Gazprom in Negotiations to Change Turkmen Gas Contract

by Roman Kupchinsky

Russia’s Gazprom and Turkmenistan’s state-owned gas company, Turkmengaz, were reported to have begun negotiations today on changing the terms of the gas purchase contract signed last December. Russia is proposing that the contract be a “take or pay” contract, linked to the price of oil and not the annual fixed price as was agreed upon in December.

Gas sales from Turkmenistan to Russia were suspended in April when a conflict broke out between the two countries over a pipeline blast caused by a change of pressure in the pipe. Turkmenistan blamed Gazprom Export for not notifying Turkmen authorities that it had stopped receiving gas. The Russian side rejected the charges and gas stopped flowing to Russia.

The conflict grew when the Turkmen side decided not to automatically award Gazprom a contract for the construction of the East-West pipeline and clinched a deal with China to develop the on-shore part of the giant Yolotan gas field.

At the heart of the dispute is the pricing mechanism agreed upon in the December 31, 2008 contract. Gazprom, according to Russian Prime Minister Vladimir Putin, agreed to pay Turkmenistan a fixed rate of $340 (which includes transit fees) for 1,000 cubic meters throughout 2009.

However, a few days later Putin and Gazprom insisted that Ukraine pay Gazprom on the basis of a take or pay contract linked to the price of oil. Why Turkmenistan was given a fixed price is difficult to say. Furthermore the terms of the December 2008 contract with Turkmenistan were never made public.

In the first quarter of 2009 Gazprom paid Ashgabat $300 per 1,000 cubic meters of gas. If a take or pay pricing method is agreed upon, Gazprom will pay Turkmengaz $220 in the third quarter and $160 in the fourth quarter of 2009.

A number of factors might have played a role in bringing Gazprom and Turkmenistan back to the negotiating table. When Turkmen gas ceased going to Russia in April, Turkmenistan, which has no other significant customers for its gas or export routes, was forced to cap some bore holes or flare off the gas, losing millions of dollars.

Russia, on the other hand, is faced with lower demand in Europe and Ukraine; however, the different opaque gas middlemen schemes Gazprom Export has created in Europe, like Gazprom Germania, rely on Central Asian gas supplies to sell to their customers. These schemes cannot continue siphoning off Russian gas without that gas being replaced by gas from Central Asia.

The Gazprom Germania website states: “The main focus of our business activities is on marketing natural gas of Russian and Central Asian origin in Western and Central Europe.”

The other question which needs to be resolved during the new negotiations is the volume of gas that Russia will buy from Turkmenistan in 2009. The earlier number of some 40 billion cubic meters, is now unrealistic and Gazprom will most likely insist on a far lower amount.