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Russia resumes natural gas imports from Turkmenistan

On April 15th, Gazprom announced that it had resumed natural gas purchases from Turkmenistan after a three year hiatus. The announcement comes at a critical moment, when Ashgabat desperately needs new gas customers to prop up its suffering hydrocarbon-dependent economy.

May 31, 2019 - Natalia Konarzewska - Articles and Commentary

President of Russia Vladimir Putin hosts the President of Turkmenistan Gurbanguly Berdimukhamedov in Sochi in August 2018. Photo: The Russian Presidential Administration (cc)

Russia halved its gas imports from Tukmenistan in 2015 and halted them altogether in the following year. Gas had been procured under a long term contract between Gazprom and Turkmenistan’s state gas company TurkmenGaz from 2003, which envisaged an annual delivery of 40 billion cubic metres (bcm) to Turkmenistan’s border. Starting from 2010, Russia has reduced the amount of the gas it bought from TurkmenGaz to 10 bcm a year and mere 4 bcm in 2015 at an arbitry price set by Gazprom. Following the gas dispute, relations between Moscow and Ashgabat have significantly cooled down.

Gazprom did not reveal an official reason behind that decision, but TurkmenGaz stated that the halt in gas imports was caused by a ‘changing situation in the internal markets’. There might be some truth to it because Gazprom used to buy Turkmen gas to supplement its domestic production and resell it in the European spot market under its own label. These imports were profitable only when Russia’s energy giant was able to procure Turkmen supply at a low price and resell it on the European market in a period when the gas price was relatively high. But since the natural gas supply glut a few years ago forced European gas prices to drop, gas purchases in Turkmenistan stopped being viable for Gazprom.

To make matters worse, in 2017 Turkmenistan stopped gas deliveries to Iran following a dispute over pricing. Gas conflicts with its two largest gas customers has left Ashgabat dependent on gas exports to China, which eagerly exploits Turkmenistan’s weak bargaining position. Turkmenistan currently supplies around 30-40 bcm annually to China, but the price it gets is not good enough as Ashgabat spends much of the profits to repay Chinese loans, which have financed investments in the energy infrastructure. To make matters worse, revenue from supplying he Chinese market with natural gas has significantly fallen after the oil price slump, because gas the contract between Ashgabat and Beijing contains a pricing formula which indexes gas prices according to the international crude oil prices. China conducts a multi-vector energy policy and has a well diversified portfolio of gas suppliers from the region, which includes Kazakhstan, Uzbekistan and Russia, and that gives Beijing a good bargaining position when it comes to negotiating gas price and volume.

Why now?

The resumption of  imports was preceded by three rounds of negotiations between Gazprom’s CEO Aleksei Miller and Turkmenistan’s president Gurbanguly Berdimuhamedov, which took place in 2018 and in March this year. Neither Russia nor Turkmenistan revealed the price or volume of the purchased gas but it was reported by the press that the volume of Turkmen gas which Gazprom intends buy is quite modest and stands at 1.1 bcm. What is more, according to analytic sources Russia’s energy giant offered Turkmenistan a modest price of 110 US dollars for thousand cubic metres.

There are several reasons for a renewed gas cooperation between Russia and Turkmenistan. At first glance, selling small amounts of gas at a very low price is not particularly profitable for Ashgabat. However, Turkmenistan’s situation is particularly problematic because its hydrocarbon revenue is currently dependent only on one natural gas client – China. What is more, pricing crisis in the oil market heavily hit country’s oil-dependent economy causing prolonged  financial crisis, which has very negative socioeconomic consequences for the country’s population. Low oil and gas prices coupled with loosing Russian and Iranian gas customers was a heavy blow for  Turkmenistan’s economy.

In theory, Turkmenistan has options to develop other gas export routes such as the Trans-Caspian pipeline, which is planned to carry Turkmen gas through the Caspian Basin and South Caucasus to Turkey and further to European markets. However, a prolonged dispute between Caspian littoral states over the status of the Caspian Basin has significantly delayed this otherwise important project. The Trans-Caspian pipeline might gain new momentum with the help of last year’s convention of Caspian littoral states, which partially clarified the status of the basin, but so far no concrete steps have been made to go ahead with this project. Construction of another of Turkmenistan’s pipeline projects – Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline (TAPI), which is planned to deliver 33 bcm of Turkmen gas annually to energy-hungry Asian states is currently under construction, but gas deliveries may be hampered by security reasons, being caused by the unstable situation in Afghanistan. Notwithstanding, these ambitious projects might be hampered by problems in Turkmenistan’s gas sector, which does not have capacity for such large scale deliveries since much of its current production is reserved for China.

It is no surprise that in such circumstances Turkmenistan would
even welcome a modest gas contract for to prop up its budget. Analysts point out that a smaller volume of gas purchased by Russia might be the beginning of larger-scale deliveries, but because of structural limitations of  the Turkmenistan’s gas sector these plans might not materialise. Beyond just gas sales, Ashgabat also intends to attract Russian investments into its energy processing and chemical industry.

