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Analysis: China awarded massive Turkmen gas contract

By JOHN C.K. DALY, UPI International Correspondent   |   June 8, 2009 at 5:14 PM   |   Comments

WASHINGTON, June 8 (UPI) -- Of the four new states bordering the Caspian that emerged from the 1991 breakup of the Soviet Union, the Russian Federation, Azerbaijan and Kazakhstan have all ramped up their oil production to significant levels. Turkmenistan, the Caspian's fourth post-Soviet state, is less endowed with oil but richly endowed with natural gas.

Since the unexpected death on Dec. 21, 2006, of Turkmenistan's "President for life," "Turkmenbashi ("father of the Turkmen") Saparmurat Niyazov, Russia, the United States and China have been engaged in a fierce covert struggle to win dominance over Turkmenistan's vast but largely untapped gas deposits. Two and a half years later, after offers and counter-offers, Beijing appears to have the inside track, a decision by Niyazov's successor, President Gurbanguly Berdimuhamedov, that will cause much hand-wringing in both Moscow and Washington.

The prize is significant -- Soviet geologists estimated Turkmenistan's natural gas reserves to be the fourth largest in the world, ranging from 10 trillion to 14 trillion cubic meters. While Turkmenbashi had often boasted of the country's massive reserves, placing them at even higher levels of up to 24 tcm, his claims were viewed by Western energy firms as blatant braggadocio, with BP calculating them at slightly more than one-tenth that amount. Determined to settle the matter (and bring in much needed foreign investment), last summer, in stark contrast to the secretive Niyazov years, Berdimuhamedov commissioned an independent audit by respected British firm Gaffney, Cline & Associates of Turkmenistan's newly discovered South Iolotan-Osman gas field.

The GCA audit silenced the skeptics, as it estimated South Iolotan-Osman's reserves alone to be between 4 and 14 tcm of gas, making South Iolotan-Osman the world's fifth- or fourth-largest field. Alas for Gazprom or Western energy concerns, it won't be developed by them.

Returning from a visit to Beijing, Turkmen Deputy Prime Minister Tachberdy Tagiyev told Berdimuhamedov that China has granted Turkmenistan a $3 billion loan to develop the South Iolotan gas deposit. Speaking to reporters in the capital Ashgabat, Tagiyev was effusive about Turkmenistan's potential to increase production, commenting, "If we annually produce 50 billion cubic meters of natural gas at the South Iolotan deposit alone, then we can meet gas demands of any country within 100 years. Currently we produce 80 bcm of gas. In addition, Malaysia's Petronas-Carigali and others, operating in the Caspian Sea offshore zone, can produce up to 20 bcm."

How did the Kremlin and the United States so badly mismanage the opportunity? While the cases differ, one common trait is that they treated the Turkmen government as penniless rubes available for fleecing.

In Moscow's case, resentment over Gazprom's "buy cheap and sell dear" policies rankled Niyazov for years, causing him several times to shut off exports to protest Gazprom's low prices. Niyazov also considered other options for gas exports, in 1997 opening the 125-mile Korpeje-Kord-Kuy pipeline to Iran, capable of carrying about 8 bcm annually. Broadening his horizons, in April 2006, eight months before his death, Niyazov signed an agreement with China for natural gas exports and the building of a Turkmenistan-China pipeline by 2010, capable of handling 30 bcm annually. Last year Berdimuhamedov approved the pipeline's construction by a Chinese oil company, and when it becomes operational next year, it will effectively end Russia's stranglehold over Turkmen gas exports.

While Niyazov's government honored its agreements with Russia to supply 50 bcm annually, it considered three other pipelines as well: the Trans-Afghan Pipeline, which, like the proposed Chinese pipeline, would handle 30 billion cubic meters annually; a pipeline skirting the Caspian coast to improve Turkmenistan's export capacity to Europe and a pipeline to the United Arab Emirates, through Afghanistan and Pakistan. None of these have advanced beyond the discussion stage, but should have alerted Gazprom's management to Turkmenistan's rising discontent with its policies.

Gazprom, taking the lion's share of Turkmen gas exports, resisted with ill grace Berdimuhamedov's attempts to secure higher prices for his exports. On Jan. 2 Itar-Tass reported that Russia had updated its contract to purchase Turkmen gas at "world prices" of $340 per tcm.

Faced with declining European revenues and demand, on April 9 Gazprom decided unilaterally to reduce its imports of Turkmen gas, suddenly cutting imports through the Soviet-era SATS-4 Davletbat-Daryalik pipeline by 90 percent to 95 percent. The antiquated network was unable to cope with the sudden pressure diminution, which caused an as yet unexplained explosion near the Turkmen-Uzbek border, completely halting Turkmen natural gas exports to Russia. Supplies have yet to be resumed, leaving Ashgabat furious and threatening legal action against Gazprom.

And China? Unencumbered by U.S. lectures on the need to implement economic transparency reforms and human rights standards but armed with massive amounts of cold, hard cash, China swiftly became Turkmenistan's valued new partner by default. As if anyone is in any doubt about China's success, on June 5 Berdimuhamedov said simply, "China has become Turkmenistan's strategic partner."

Underscoring Ashgabat's perceptions of China's reliability, last August Turkmenistan offered to sweeten its Chinese contract by increasing exports by 10 bcm to 40 bcm annually during Chinese President Hu Jintao's visit to Ashgabat, even before the Turkmen-China line becomes operational. As Moscow and Washington are learning to their sorrow, the Turkmen are anything but penniless hicks ripe for fleecing by offering bottom dollar along with Wall Street wizardry. Given China's booming economy, Ashgabat is also doubtless assuming that it is highly unlikely that Beijing will ever slash imports, even though it might be good interim capitalist policy.

In holding out for a long-term fair and equitable contract against Moscow and Washington's "get rich quick" capitalist blandishments, Berdimuhamedov heeded the sage proverb of his forbears, "great patience is the key to joy."

© 2009 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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