Publication: Eurasia Daily Monitor Volume: 4 Issue: 232

What a difference a year makes. One of the final diplomatic triumphs of Turkmen leader Saparmurat Niyazov before his death last December was to renegotiate Turkmenistan’s exclusive natural gas contracts with the Russian energy giant Gazprom from a bargain rate of $65 per thousand cubic meters to $100 per thousand cubic meters.

Niyazov’s successor, President Gurbanguly Berdimukhamedov, has managed to negotiate yet another contract with Gazprom under which Turkmengaz will sell its natural gas to Gazprom Export at $130 per 1,000 cubic meters for the period January-June 2008, with prices rising to $150 for the remainder of the year. Even better for the Turkmen government, beginning on January 1, 2009, market forces will determine the gas price level (Interfax, December 13).

The agreement is notable for two aspects. First, the new contract effectively insures Gazprom’s continuing monopoly of Turkmen natural gas exports for the foreseeable future, effectively locking out foreign competition. Second, the agreements will effectively produce substantial price hikes for consumers of Turkmen natural gas, most notably Ukraine, which beginning next year, according to the Ukrainian Fuel and Energy Ministry, will pay a price of $179.50 per 1,000 cubic meters for imports of Turkmen gas. Gazprom has been Ukraine’s sole supplier of natural gas since 2006.

For someone initially dismissed as a potential lightweight after assuming the presidency, Berdimukhamedov has adroitly managed the difficult feat of both negotiating higher prices from Gazprom while keeping Western companies interested in the prospect of developing Turkmenistan’s vast natural gas reserves.

The reality is, however, that the Turkmen government has decided to cooperate with Russia for the foreseeable future as its most reliable partner for gas exports, even as it considers alluring Western offers for development. On December 12 Russian Prime Minister Viktor Zubkov signed a draft agreement with Kazakhstan and Turkmenistan on constructing a Caspian littoral gas pipeline, which effectively shuts out Western competition for the foreseeable future. The agreement authorizes Gazprom, KazMunayGaz and Turkmengaz to construct the pipeline “from the Belek compressor station [Turkmenistan] to the Alexandrov Gay gas metering station [Russia], taking into account the upgrading of the existing Okarem-Beyneu and Central Asia-Center gas pipelines, to transport Turkmen and Kazakh natural gas through Turkmenistan, Kazakhstan, and the Russian Federation.” The agreement commits Russia to purchasing and transporting up to 10 billion cubic meters of Turkmen gas annually (Itar-Tass, December 12).

The Caspian littoral gas pipeline represents a major blow to Western energy companies, particularly U.S. ones, that had hoped to secure a substantial share of the development of Turkmenistan’s massive natural gas reserves in the aftermath of Niyazov’s death. An indicator of Washington’s level of interest is the fact that in the past year more than 16 high-level U.S. government delegations have visited Ashgabat. Despite such diplomatic prominence, however, the Turkmen authorities have decided for the moment to retain and deepen their relationship with Russia.

The decision is based on two factors, geography and proximity. Since the collapse of the Soviet Union in 1991 Turkmenistan has used Russian-dominated Soviet-era pipelines for natural gas exports, with the exception of minor exports to Iran. The United States was hopeful that it could convince the Turkmen government to approve and participate in the construction of an East-West undersea Caspian natural gas pipeline, which would allow the export of Turkmen natural gas to facilities in Azerbaijan en route to Western markets. For Turkmenistan Washington’s optimism was tempered by the fact that there has yet to be a final delineation of the Caspian among Azerbaijan, Kazakhstan, Iran, Russia, and Turkmenistan. A further factor persuading the Turkmen government to continue its relationship with Russia was that not only would the use of existing Russian facilities allow Ashgabat an immediate cash flow, but Russia’s willingness to pay increased fees for Turkmen exports over the past year and in the future has effectively more than doubled the current revenue stream flowing into Turkmenistan.

U.S. companies have not been completely excluded from Turkmenistan’s energy plans, if for no other reason than their expertise in offshore drilling makes their participation in Turkmenistan’s efforts to exploit its offshore Caspian reserves of high importance. The U.S. company ConocoPhillips, in conjunction with its partner Lukoil, is continuing discussions with the Turkmen government about the development of three promising Turkmen offshore Caspian hydrocarbon blocks (N19, 20, 21), according to Lukoil board member Richard Matske, with the hope that contracts will be finalized by the end of December. Last month Lukoil Vice President Leonid Fedun said, “I hope that in the next few days we will announce the signing of a production-sharing agreement on one of those projects” (Interfax, December 13). Despite Moscow’s current preeminent position, the massive size of Turkmen natural gas reserves suggests that Western energy companies could still play a potentially significant role on the eastern side of the Caspian.