A Bad New Year’s Present For The Kremlin

December 17, 2009

Martin McCauley writes: It’s cold in Moscow. However, this winter will get even colder for the men in the Kremlin, who depend so much on the revenues from the sale of natural gas. The Chinese have stolen a march on them – again. On Monday, the first gas along the pipeline from Turkmenistan to Xinjiang in western China began to flow.

There will be two pipelines. The second one is due to be built next year. To mark this momentous occasion Chinese President Hu Jintao (he dyes his hair jet black, by the way, just like all other members of the Chinese leadership), together with the presidents of Turkmenistan, Uzbekistan and Kazakhstan (all of whom allegendly dye their hair black as well), celebrated with Chinese and local delicacies.

As well they might. They had pulled off quite a coup. They are the winners, and the losers are Russia and its giant state-owned corporation, Gazprom. (‘Gaz’ stands for ‘gas’ in Russian and ‘prom’ are the first four letters of Russian word ‘promyshlennosht’, meaning industry.)
The capacity of the new pipeline is planned to be 30 billion cubic metres (bcm) from Turkmenistan and 10 bcm from Kazakhstan. A pipeline from western Kazakhstan is due to begin in 2011 and connect with the Central Asia-China pipeline. One estimate is that the gas field in Turkmenistan contains 1.3 trillion cubic metres. Enough gas to keep China warm for decades.

Unlike gas negotiations with Russia, the Turkmen and Chinese negotiators reached an agreement quickly. The deal to build the pipelines and supply gas was signed in 2006. Construction began in 2007 and the target date of December 2009 was met. To the horror, no doubt, of the Kremlin.

The Turkmen pipeline runs through Uzbekistan and Kazakhstan. Gas supply will now help develop these three Central Asian states. The Chinese are to build motorways, electricity lines and new settlements along the pipeline. A huge gas processing plant is also being built. China also offered to fund and develop telecommunication networks, building materials and others sectors of the Turkmen economy.

Where does this leave Russia? Out in the cold, to be perfectly frank. Traditionally Turkmenistan had to sell all its gas to Gazprom and pipe its gas to Russia. Now Ashgabat has a choice where its gas goes. Moscow promised last year to pay European prices for Turkmen gas. The problem, however, is that demand has dropped by a third and Russia is not taking as much gas as it contracted for. The situation with the Chinese is totally different. They will take every cubic metre of gas Turkmenistan produces. One can also assume that the Chinese are not paying European prices for the gas.

The price China is paying for Turkmen gas is very important for Gazprom. The Central giant Asia-China pipeline will only take four years to complete. Contrast that with the slow pace of Russian-Chinese negotiations about building a pipeline to deliver gas from Russia to China. Gazprom and the Chinese signed a deal in October 2004. In March 2006 a $10 billion Altai pipeline was agreed. In October 2009 another huge deal was agreed. However, not a single metre of pipeline has yet been laid to send gas to China.

The sticking point has always been the price that China was willing to pay Gazprom for gas. China wanted it linked to the cost of coal production in China, as coal produces 70 per cent of the country’s energy. Gazprom wanted to set European prices.

It now gets even worse for Russia. When it comes to negotiating a new price for Russian gas, the Chinese will simply quote the Turkmen price and demand that Russia meet it. Since Ashgabat has no intention of telling the Russians what the price is, the Chinese can quote any price they like. It is unlikely that Gazprom will be able to make a profit from any gas sales to China.

A cold wind is blowing through the corridors of power in the Kremlin. China has outmanoeuvred Russia in Turkmenistan and is set to take more and more Uzbek and Kazakh gas as well. Gradually Russia is being pushed out of Central Asian gas market.

– End –

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