Turkmenistan’s oil and gas complex
By Sergei Kolchin
EDITOR’S NOTE: Turkmenistan made headlines around the world when, at the end of December 1997, President Saparmurat Niyazov and Iran’s new president, Mohammad Khatami, officially opened the first natural gas pipeline linking Iran, via Turkmenistan, to the huge energy resources of the Caspian. The 200-km pipeline is the first in the region to bypass Russian territory. Initially, it will carry gas from the Korpedje field in western Turkmenistan to the industrial town of Kord Kuy just across the border in northern Iran. Eventually, however, there are plans for it to transport gas from Turkmenistan to Europe via Iran and Turkey. This would allow Turkmenistan not only to export its energy without depending on Russian pipelines, but to compete directly with Russian companies for more lucrative markets than those Turkmenistan presently enjoys.
Turkmenistan’s economy is founded on oil and gas. The country has immense, if incompletely estimated, reserves of oil, and it is the world’s fourth largest producer of natural gas. It is estimated that 80 percent of the country (or more than 400,000 sq. km) may hold oil reserves. Turkmenistan differs from its Caspian neighbors, however, in that it has only limited capacity to refine its hydrocarbon resources. Instead, the country’s economy is oriented toward exporting its raw materials. Since it became independent in 1991, Turkmenistan has sought to sell its oil and gas at world prices. Until 1994, Turkmenistan had a quota of about 11 percent of total Russian gas exports. Russia canceled this arrangement because it wanted to boost its own hard currency revenue from gas exports. In March 1997, Turkmenistan temporarily suspended gas exports via Russian pipelines. Since then, its export revenues have fallen sharply and the country has increased its search for export routes bypassing Russian territory.
Over 150 oil and gas deposits have so far been discovered in Turkmenistan. The country’s largest oil and gas fields include:
— the shelf of the South-Caspian Basin, with about 2 billion tons of prospected oil resources and 2 trillion cubic meters of natural gas;
— the central Caspian, whose hydrocarbon resources are estimated at 1 billion tons of oil and 2.8 trillion cubic meters of natural gas;
— western Kopetdag, with an estimated 0.8 billion tons of oil and 2.9 trillion cubic meters of natural gas;
— the Predkopetdag trough, with 0.6 billion tons of oil and 2.5 trillion cubic meters of natural gas;
— the right bank of the Amu Darya river, with a total of 1.8 trillion cubic meters of natural gas.
Other large oil and gas fields are located in Northern Karabogaz, the Repetek-Kelif zone, and the Deryalyk-Dovdan trough. Turkmenistan and Azerbaijan are in dispute over what Baku calls the Kyapaz oil field (Ashgabat calls it Serdar), located on the maritime boundary that divides the two countries.
At present, Turkmenistan’s economy is dominated by natural gas extraction. In 1996, some 40 billion cubic meters of natural gas were extracted in Turkmenistan, 32 billion of which were exported.
Large-scale development of Turkmenistan’s oil fields has not yet begun. Some five million tons of oil were extracted in 1996. There are estimates that oil extraction in the republic could increase to 9-11 million tons in 2000 and to 15-20 million tons by 2010.
Sea or Lake?
Turkmenistan was the last of the Caspian littoral states to announce its intention of developing its sector of the Caspian shelf. Since the collapse of the USSR, the Caspian’s five states have been embroiled in a dispute over its status. Originally, Turkmenistan, Russia and Iran argued that the Caspian was a lake. This, they said, meant that its resources were the common property of all the littoral states and should be exploited on a common basis. Azerbaijan and Kazakhstan countered that the Caspian was a sea. Under international law, this meant that its waters should be partitioned, giving each of the littoral states exclusive rights to the resources in its sector.
Over the past year, Turkmenistan has shifted position on this issue. This first became apparent last spring, when Turkmenistan laid claim to a field being developed by the Azerbaijani International Operating Company. This was interpreted as a subtle indication that Turkmenistan had come round to the idea of partition so that it too could exploit the resources in its sector. Turkmenistan’s action was promoted by the crisis in the republic’s economy and, in particular, in its oil and gas sector. While not as bad as those of past years, data for 1997 indicated that the country’s economy was continuing to shrink. While a 4.2 percent increase was reported in the extraction of oil and gas condensate, many CIS recipients of Turkmenistani gas had failed to pay their bills. This in turn reduced Turkmenistan’s ability to raise the investment it needed to develop its energy industry.
In September 1997, Ashgabat launched an international tender for the development of oil and gas deposits in the Turkmenistani sector of the Caspian Sea shelf. Ashgabat added that it was ready to open negotiations with Azerbaijan on the maritime boundary between the two countries.
Turkmenistan originally offered concessions in 11 of the 30 oil- and gas-bearing sections into which the Turkmen sector of the Caspian is divided. Later this was reduced to eight. The tender is taking place in two stages. In the first, interested companies were invited to study the documentation, create consortiums and submit proposals to the organizers. The original deadline of end-November 1997 for the bids has been extended until February 15, 1998, because of the large number of applicants. In stage two, negotiations will be held with the companies that have made it through the first stage with a view to concluding contracts.
According to the organizers of the tender, companies from 47 countries have shown an initial interest. Talks are under way with Japan’s Mitsui, Mitsubishi and National Oil Company, the National Oil Company of Austria, the American companies Chevron, Unocal and Amoco, the French company Total, Italy’s Agip, and Russia’s YUKOS and LUKoil. According to the terms of the tender, the winning company will acquire technical and geological information, including seismic data, prepared by the American company Western Atlas. It also has to bring the state company Turkmenneft into the project.
