• 3 minutes China has *Already* Lost the Trade War. Meantime, the U.S. Might Sanction China’s Largest Oil Company
  • 7 minutes Saudi and UAE pressure to get US support for Oil quotas is reportedly on..
  • 11 minutes China devalues currency to lower prices to address new tariffs. But doesn't help. Here is why. . . .
  • 15 minutes What is your current outlook as a day trader for WTI
  • 5 hours Domino Effect: Rashida Tlaib Rejects Israel's Offer For 'Humanitarian' Visit To West Bank
  • 5 hours In The Bright Of New Administration Rules: Immigrants as Economic Contributors
  • 24 hours Will Uncle Sam Step Up and Cut Production
  • 6 hours Trump vs. Xi Trade Battle, Running Commentary from Conservative Tree House
  • 5 hours Movie Script: Epstein Guards Suspected Of Falsifying Logs
  • 13 hours Gretta Thunbergs zero carbon voyage carbon foot print of carbon fibre manufacture
  • 3 hours Continental Resource's Hamm (Trump Buddy) wants shale to cut production.Can't compete with peers. Stock will drop in half again.
  • 2 days Significant: Boeing Delays Delivery Of Ultra-Long-Range Version Of 777X
  • 5 hours US Petroleum Demand Strongest Since 2007
  • 21 hours NATGAS, LNG, Technology, benefits etc , cleaner global energy fuel
  • 3 days I think I might be wrong about a 2020 shakeout
  • 2 days Why Oil is Falling (including conspiracy theories and other fun stuff)
  • 52 days To be(lieve) or Not To be(lieve): U.S. Treasury Secretary Says U.S.-China Trade Deal Is 90% Done
Alt Text

What’s Behind The Drop In Asian LNG Prices?

Asian LNG prices tanked on…

Alt Text

Canada’s Natural Gas Crisis Is Being Ignored

While Canadian crude has been…

Martin Vladimirov

Martin Vladimirov

Martin Vladimirov is an energy analyst at the Center for the Study of Democracy researching energy security risks in Europe and the Middle East. He…

More Info

Premium Content

Gazprom Putting The Squeeze On Turkmenistan

Natural gas relationships are a bit like marriage. They are often long, expensive and ultimately very difficult to end. There could not be a better example than the energy relationship between Gazprom and Turkmenistan.

Although the country’s independence from the Soviet Union gave the newly-elected president, Saparmurad Niyazov, also known as Turkmenbashi (the Father of the Turkmens), exclusive control over the sixth largest natural gas reserves in the world, the government’s dependence on Russia to market Turkmen gas did not change. For most of the 1990s and early 2000s, Turkmenistan was selling the majority of its gas output, to Russia, with Iran being the next notable customer. With a lack of other export infrastructure, Russia’s vast pipeline network was the only export outlet for Turkmenistan.

Gazprom has typically played the role of alternative gas supplier for countries in the Commonwealth of Independent States (CIS), a loose organization of former Soviet republics. Gazprom was the necessary middle-man purchasing the Turkmen gas low and selling it at a lucrative margin. The exports to Ukraine were able to instill powerful gas intermediaries in Kyiv, who negotiated with Turkmengaz via Gazprom officials, reaping huge profits from reselling the gas on domestic markets. Hence, Gazprom was relieved from the burden of being a supplier of last resort to the CIS countries and managed to maximize profit on its own gas by selling it at high oil-indexed prices on Western European markets. Related: Will ‘Corner Office Syndrome’ Be The Downfall Of Canada’s Oilfield Services?

This scheme operated successfully with Ukraine at least until 2009 when the global economic crisis depressed demand making the additional Turkmen gas simply unnecessary. Deliveries were halted for months due to technical reasons.

Finally, in 2010, the state-owned Turkmengaz company and Gazprom signed a long-term take-or-pay agreement for the supply of 10 bcm of gas per annum (four times lower volumes than pre-2009) at US $240 per 1000 cubic meters.

Last year, though, Gazprom decided it does not need to “take” anymore. Gazprom’s CEO promised that he would cut commercial ties with Turkmenistan. Then in the beginning of 2015, Gazprom said it would buy just 4 bcm of gas per year and would challenge the long-term contract in the Stockholm arbitration court in an attempt to revise the purchase prices.

The reason for the sharp move was that the drop in natural gas prices in 2014, due to their oil-indexation, made purchasing Turkmen gas and then reselling it abroad, simply too expensive. Thanks to shrinking demand in the EU, amid economic stagnation, and energy efficiency improvements, Gazprom is seeking ways to diversify its trading structure. Related: Oil Price Rout Set To Inflict Real Pain On Russia

Unilaterally, in the first half of 2015, Gazprom has started paying Turkmenistan the average European price instead of the agreed fixed price leading to around US $400 million in losses for Turkmengaz, according to the Turkmen energy ministry. Even if Gazprom wins the case, it is difficult to see how Turkmenistan would agree to abide by the court’s ruling.

The government in Ashgabat could respond by fully redirecting its gas supply to China, which already buys more than half of all gas exports via the Central Asia – China pipeline, whose capacity of 55 bcm/y is currently only used at approximately 50 percent capacity. China has also eyed higher gas imports from Iran in an attempt to meet its exponentially rising gas demand.

China is also helping Turkmenistan develop the supergiant Galkynysh field, the second largest in the world. Estimated to hold up to 21 trillion cubic meters of gas, it could potentially turn Turkmenistan into the third largest gas producer in the world. Commercial gas production already started in the fall of 2013 and the expectation is that Turkmenistan could export up to 65 bcm of gas to China by 2020. This strategy makes sense considering current forecasts predicting natural gas consumption to reach 10 percent of total primary energy supply by 2020 up from 5 percent in 2012. This comes on the back of Beijing’s attempts to limit pollution and diminish its dependence on coal for power generation. Related: China’s Stock Market Meltdown Not Over Yet

The other alternative for Turkmenistan – namely to ship its gas westward to Europe – still looks highly unlikely. Despite EU insistence that a pipeline through the Caspian Sea should be built to link the existing Southern Gas Corridor with the Turkmen reserves, the outstanding dispute over the Caspian legal status prevents any major infrastructure project that is not supported by the five littoral states. Russia, in particular, has been most vocal in opposing new energy infrastructure in the Caspian, allegedly on environmental grounds. In addition, Turkmenistan lacks sufficient pipeline infrastructure to transport the natural gas from the Galkynysh field in the East to the Caspian Sea in the West.

With demand uncertainty in Europe rising, funding a major gas export project would be a leap of faith at best. Russia has already started learning this lesson the hard way as it realizes the economic futility of building enormous pipelines that have purely political goals.

By Martin Vladimirov for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play