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Analysis: Gazprom further alienates Turkmenistan over pipeline explosion

By JOHN C.K. DALY, UPI International Correspondent   |   May 19, 2009 at 5:54 PM
WASHINGTON, May 19 (UPI) -- Just a year ago, Gazprom, Russia's state natural gas company behemoth and the country's biggest and most powerful company, seemed to go from strength to strength. Now, however, its policies have alienated one of its largest suppliers, Turkmenistan, and if Gazprom's management does not dramatically alter its policies, then it could lose access to the 42 billion to 45 billion cubic meters of natural gas it purchases annually from Turkmenistan, perhaps for good.

In 2008, Gazprom's sales to the European Union were nearly 170 bcm out of a production of 550 bcm. Gazprom's current share in the global and Russian natural gas production is 17.3 percent and 85 percent, respectively. A loss of access to Turkmen exports, which represent a quarter of Gazprom's EU exports, would make it extremely difficult for the company to continue its present level of shipments to Europe, long its primary and most lucrative market.

While the EU currently relies on Gazprom for more than a quarter of its energy needs, a prolongation of its dispute with Turkmenistan will fuel efforts to seek out alternative sources of the "blue fuel," as last January's Gazprom-Ukrainian dispute already heightened Brussels' fears about the reliability of Russia as a natural gas exporter.

In 2008, Gazprom sold gas to Europe at a price of $409 per thousand cubic meters; acknowledging the reality of the global economic downturn, in March, Gazprom executives, no doubt with tears in their eyes, downwardly revised their price forecast for the sale price of gas to Europe to $257.90 per tcm. Less than two years ago, Gazprom had a market value of $245 billion.

Figures from January 2009 show that Gazprom saw significant drops in both production and exports as compared to January 2008. Production is reported to have fallen by 13.9 percent, while exports in the fourth quarter of 2008 dropped by 21 percent. Gazprom Deputy Chairman Alexander Medvedev said the company predicts that production levels will fall by 7 percent this year from 2008 production figures to an estimated 512 to 523 bcm, with income from exports shrinking to $47 billion, a decline of at least 30 percent.

While Turkmen gas represents the bulk of Gazprom's Central Asian purchases, the company also buys 15 bcm of Kazakh gas and 7 bcm of Uzbek gas, an amount equal to about 14 percent of the company's 2008 total production.

The boulder in Gazprom's shoe is that the Russian domestic market, which is heavily subsidized, now accounts for about 70 percent of the company's production, with domestic consumption rising by more than 3 bcm a year. Accordingly, to free up as much indigenous production as possible for export, one-third of Russian internal gas usage has to be supplied from non-Gazprom sources.

This week, Gazprom reported that its net profit in the fourth quarter of 2008 had fallen 84 percent to $1.1 billion as global demand declined and that its net debt in December was $41 billion, making it the country's biggest debtor.

Faced with declining revenues and demand, on April 9, Gazprom suddenly and unilaterally reduced its imports of Turkmen gas by 90 percent to 95 percent via Truboprovodnaiia sistema Sredniaia Aziia-Tsentr (the Central Asia-Center, or SATS, pipeline system) SATS-4 Davletbat-Daryalik pipeline. The antiquated Soviet-era pipeline network was unable to cope with the sudden pressure diminution, which caused an as yet unexplained explosion at the SATS-4 302nd-mile segment between the Ilyaly and Deryalyk compressor stations near the Turkmen-Uzbek border, halting Turkmen natural gas exports to Russia.

Five weeks later, much to Ashgabat's fury, the flow has yet to be restored. Turkmen President Gurbanguly Berdimuhamedov has vehemently protested Gazprom's unilateral action to Moscow, indicating that Turkmenistan may well seek international arbitration to collect damages as well as consider its options to diversify its export routes.

While steadfastly denying any responsibility for the explosion, Berdimuhamedov's threats have belatedly caught Moscow's attention. On May 18, Energy Minister Sergei Shmatko told Interfax, "I think it would be excessive to interfere in this issue on a political level," stressing that the two countries' gas companies need to resolve this issue before concluding, "I hope this issue will be resolved successfully." The following day, however, Gazprom's Medvedev studiously avoided corporate responsibility for the incident, telling a Berlin conference on the Russia-EU energy dialogue that the issue of resuming supplies depends on the Turkmen side, adding haughtily, "We are prepared to accept Turkmen gas in accordance with our contractual terms."

When Shmatko and Medvedev deign to visit Ashgabat to resolve the issue, they will find themselves negotiating with new officials. Berdimuhamedov, well aware that energy development and exports generate an estimated 70 percent of his government's income, on May 18 sacked Toidurdy Durdiev, the deputy chief of the state-owned oil company Turkmennebit -- also known as Turkmenneft, and Durdy Tadjiev, first deputy chair of the state-controlled natural gas company Turkmengaz, "for serious shortcomings" in the execution of their responsibilities, with the state-run media reporting that the pair were removed "due to serious faults committed by them in their work and their professional ineptness."

While Gazprom maintains that Turkmenistan is responsible for the pipelines traversing its territory, there are increasing signs that Berdimuhamedov is not inclined to let the matter drop, stating that he would order an international investigation of the accident unless Gazprom accepted the blame, commenting, "If Gazprom is guilty, let them take upon themselves all losses and expenses inflicted on our country by the accident."

Berdimuhamedov's forthright stance has blindsided Gazprom's leadership, long accustomed to bullying producers and customers alike. Gazprom's executives might well remember that in 2006 their high-handed penurious policies of "buying cheap and selling dear" led Berdimuhamedov's predecessor, Saparmurat Niyazov, to sign a deal with China in April 2006 for the Turkmenistan-China natural gas pipeline capable of handling 30 bcm annually. Last year, Berdimuhamedov approved the pipeline's construction by a Chinese oil company, and the pipeline is scheduled to become operational in 2010, effectively ending Russia's stranglehold over Turkmen gas exports.

European, U.S., Indian and Japanese firms are also lobbying for a piece of Turkmenistan's burgeoning natural gas production. If Gazprom wants to meet its domestic demands while fulfilling its European contracts, then it seems increasingly likely that company executives are going to have to take two actions that their arrogance has precluded up to now -- apologize and pay compensation. While the Russian government owns 50.02 percent of the company's shares, given that on May 18 Gazprom announced it will pay a dividend of 0.37 rubles a share, a decline of 86 percent from last year's payment of 2.66 rubles, Gazprom's executive board may shortly begin to feel some heat from its 49.98 percent of shareholders, who are undoubtedly increasingly dissatisfied with their shrinking profits due to management's "serious shortcomings," of which the ongoing dispute with Turkmenistan is a prime example.

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