WILL NIAZOV HAND MOSCOW THE SPIGOT ON TURKMEN GAS?

President Saparmurat Niazov courts the risk of allowing Russia to become both the primary market and transit route for Turkmen gas–the main source of income for the impoverished country. That double dependency is all the more hazardous because Russia and Turkmenistan are competitor countries–as witnessed by Moscow’s bold efforts to snap up the Turkish and other gas markets that Turkmenistan had itself targeted with host country and American backing. Moscow will enjoy the advantage in that competition as long as the sole large-capacity export pipeline out of Turkmenistan runs through Russia.

While drifting into dependency on Russia, Niazov has frozen the Trans-Caspian Pipeline Project (TCPP) for the export of Turkmen gas via the South Caucasus to Turkey and beyond. The president has set nonstarter financial preconditions in his negotiations with the TCPP consortium of the Bechtel, General Electric and Shell companies; he has also turned his back on the chief U.S. envoy for Caspian energy issues, who had actively promoted the trans-Caspian pipeline project.

Against that background, Niazov needs supply and transit agreements with Russia for 2001 to be signed quickly. Moscow, for its part, seems confident enough to hold out for maximum advantage to itself. The leading role in those negotiations seems to be devolving on Gazprom’s affiliate Itera company. Negotiations between Itera’s chairman Igor Makarov and Niazov on December 11-12 in Ashgabat ended inconclusively. Turkmenistan seeks a sale contract for 30 billion cubic meters of gas, priced at US$41 per thousand cubic meters at the Turkmen border. Russia would pay in hard currency for 40 percent of the total cost and would offset the remaining 60 percent through deliveries of Russian goods and services.

The Russian side purchased 20 billion cubic meters of Turkmen gas from January to September 2000 and another 10 billion cubic meters from October to December. It agreed to pay US$36 per thousand cubic meters under the first contract and US$38 under the second. In both cases it used the payments formula of 40/60 for cash and barter.

A price of US$41, even if eventually obtained, would only constitute an illusory improvement for Ashgabat. The prices in 2000 and the increase sought for 2001 almost certainly fail to keep pace with the steeply rising fuel prices on international markets. Back in 1998, when international fuel prices had hit rock bottom, Gazprom’s chairman Rem Vyakhirev had publicly challenged Turkmenistan in its capital city to accept a Russian price of US$36 per thousand meters of Turkmen gas, or else let “Turkmen starve.” That statement dramatized the consequences for Turkmenistan of exclusive reliance on the Russian outlet.

With the current international price dynamics, Russia could afford slightly increasing the purchase price and still reap substantial profits by reselling Turkmen gas to third countries as part of “Russian gas” supplies.

In that sense, Niazov was correct when complaining–during a session with the foreign envoys accredited in Ashgabat–that Moscow “misses out on profitable deals” through its “sluggishness” in the negotiations for renewal of purchase contracts with Turkmenistan. “Great Russia should cooperate with small countries on an equitable basis,” the president admonished–in the absence of alternative outlets for his country.

The structure of Russian payments, moreover, represents a distinct disadvantage to Turkmenistan because of the predominant barter component and the substandard quality of Russian goods and services that would be delivered. For their part, the TCPP consortium and Turkey had made clear to Niazov that his country would be paid 100 percent in hard currency for gas exported through the trans-Caspian pipeline.

With the TCPP project shelved, Russia and Iran are poised to conquer the Turkish gas market–the world’s fastest growing market for gas. Russia’s is the larger offer through the “Blue Stream” pipeline, to be laid on the bottom of the Black Sea from the Russian to the Turkish shore. Russia has neither the capital nor the technology for that project, but it relies on Italy’s state-controlled ENI corporation to provide both in a joint venture with Gazprom. TCPP and Blue Stream are generally regarded as mutually exclusive because they target the same market with the same massive offer. Ironically, part of the “Russian” gas on offer to Turkey will in fact Turkmen gas, to be resold by Gazprom with a hefty markup.

International financing will go to whichever project is off to a faster start and wraps up supply contracts with Turkey. Blue Stream has already enjoyed a head start on construction work. If Niazov continues stalling on TCPP, he will end up ensuring Blue Stream’s success and another windfall for his competitor, Gazprom.

That outcome would not only freeze Turkmenistan out of the Turkish market, but would also close the sole viable alternative to the Russian transit route for Turkmen gas. TCPP had offered Turkmenistan a market not only in Turkey but potentially also in the Balkans and Central Europe via Turkey. Absent the trans-Caspian pipeline, however, Turkmenistan will be reduced to selling its gas to Russia cheap and watch Russia resell it at a profit.

Niazov is aware of that prospect. Recently the visiting Turkish State Minister Ramazan Mirzaoglu quoted Niazov as stating: “We are selling gas to Russia and you [will be] buying gas from Russia. We are selling gas to Iran and you [will be] buying gas from Iran. In a way, you get ripped off” (Anatolia news agency, November 21). But so, obviously, does Turkmenistan unless Niazov changes his attitude toward TCPP.

The Iranian route is no alternative because Iran itself is a competitor, not interested in transiting Turkmen gas. Iran’s interest is limited to bringing meager amounts of Turkmen gas to areas in northern Iran which are situated far away from Iran’s own gas fields in the south. Accordingly, Iran has cooperated in laying the Korpeje (Turkmenistan)-Kurt Kui (Iran) pipeline, operational since 1998, with a capacity of just 5 billion cubic meters annually, and being used for only a fraction of even that capacity. Turkmenistan sold a mere 1.8 billion cubic meters to Iran through that pipeline from January to October 2000 (Dow Jones Newswires, RIA, Turkmen Television, Turkmenistan.ru website, IRNA, December 7-13; see the Monitor, October 5, 23).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at pubs@jamestown.org, by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions