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Turkmen Gas For China Is Bad News For Russia. Very Bad News

July 2, 2009

Turkmen Gas For China Is Bad News For Russia. Very Bad News Martin McCauley reports from the United States: An ostensible ‘accident’ damaged the main export gas pipeline from Turkmenistan to Russia last April. Gazprom, the Russian state-owned  energy giant, has not imported any gas from Turkmenistan since then. The main reason is the fall in demand from EU countries for gas from Russia. During the first four months of this year, exports to the EU dropped by 40 per cent. This reduced Gazprom’s market share from 31 per cent to 16 per cent. Export revenues in 2009 are expected to plummet by 40 per cent. As a result Gazprom will cut its dividends by up to 85 per cent and its investment programme by 35 per cent.

When EU demand was high, Gazprom relied on Turkmen gas to make up the shortfall in Russian produced gas. Now it does not need that gas but Turkmenistan needs the gas revenue. What is Ashgabat to do?

The bad news for Russia is that there is a customer willing to take all the gas that Turkmenistan has for sale: China. The only problem is that there are no pipelines between the two countries. However a 7,000 km pipeline is being built which will run through Uzbekistan and Kazakhstan to Xinjiang in western China. New pipelines will then take it on to central and eastern China. The Turkmen stage is expected to be finished by December 2009 and the entire pipeline in late 2010. The Chinese National Petroleum Corporation has signed contracts to buy gas for the next thirty years. The volume envisaged is 40 billion cubic metres annually. This is close to the amount Russia has committed itself to import from Turkmenistan. However it will not reach this total in the current year.

China is presenting itself as a reliable customer which will meet its contractual obligations. This is in stark contrast to Russian behaviour. China’s State Development Bank has extended a $4 billion soft loan. In May the two sides had tentatively agreed a $3 billion loan. The money is mainly to develop vast new gas fields in eastern Turkmenistan. The likelihood is that China’s import of Turkmen gas in the years ahead will quickly outstrip those by Russia.

A separate $300 million credit will finance the construction of a nitrate factory in Turkmenistan. Its output, vital for increasing agricultural yields, will be exported to China. Since such a factory is fuelled by gas, it makes economic sense to locate the factory in Turkmenistan.

The gas pipeline is being built by Chinese labour. However they have encountered many technical problems. Beijing is urging those involved to complete the project on time because it is vital to the interests of the two countries.

Besides the nitrate factory, China has offered to build a glass factory. It has also provided computers free of charge and increased the number of scholarships for Turkmen students to 90 per year.

Gazprom knows that its window of opportunity to squeeze Turkmenistan on gas volumes and prices is closing. Delegations from Moscow now descend on Ashgabat almost every week. The objective is to force the price paid for Turkmen as low as possible. This is bad politics but Gazprom regards it as good business, given its present financial difficulties.

Turkmenistan has two options. It can refuse to agree to lower gas prices to Russia. How long can it hold out without gas revenue from Russia? It may use part of the Chinese credits to tide itself over until gas flows to China in 2010. The other option is to agree to lower gas prices to Russia for a short period. At present Russia does not need Turkmen gas to supply the European market. However if EU economies recover in 2010 or 2011 it will need Turkmen gas. Europe faces the risk that Gazprom will not be able to deliver the necessary gas. That would mean high prices for the available gas. Hence the Chinese deal is good news for Turkmenistan. It is bad news for Russia but also the EU. Brussels needs to find alternative gas supplies before a crisis develops next year or 2011.

– End –

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One Response to “Turkmen Gas For China Is Bad News For Russia. Very Bad News”

  1. Turkmenistan Natural Gas | Climate Vine on September 19th, 2009 3:39 pm

    […] fallen with the recession in demand, around the world. That pipeline is now expected to be in place by the end of next year, and I saw pipelines being laid in China on my recent visit, as they extend the network. The […]

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