions in Triggering Gas Pipeline Explosion
• Turkmenistan: 10 April 2009: Pipeline Blast in Turkmenistan Halts Gas Supplies to Russia
• Turkmenistan: 30 March 2009: President Instructs Turkmen Government to Hold International Tender to Build East-West Gas Pipeline