Before the announcement on the shelf project, the American company Unocal, working in alliance with the Saudi Arabian firm Delta, had been very active in Turkmenistan’s oil and gas sector, squeezing out its Argentinean competitor Bridgas. This company was among the pioneers in the joint investment projects in Turkmenistan, the "Keimir" joint venture in oil extraction, created in 1993. At the same time, another joint venture was established, "Larmag-Chepeken," with the participation of the Dutch firm Larmag Energy. These first attempts of foreign investors to participate in oil extraction were not successful. The British company Monument Oil and Gas, which prospected three deposits in the west of the republic (Burun, Kyzylkum, and Karatele), was more successful, and the company concluded a production-sharing agreement with the government of Turkmenistan. This company, together with Mobil, presented the Turkmenistani side with a project for restoring 2,000 wells in the western oil and gas region. As a result, the consortium was offered the exclusive right of negotiating a production-sharing agreement on this project.
In the area of refining hydrocarbon resources, which is still Turkmenistan’s weak spot, contracts were signed in February 1996 on modernizing the oil refinery in the city of Turkmenbashi. They are to be implemented by 1999. The project is to be carried out, for the most part, by Japanese firms and capital. Turkmenistan has also, according to the terms of a credit agreement with Japan’s Export-Import Bank, been offered a credit of 13.6 billion yen for buying Japanese-produced equipment. The Iranian-French consortium ("Iranian Oil Company"-"Technip") is building a catalytic cracking apparatus with a capacity of 1.8 million tons per year. The German "Mannesman" concern, with financial support from Deutsche Bank, has undertaken to build a plant to produce oils and paraffins with a capacity of 80,000 tons per year. In petrochemistry, again with the participation of Japanese companies ("Itochu," JGC, and "Nissho Inai"), a polypropylene-producing plant is to be built with a capacity of 90,000 tons per year. While the oil-refining base in the republic remains underdeveloped, alternative means of transportation of raw hydrocarbon resources for export are being actively developed.
The possible alternatives for transporting Turkmen gas and, in future, oil as well, are oriented toward external markets, bypassing Russian territory.
The main routes are as follows:
(1) Caucasus/Black Sea/Ukraine/Western Europe;
(2) Afghanistan/Pakistan/Indian Ocean;
(3) Iran/Turkey/Southern Europe;
Three of these routes remain hypothetical but, as mentioned above, the first link of the Iranian route opened last month. Its capacity is to be 8 billion cubic meters of gas per year. The Iranian side guaranteed 80 percent of the financing. The bigger project of laying an export gas pipeline through Iran to Turkey and, ultimately, to Europe via the Bosphorus, remains only an idea at present. It is estimated that it would cost $2.5 billion to build and that it could deliver 28-30 trillion cubic meters of gas per year. The fact that this route goes through Iran does not inspire enthusiasm in the U.S. or Western Europe.
No less complex from the geopolitical point of view is Turkmenistan’s proposed pipeline through Afghanistan to Pakistan and India, which is being supported by Unocal. In spite of the interest shown in this route by other Central Asian energy suppliers (Kazakhstan and Uzbekistan), transit through Afghanistan is seen as highly risky.
In mid-May 1997, a memorandum was signed in Ashgabat on the building of a gas pipeline to Europe through Iran and Turkey by the presidents of these countries and Turkmenistan. At the same time, a protocol was signed on a gas pipeline to Pakistan (by the prime minister of Pakistan, the president of Turkmenistan, and Unocal and Delta). The cost of this project is estimated at $2 billion and the capacity of the pipeline is to carry 15 billion cubic meters of gas per year. The Anglo-Dutch company Royal Dutch/Shell has expressed an interest in this project.
A third project calls for construction of the longest pipeline in the world, a trans-Asia pipeline that would follow the route of the Great Silk Road (8,000 km long, including 2,000 km along the seabed); this project will require enormous investment to the order of $10-12 billion, and is in the preliminary planning stage. In August 1995, the American company Exxon, Japan’s Mitsubishi and the Chinese National Oil Corporation signed an agreement "to study the project."
Turkmenistan’s hopes of transporting gas to Southern Europe and East Asia face strong Russian competition. Turkmenistan and Russia are natural competitors in the natural gas market. What’s more, they are competing for the same prize — Turkey’s lucrative market. Russia plans to increase its gas exports to Turkey to 30 billion cubic meters by 2005, while Turkmenistan hopes to supply 8 billion cubic meters of gas to Iran in 1998 and up to 28-30 billion cubic meters to Turkey after the year 2000. At present, Turkmenistan must be satisfied with exporting to CIS countries with little ability to pay (92 percent of its exports go to Ukraine); naturally, this provokes dissatisfaction in Turkmenistan and, last March, Ashgabat cut off gas exports Ukraine and other CIS states because of a dispute over prices. According to President Niyazov, "Turkmenistan has the capability of exporting 80-90 billion cubic meters of fuel, but is able to realize no more than one-third of that and often finds itself having to loan gas to our CIS partners." For this reason, the country is setting its long-term sights considerably further afield.
Translated by Mark Eckert
Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russian Academy of Sciences’ Institute of International Economic and Political Studies.
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