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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Green Eyed Gazprom Attacks Turkmenistan's Natural Gas Resources

In the European Union, the Russian Federation state-owned natural gas behemoth Gazprom is regarded as a slightly sinister covert agent for Russian foreign policy, steadily addicting the EU to more and more imports of Russian natural gas through a brilliant, long-term strategy.
In reality however, the picture is much more complex, and Gazprom’s image is far more tarnished in Central Asia, whose exports Gazprom needs in order to sustain its level of European exports.
At times it seems as if Gazprom is going out of its way to antagonize its Central Asian suppliers, most recently when on 11 October the British accounting firm Gaffney, Cline and Associates announced the results of their second independent audit of Turkmenistan’s major natural gas fields - South Yolatan-Osman, Minara and Yshlar. The firm concluded that the fields’ reserves consisted of 26.2 trillion cubic meters, a figure that could be revised upwards, as the northwestern, southeastern and western limits of the unique South Yolatan-Osman natural gas field formation have not yet been definitively determined. Turkmen President Gurbanguly Berdymukhammedov was sufficiently impressed to sign a special resolution naming the entire zone "Galkynysh" (“Revival.”)
Cue Gazprom Deputy CEO Aleksandr Medvedev, who on a televised interview with Vesti-24 on 18 November subsequently commented, "I don't think there are reasons for making such statements, given that no real audit has been conducted, or a report presented on its results. Of course, there is gas in place in Turkmenistan. But the new gas fields are not easy to handle and are in need of sophisticated extraction know-how."
Turkmenistan's Foreign Ministry was quick to react, issuing a statement labeling Medvedev's remarks as "yet another clumsy attempt to distort the real situation regarding Turkmenistan's resource potential, in particular its gas reserves. Turkmenistan will continue energy cooperation with all interested parties, based on mutual respect, equal partnership and the diversification of routes to supply its energy resources to world markets," strongly implying that Russia has begun a secretive and coordinated misinformation campaign to hinder Turkmenistan’s efforts to more than triple its natural gas output within the next two decades by developing new markets by disparaging its assets to potential investors.
For skeptics doubting Asgabat’s assertions, BP data now ranks Turkmenistan’s natural gas reserves as the world's fourth largest, exceeded only by those of the Russian Federation, Iran and Qatar.
Which leaves Gazprom either in the position of trying to buy Turkmen gas cheaply for export onwards to Europe, or seeing it as a potential competitor if the Turkmen government lines up other customers, which has been happening ever since a high-handed action against Turkmen gas exports by Gazprom occurred two years ago.
On 9 April 2009, hit by declining sales due to the global recession, Gazprom suddenly and unilaterally reduced its imports of Turkmen gas via Truboprovodnaiia sistema Sredniaia Aziia-Tsentr (the Central Asia-Center, or SATS, pipeline system) SATS-4 Davletbat-Daryalik pipeline by 90-95 percent. The antiquated Soviet-era network was unable to cope with the sudden pressure diminution and exploded 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, which had been running at 42-45 billion cubic meters (bcm) per annum.
The following day Turkmenistan's Foreign Ministry blamed Russia for the pipeline explosion and subsequent conflagration that halted the country's gas exports, stating, "A letter of Gazpromexport about the decrease of the volumes of taking Turkmen natural gas received by the Turkmen side by the end of the day on April 7 cannot be regarded as a preliminary notification, because on April 8 at 11 a.m. the sharp reduction in the volume of natural gas received by the Russian side began."
When Turkmen natural gas exports to Russia finally resumed in January 2010, they did so at a much lower level, about 10 bcm annually, and at a lower price, which had been roughly $300 per thousand cubic meters (tcm) in the first quarter of 2009 prior to the explosion, to a price less than $200 per tcm through 2010.

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 indigenous natural gas production, with domestic consumption rising by more than 3 bcm a year. Accordingly, to free up as much Russian Federation production as possible for export, one-third of Russian internal gas usage has to be supplied from non-Gazprom sources, i.e., Central Asia.
But after Gazprom’s high handedness Turkmenistan increased looking east for customers. Gazprom's executives in their assumption that Turkmenistan would put up with any action that the company might dish out had forgotten that their high-handed penurious policies of "buying cheap and selling dear" led Berdymukhammedov's predecessor, Saparmurat Niyazov, to sign a deal with China in April 2006 for a Turkmenistan-China natural gas pipeline capable of handling 30 bcm annually. Even earlier, Niyazov, increasingly irritated by Gazprom’s low-balling prices, 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.
Eight months after Gazprom cavalierly turned off the taps, on 14 December 2009 China and Turkmenistan formally opened the first section of a 1,139 mile-long, 40 bcm per year natural gas pipeline, financed by China National Petroleum Corporation (CNPC), China's largest oil and gas producer and supplier. The Turkmenistan-China pipeline has since been expanded to carry Uzbek and Kazakh natural gas, and sales to China have expanded since, as in June that China announced its second pipeline with Turkmenistan, a $22 billion, 5,370 mile-long pipeline with an annual capacity of 30 bcm had begun operations.
So, Gazprom’s recent snide statements about Turkmen natural gas reserves can be viewed in the context of sour grapes, along with the fact that Turkmen natural gas exports are now a direct competitor to Gazprom’s hopes to expand its east Asian market presence, with Beijing at this state clearly preferring to deal with Turkmenistan rather than the arrogant natural gas apparatchik “biznessmen” in Moscow.
For their predicament, Gazprom executives have only themselves to blame, as no one likes a bully – especially a greedy and cheap one.

By. John C.K. Daly of Oilprice.com

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