Jul 10, 2008 | 16:37 GMT

9 mins read

Central Asia: The Energy Boom

Central Asian Energy (Special Series), Part 1: Problems Within the Region
Russian natural gas giant Gazprom announced July 9 that the price of natural gas sent to Europe will rise quickly due to an increase in the price of natural gas going from Central Asia to Russia. The price increase will most likely hit many European consumers hard and keep cash flowing to Moscow, but it will also give Central Asian states like Turkmenistan and Kazakhstan large amounts of their own cash for the first time. This raises the question of what these Central Asian states will do with their new income.
Russian natural gas behemoth Gazprom announced July 9 that the price at which Russia sells natural gas to Europe will quickly rise to $500 per thousand cubic meters (tcm). It attributed the staggeringly high price on a hike in prices from Central Asia, which supplies some of the natural gas Russia sends to Europe. The high prices will most likely cripple many European consumers and continue the flow of cash going to Moscow, but the rise in prices from Central Asian states like Turkmenistan and Kazakhstan will give those countries their own cash — and lots of it — for the first time in their histories. Russia has continually raised natural gas prices to Europe (which depends on Russia for one-quarter of its natural gas) from $113 per tcm in 2003 to approximately $430 per tcm currently. Russia depends on natural gas from Turkmenistan and Kazakhstan to help fill its orders for Europe, just as the two Central Asian states are dependent solely on Russia to export their vast energy resources. Turkmenistan and Kazakhstan hold some of the world's largest energy reserves; Kazakhstan is estimated to have 40 billion barrels of oil and 3 trillion cubic meters of natural gas, and Turkmenistan is estimated to have 2 billion to 6 billion barrels of oil and 3 trillion cubic meters of natural gas. Uzbekistan also holds significant reserves but is not seeing the large influx of cash that Kazakhstan and Turkmenistan are — though once the energy connections being constructed between Central Asia and China are complete, expect Uzbekistan to follow suit. In short, Kazakhstan and Turkmenistan are among the top 12 countries with natural gas reserves, most of which have not really been tapped. Together, the two nations currently export approximately 65 billion cubic meters (bcm) annually, though this amount is supposed to reach 85 bcm in 2009. Either way, they are still barely tapping their natural gas reserves. Turkmenistan and Kazakhstan continued in the Soviet tradition of giving the Russians natural gas at below-market rates until this past year, when they finally started to realize what enormous potential cash wealth they had been missing out on. In 2006, Turkmenistan and Kazakhstan sold Russia natural gas for roughly $44 per tcm, though Moscow was selling it to Europe for $295 per tcm. In December 2007, the Turkmen government finally informed Russia that it would be raising its price to $130 per tcm in the first half of 2008, and then $180 per tcm for the second half of the year. Kazakhstan (and to some degree Uzbekistan) quickly jumped on board behind Turkmenistan and also raised its price. This has spurred Russia to pass on the increase to Europe. Thus, 2008 is turning out to be a pivotal year for Kazakhstan and Turkmenistan, who are watching enormous amounts of cash come pouring into their coffers — something they have never had. In just the past year, the two countries have seen their revenues from natural gas triple, and those revenues will nearly double in the next year. Kazakhstan made a measly $880 million from natural gas exports to Russia in 2006, but this year will see more than $3 billion, with $6 billion in revenues estimated to flow in for 2009. Turkmenistan is seeing even more cash from its natural gas exports to Russia: from $1.8 billion in 2006 to $7 billion in 2008, to an estimated $12 billion in 2009. This cash inflow from natural gas is coupled with increased revenue from oil exports — especially for Kazakhstan. Turkmenistan only exports a little oil to Russia (approximately 200,000 barrels per day), which brought in around $200 million dollars this past year. But Kazakhstan exports more than 1 million barrels of oil to Russia daily, which brought in $2 billion in 2007. Kazakhstan's gross domestic product (GDP) has risen from $18 billion to more than $130 billion in the past decade — most of it in the past two years. Turkmenistan's GDP has risen from just $1 billion to more than $28 billion in the past ten years. However, because nearly all of the increase is due to natural gas sales, this is not traditional economic growth — it is simply the accrual of massive amounts of cash in states that have a very