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Economy

Turkmenistan faces competition from Russia as China's largest supplier

Gurbanguly Berdimuhamedow, president of Turkmenistan, meets Russian President Vladimir Putin at a regional summit in Astrakhan, southwest Russia.   © Getty Images

ALMATY, Kazakhstan -- Once known mainly for its remoteness and belligerent tribesmen, Turkmenistan has emerged as a major natural gas producer -- and China's largest supplier. Only five years after a 1,818km pipeline between the two countries opened, Turkmenistan accounts for almost 50% of Chinese gas imports.

    President Gurbanguly Berdimuhamedow aims to increase natural gas exports fourfold to 180 billion cubic meters a year by 2030 by catering to the growing needs of the Chinese and Southeast Asian markets. But his country faces competition from Russia, the world's largest gas producer.

The isolated exporter

In a matter of months last year, Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, agreed to two major deals, potentially worth $800 billion, that could supply China with 68 billion cubic meters of Siberian gas annually over the next 30 years. To counter the Russian threat, Turkmenistan is scrambling to open new export routes.

    "Turkmenistan is an island state," said Keun-Wook Paik, a senior research fellow at the Oxford Institute for Energy Studies, referring to the country's isolated position between Iran, Afghanistan, Uzbekistan, Kazakhstan and the Russian-dominated Caspian Sea. "Without the pipeline infrastructure development, the massive gas reserves have no value whatsoever."

     Under the strict rule of Berdimuhamedow and his predecessor, the late Saparmurad Niyazov, who steered the country to independence from the former Soviet Union in 1991, Turkmenistan has developed few relationships with the wider world. The country is virtually closed to independent scrutiny, media and religious freedoms are tightly restricted, and human rights activists face the constant threat of government reprisals, U.S.-based Human Rights Watch said in its 2013 World Report.

      Yet top-class energy reserves have put Turkmenistan on the map as one of the world's emerging gas powerhouses. The country sits above an estimated 17,500 billion cubic meters of natural gas, according to the 2014 Statistical Review of World Energy produced by U.K. oil group BP.

     If confirmed, these reserves would be exceeded only by Iran's 33.8 trillion cubic meters, Russia's 31.3 trillion cubic meters and Qatar's 24.7 trillion cubic meters. Its massive gas reserves, combined with low domestic demand from a population of only 5.24 million, make Turkmenistan an ideal natural gas exporter, at least on paper.

Struggling to branch out

Russia's network of gas pipelines was the country's only available pipeline option for many years, with Moscow limiting Turkmen gas to the role of back-up supply for low-price markets in the Commonwealth of Independent States, a loose economic grouping of former Soviet republics.

     The limitations on Turkmen gas exports ended in December 2009, when a smiling Berdimuhamedow shook hands with Hu Jintao, then China's president, at the inauguration of the $7.3 billion, Chinese-backed Central Asia-China Gas Pipeline, which offered the country a chance to break loose from Moscow's grip.

    Five years on, the CACGP network has three active trunks with a capacity of 55 billion cubic meters per year, which is supplied by Turkmenistan with contributions from Uzbekistan and Kazakhstan. Work began in September on a fourth trunk, known as Line D, running through Tajikistan to China. Line D will add another 30 billion cubic meters to the network's capacity.

     Turkmenistan has thrived thanks to its growing gas production and exports, with annual economic growth of more than 10% in 2014, according to government figures. However, regional economic turbulence caused by falling oil and gas prices prompted the government to devalue the currency, the Turkmen manat, by 18.6% against the dollar on Jan. 1.

     Turkmenistan's problems could increase if Russia succeeds in efforts to sell more of its own gas in Asia. The latest of the agreements signed by Russia and China entails the supply of Russian gas from Western Siberian fields through the yet-to-be developed Altai pipeline. The deal, which has to be confirmed in 2015, would add another 30 billion to 38 billion cubic meters in gas exports secured by the Kremlin in May. Beijing appears to have facilitated Russian ambitions by delaying the proposed completion date of the CACGP's Line D.

     Russia may have even greater ambitions. "The volume of gas supplies [to China] in the medium term could be 60 billion or 100 billion cubic meters per year," Alexei Miller, chief executive of Gazprom, the Russian state-owned gas producer, said in November.

     Meanwhile, Moscow is also gearing up to end imports of about a quarter of Turkmen gas exports, which it uses as a backup for export and for the domestic market. "Russia has plenty of its own gas, and there is no need to import gas from Central Asia," Mikhail Krutikhin, a partner in RusEnergy, an energy consulting company, told the Nikkei Asian Review.

     Iran, which buys 10% of Turkmenistan's gas exports to meet the needs of its northern provinces, also seems committed to ending imports from Turkmenistan because of a rise in domestic production. If Turkmenistan's government is to achieve its goal of boosting gas exports by 2030, it will need to find new buyers, which will mean building new pipelines.

Politics vs. business

Turkmenistan has been trying to reach out to energy-hungry Pakistan and India for years through the 1,800km Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline plan. The concept was developed in the 1990s, when Unocal of the U.S. and Argentina's Bridas tried separately to gain support for the project. Talks came to a halt when the Afghan Taliban, which seized Kabul in 1996, linked up with Al-Qaida. But the project may yet be revived.

     "As Western military forces pull out of Afghanistan, a Taliban government may come back into power, and they have been known for supporting the TAPI project," Krutikhin said.

     The TAPI pipeline would allow Turkmenistan to supply gas from its huge Galkynysh field to the Pakistani and Indian markets through Afghanistan. It could also be a new export route for Iranian gas. However, the security risks posed by the project are high. No oil company willing to risk as much as $7.6 billion has yet come forward.

     Exxon and Chevron recently pulled out of preliminary negotiations. Total of France and Malaysia's Petronas are now rumored to be interested in the project. Petronas declined to comment, and no comment was available from Total.

     Turkmen gas would also be a perfect fit for European countries looking to loosen Russia's near monopoly over European gas supplies. Turkmenistan is trying to build momentum for a proposed trans-Caspian pipeline that would carry its gas across the sea to Azerbaijan, and eventually to Europe through Georgia and Turkey. The project has a strong business case, but lacks political support.

     "Two countries that are very firmly standing against the implementation of the trans-Caspian project are Russia and Iran, and they can be very successful at it, because the legal status of the Caspian Sea has not been well defined," said Andrei Kazantsev, a native of Turkmenistan who is director of the Analytical Center of the Moscow State Institute of International Relations, a branch of the Russian foreign ministry.

    Kazantsev was referring to legal uncertainties about the ownership and management of the Caspian basin, which lies between Iran, Turkmenistan, Kazakhstan, Russia and Azerbaijan. Yet the Kremlin has recently shown interest in proposals for a new pipeline across the Black Sea to Turkey, which could benefit several of its neighbors.

     "Russia could band together with Turkmenistan, Turkey, and Azerbaijan to form a quadrilateral project to export gas to the European market," said Dmitri Alexandrov, head of research at Univer Capital, a Moscow brokerage.

     That would be a win-win situation for Russia, which would retain its control of the European market, and for Turkmenistan, which would see its gas flow to Europe, opening a new market to rival its successes in Asia. Such an outcome would be less satisfactory, however, for European countries hoping for secure gas supplies free of Russian control.

Kanat Shaku contributed research for this article.

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