TURKMENISTAN-CHINA GAS AGREEMENTS: STILL A VERY LONG SHOT

On July 17 in Beijing, the Turkmen and Chinese governments signed grandiose-looking agreements on gas field development in Turkmenistan and gas sales to China. Presidents Hu Jintao and Gurbanguly Berdimukhamedov — on his first visit to China since becoming president in February — witnessed the signing.

China’s National Petroleum Corporation (CNPC) and the Turkmen State Agency for Management and Use of Hydrocarbon Resources — an agency directly subordinated to the head of state — signed a production sharing agreement to explore and develop gas fields on the right bank of the Amu-Darya River (eastern Turkmenistan). Known gas fields there hold reserves of 1.7 trillion cubic meters of gas, according to earlier Turkmen estimates, cited in connection with this agreement’s signing.

These estimates are not independently confirmed and do not include unexplored or unprospected fields in that basin. Thus, the reserves may turn out to be significantly lower or significantly higher than the current reference figure. CNPC already holds a contract — valued at $1.5 billion according to the corporation — for gas field exploration in Turkmenistan. It envisages digging 12 exploration wells during 2007-2010 at the fields of South Yolotan (in southeastern Turkmenistan).

Also on July 17, CNPC and the state firm Turkmengas signed a sale-and-purchase agreement that envisages deliveries of 30 billion cubic meters of Turkmen gas to China annually for 30 years. There is no public word on the starting date of the delivery period, pricing arrangements, or pipeline construction and third-country transit. The pipeline would run to China’s Xinjiang, there to connect with China’s own network.

China completed at the end of 2004 a 4,000-kilometer gas pipeline from gas-producing Xinjiang to Shanghai. It also plans (or planned) to complete by the end of 2010 a 6,500-kilometer gas pipeline from Xinjiang to Canton. Apparently, Turkmen gas would go into this latter pipeline. However, Turkmen gas will clearly not reach China by that date, if at all. Uncertainty in this regard probably explains the dearth of specific information on the pipeline during Berdimukhamedov’s visit.

According to Berdimukhamedov at the signing ceremony, “The Turkmen side will do everything it can to implement the agreements.” He pledged that Turkmenistan would prepare in time the infrastructure for transport, communications, and electricity provision for CNPC’s operations in the right-bank Amu-Darya basin.

Furthermore, Turkmenistan would “guarantee the gas volumes,” even with production from outside the Amu-Darya basin if necessary. The wording suggests that the project is not based on proven or even probable reserves and that Beijing expects volumes from proven and operating fields, if development of the designated area does not yield sufficient volumes to meet Chinese import targets.

“Turkmenistan has enough gas to export in various directions,” Berdimukhamedov assured the Chinese, albeit without data to support such assurances. This was a standard tactic of Berdimukhamedov’s recently deceased predecessor, Saparmurat Niyazov, in negotiating with potential customer countries, under Russian pressure to monopolize Turkmen gas and in the absence of conclusive estimates on Turkmenistan’s overall reserves.

The agreements and accompanying public statements contain no reliable reserve estimates, investment projections, export-import price formation, implementation timetable, or indeed the route and construction costs of the pipeline. Such omissions cast doubt on this project’s outlook. Back in Ashgabat, Berdimukhamedov’s televised remarks on the project were unusually brief and subdued, not accompanied by the standard exhortations, and packaged together with some trivial government matters.

The July 17 agreements are follow-ups to the April 2006 General Agreement on gas cooperation, signed also in Beijing by Hu with then-president Niyazov. The 2006 framework agreement was a declaration of intent. Whether the two agreements just signed amount to more than that, seems far from clear.

The April 2006 general agreement had envisaged that the 30-year, 30 billion cubic meters per year commitment was to take effect in January 2009. That starting date is clearly no longer feasible, if it ever was. That agreement had also envisaged setting up two working groups for preliminary feasibility studies on field operations and construction of the export pipeline. The groups were to hold bimonthly meetings with a view to signing an implementation package by December 31, 2006. That package was to include:

1) a production-sharing agreement on field exploration and development;

2) an agreement on the parameters of pipeline construction, setting the terms for the technical and economic feasibility study of the pipeline project; and

3) a sale-and-purchase agreement, with pricing based on “comparable international market prices” and payments to be made exclusively in U.S. dollars.

Furthermore, China and Turkmenistan were to hold consultations with transit countries (implying Kazakhstan and possibly also Uzbekistan) regarding construction of the pipeline on their territories.

However, there is no evidence to attest that any of those steps were taken since April 2006. Whether Berdimukhamedov would or could deliver more than Niyazov did on this project seems also doubtful from Beijing’s perspective. During his visit, the Chinese repeatedly reminded Berdimukhamedov publicly of the need to “implement bilateral agreements, [and] work closely on the gas project” — clearly an admonition from Chinese Prime Minister Wen Jiabao. The two presidents’ communiqué mentions “the need to strictly abide by, and conscientiously implement, the documents that were signed and comprehensively put into effect the agreements reached” — again a mark of Beijing’s growing sense of urgency, if not growing skepticism about Turkmenistan’s latitude to deliver on this project.

Absent Western engagement, Ashgabat has not been able to challenge Russia’s quasi-monopsony on Turkmen gas. The West collectively would again be the strategic loser from any deal that would send Turkmen gas to China, instead of to Europe via Turkey. The Turkmen-Chinese agreements seem in any case a very long shot, not an immediate or realistic challenge to Russian monopsony. However, the Kremlin will cite these agreements to suggest that Turkmenistan’s gas reserves have already been preempted almost entirely by Russia and China, so as to discourage any Western involvement.

The Kremlin wants to sign intergovernmental agreements with Ashgabat in September that would indeed preempt most of Turkmenistan’s export potential. Turkmenistan needs Western proposals on gas pricing and pipeline investment ahead of September.

(Xinhua, Turkmen Altyn Asyr, Interfax, July 17-19; see EDM, April 10, 2006, May 14, 16, 17, July 19)