limited ability to metabolize it. Now, the question is what do these two countries — which have never really had their own cash and are used to being dependent on their former Soviet master, Russia — do with so much money that is flowing in too fast for them to count? To start off, neither country is used to having disposable cash. Moreover, neither country has planned out what to do with its massive amounts of money. Whereas Russia is storing its cash away, knowing that its domestic production is dwindling and Europe is looking for other options for energy supplies, Central Asia is in an entirely different situation. Kazakhstan and Turkmenistan have barely tapped their energy supplies and have large, competent Western, Chinese and Russian majors looking to develop their reserves. Both countries also have other options on the table — and about to come on line — to send their energy somewhere other than Russia. Europe is looking to build a trans-Caspian pipeline to access Central Asian natural gas, though the line is not yet under construction. But China, a major energy consumer, has nearly completed its oil and natural gas pipelines through Central Asia. The oil pipeline will be operational in 2009, and the natural gas pipeline will begin to flow in 2010, reaching its full capacity of 30 bcm per year in 2013. And it would be odd indeed for the Chinese to only want a single line. More money — lots more money — will be coming Central Asia's way. Kazakhstan has already set up a National Fund of Kazakhstan for international reserves and assets which, due to high energy prices, has doubled in just one year to $20 billion. The country has not decided what to do with its cash and is simply sitting on it for the moment. Turkmenistan has yet to set up a sovereign wealth fund or something of that sort. Having large amounts of expendable cash ensures that both countries' leaders can maintain control and stability in their states. Kazakhstan's leader, Nursultan Nazarbayev, is getting long in the tooth and has been contemplating who should succeed him, with his daughter, Dariga, as the front-runner. Having cash at their disposal ensures that the Nazarbayevs can buy out the opposing clans as well as the security services to keep them loyal and ensure the Nazarbayev dynasty. Turkmenistan's leader, Gurbanguly Berdimukhammedov, has only been president since the start of 2007 and is highly concerned about Turkmenistan's many clans either fracturing the country or overthrowing the government. However, the country's largest clan, called Mary, has a long tradition of staying loyal to the country's leaders for the right price — and that is a price Berdimukhammedov can certainly pay right now. Turkmenistan is also looking to its economic future and sees a very gloomy picture for its current cash cow, cotton. Turkmenistan is mostly desert, and having the thirsty crop of cotton as a major commodity is not only decimating the country's agricultural sector but is ultimately unsustainable, mainly because the country's main source of water, the Aral Sea, is drying up very quickly. Being showered in cash from energy allows Turkmenistan not only to replace the cotton revenues, but also to pay top dollar to import food. But there is another area where both countries are looking to possibly increase their spending: defense. Neither Kazakhstan nor Turkmenistan has much of a military or defense sector, though both are surrounded by some very large military and regional powers — China, Russia, Uzbekistan and Iran. Traditionally, the two countries have tried to keep their heads down, remain out of those powers' way and stick closely to Moscow for protection. But with money of their own, Astana and Ashgabat could develop some sort of their own security. Kazakhstan has increased its military budget from $400 million in 2005 to $1.2 billion in 2007, and Turkmenistan has increased its budget from $150 million in 2005 to $500 million in 2007 — both nearly threefold increases. But Turkmenistan has shown that it is interested in more with recent deals to buy missile systems from Russia. No matter the focus of these funds, Kazakhstan and Turkmenistan are just now realizing what a problem high energy prices are for large powers like Europe and China, and they and are just now figuring out that they can take advantage of the situation. They are looking to set up systems that will let them take advantage of the high prices of energy going to Europe through Russia in the short term, and then continue to receive that level of income from Asia in the long term. It is unclear exactly how these two states will use their funds and growing power over time, but for now, it at least ensures their stability and their leaders' abilities to rule their own states.

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