Russia might be interested in the resumption of gas imports from Turkmenistan for both commercial and political reasons. Despite looming challenges coming from LNG imports to Europe, in 2017 and 2018 Gazprom was able to increase its share in the European gas market to record numbers – from 34.7 per cent in 2017 to 36.7 per cent in 2018. Moreover, Russia has upcoming large-scale gas projects such as Turkish Stream, Power of Siberia and Nord Stream 2. Russia’s gas production is currently on record high levels, but since Gazprom has several new gas projects in the pipe it might again deem it feasible to buy additional volumes of gas at an attractive price in Turkmenistan to reexport it to other markets or keep it for domestic use. In 2019 natural gas prices in European market are predicted to fall due to to an abundance of supply and mild winters but with average prices of Russian gas, which in 2018 reached 245 US dollars per thousand cubic metres it is still profitable for Gazprom to purchase gas in Turkmenistan at a break even price and resell to European customers. Some analysts argue that Russia’s renewed interest in a Turkmen supply goes beyond just commercial reasons. Since a window of opportunity might have opened for the Trans-Caspian pipeline after last year’s convention of Caspian littoral states, Russia could be interested in undermining this project, which has a potential to weaken Moscow’s gas position in the European market, since it is envisaged to bring large volumes of Caspian (Turkmen and possibly Azerbaijani and Iranian supply) gas to Europe.

Turkmenistan’s financial woes

Since 2014 Turkmenistan has been experiencing probably the worst financial crisis since gaining independence from the Soviet Union in 1991. The Crisis is mainly caused by the collapse of the oil and gas prices, which was a particularly big blow for country’s hydrocarbon dependent economy. Despite state propaganda painting an ever rosy picture of economic growth, there are many available reports that say the opposite.

Turmoil in the oil and gas market has caused a significant drop in prices for natural gas which Turkmenistan exports to China, from 503 US dollars per tonne in 2014 to only 266 US dollars in 2017. A drastic decline of foreign currency inflows put pressure on the local currency, the manat, which had undergone two rounds of devaluation and lost about fifth of its value. A high, artificially fixed exchange rate for manat to dollar and foreign a currency exchange ban for citizens has put a strain on household budgets. Ordinary citizens suffer from a steep rise in prices of imported goods, particularly of basic foodstuffs and a drastic fall in the remittances sent by relatives who work abroad, which often helped to keep the family budget afloat. The economic crisis is so severe that since 2017 the country is experiencing food rationing and even shortages, which causes Turkmen’s to make grocery shopping in private shops and bazaars at a price, which is significantly higher than official one. The current financial crisis has yet another adverse aspect – hydrocarbon revenues have caused serious currency shortages, which makes it difficult for the government to pay foreign contractors. These problems keep foreign companies away from Turkmenistan’s market, despite their earlier interest in investing there, which further restricts foreign currency inflows and makes financial recovery more difficult.

Plummeting hydrocarbon revenues significantly reduce state expenses and causes drastic cuts in the country’s once generous social welfare system. In 2018 authorities decided to halt subsidies for water, natural gas and electricity, which had been in place for more than two decades. At the outset of 2019, President Berdimuhamedov signed a decree, which will enable the privatisation of the state owned transportation system. It was officially explained that privatisation of transport will boost the competitiveness of the country’s economy and bolster small and medium businesses, but it appears that the reason behind it is to seek cuts to avoid collapse of public finances. Probably for the same reasons, the government also decided to reorganise and gradually phase out funding for Turkmenistan’s Academy of Sciences.

Turkmenistan has abundant oil and offshore and onshore natural gas reserves – the fourth largest in the world. Its closed economic and political model hampers sustainable economic development. Its economy and revenue practically depends on oil and gas exports, which constitute 85 per cent of total exports. As such, the country’s economy is overdependent on hydrocarbon sales, which in times of oil prosperity brought rapid economic growth and large revenue to state coffers. However, much of the revenue was misused and spent on vanity projects or unprofitable investments such as luxurious resorts on the Caspian Sea shore.

Turkmenistan’s crucial gas sector suffers several financial and technological constraints which block development of new projects. The performance of the country’s gas production industry for a long time have been below its potential because of the closed character of Turkmenistan’s economy and limitations placed on foreign investors to enter country’s oil & gas industry. Its landlocked geographical position and limited options for natural gas exports also contribute to the fact that Turkmenistan falls below its potential to develop its abundant hydrocarbon resources. Apart from that, in the times of oil prosperity, authorities have failed to diversify the country’s economy to end over-reliance on gas and oil exports. Economic diversification is particularly important for hydrocarbon exporting countries, which are vulnerable to price shocks in the oil market. Only recently did the government start to seriously develop projects in non-oil sectors and introduce new investments to the gas industry. New projects such as new Caspian port and a planned cross country highway project are implemented to boost revenue from regional trade. Turkmenistan plans to launch a gas processing project, which would turn the supply into fuel and chemicals in a bid to diversify exports.

Turkmenistan is experiencing economic problems strikingly similar to other post-Soviet oil-dependent countries. However, other Caspian oil producers such as Russia. Kazakhstan and Azerbaijan have either better export options or a more open economy, which, at least partially, helps to offset the oil price slump. Turkmenistan, despite having abundant hydrocarbon reserves, does not have any of that. This is why it desperately seeks new gas export options and allocates large parts of its shrinking revenue to finance infrastructure projects in a bid to boost its economy. Against this backdrop, Gazprom gas purchases in Turkmenistan, albeit very modest, give Ashgabat a much needed injection of foreign currency and a possibility to develop cooperation with Russia in new projects, which are planned to diversify Turkmenistan’s export portfolio. It also offers an opportunity to offset problematic over-dependence on China.

Natalia Konarzewska is a graduate of University of Warsaw and is a freelance expert and analyst with a focus on political and economic developments in the post-Soviet space.

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