Turkmenistan: Desperate for a Gas Market

Turkmen President Gurbanguly Berdimukhammedov will travel to China on April 30, where he is scheduled to meet with Chinese President Hu Jintao as part of a series of meetings between Chinese leaders and visiting heads of government ahead of the Shanghai World Expo, which begins May 1. Berdimukhammedov and Hu will likely discuss a number of issues, but none will be more significant to both countries than energy. According to Stratfor sources in Ashgabat, Turkmenistan has plunged into a serious crisis over a massive decline in natural gas exports, which is slashing the country's gross domestic product nearly in half. Berdimukhammedov's visit to China aims to mitigate this crisis as much as possible. But even with China's help, Turkmenistan will not be able to get out of the crisis unless the country turns to the other heavyweight in the region: Russia. Turkmenistan possesses some of the world's largest natural gas reserves, and the country has the production capability of around 75 billion cubic meters (bcm) per year as of 2009. Turkmenistan also has a population of only about 5 million, and little real domestic industrial activity, which means that the domestic demand for this energy is quite low, at a consumption rate of 21 bcm in 2009. This translates into an export capability of 54 bcm, making Turkmenistan one of the world's leading natural gas exporters. Traditionally, nearly all of Turkmenistan's energy exports have gone to Russia at a discount, which Russia would then export to the Europeans for a much higher price. But the pipeline that took Turkmen energy supplies to Russia ruptured in April 2009, after Moscow failed to tell Ashgabat that it had significantly lowered its import level of natural gas, causing the pipeline to explode due to the increased pressure. While Moscow said the failure to notify Ashgabat was an accident, Russia simply did not need the gas as European demand was down significantly due to the financial crisis and a relatively warm winter. Whether this was the case or Moscow intentionally neglected to tell Ashgabat about its plan to reduce imports to sabotage the pipeline, the effect was the same. Much of Turkmenistan's energy sector literally shut down due to the rupture. Russia was importing nearly 48 bcm of natural gas before the pipeline broke, but stopped importing supplies completely for nearly a year afterward. Turkmenistan was subsequently forced to close more than 200 wells because there was simply nowhere else to send the natural gas. This has translated into a heavy financial hit for Ashgabat, in the form of $1 billion in lost revenues per month since the pipeline explosion. Energy exports make up more than half of Turkmenistan's national budget, and Ashgabat was left worrying about falling far short of meeting its budget needs. Turkmenistan then focused its attention more heavily on alternative markets, looking to send its abundant natural gas supplies to other regional powers like China and Iran. Before the pipeline rupture, Turkmenistan did not pursue such projects vigorously because it could count on Russian consumption. But following the cutoff, these routes became imperative. Construction was already under way on a pipeline to China as well as a pipeline to Iran, and both projects were completed by early 2010. While the latter was a relatively small expansion of a modest pipeline that was already going to Iran, the pipeline to China was hailed as a tremendous boon to Turkmenistan's need for an energy-hungry consumer. Turkmenistan signed a contract with China for 5 bcm of exports in 2010 and planned to increase these exports to 40 bcm by 2012, giving Ashgabat a much needed market for its natural gas. But even with these new pipelines, Turkmenistan's natural gas exports are still down by 70-84 percent, as export flows to China and Iran are still in their early stages. Turkmenistan resumed contracts with Russia to get supplies flowing again in January, but at a fraction of what Turkmenistan had been sending to Russia before the pipeline exploded. Combined with what is being sent to China and Iran, this resumption in supplies will only raise export levels to roughly half of what Turkmenistan is capable of exporting. So Turkmenistan is still forced to look for other options to make up for its export supply glut. Europe is one alternative market that has expressed interest in Turkmenistan's natural gas. The Europeans have long discussed their desire to include Turkmenistan in ambitious projects like the Nabucco pipeline or Trans-Caspian. But these projects are nowhere close to breaking ground, and Ashgabat needs immediate help. Increasing exports to Iran is also problematic, as the current pipeline from Turkmenistan to Iran has a relatively small capacity. While there are plans to increase exports to Iran to 20 bcm per year, this would require building another pipeline, taking time that Ashgabat does not have. With the limited potential or feasibility of these other options, China is Turkmenistan's best hope for an export market, and this sets the tone for Berdimukhammedov's visit on April 30. Stratfor sources report that during the meeting there will be discussions about China potentially increasing its import levels. However, China is only capable of importing another 10 bcm per year in addition to the current 5 bcm — a small amount, but Turkmenistan will take whatever it can get — until the construction of a second pipeline is completed (late 2011 at the earliest). Thus, China can offer small a reprieve to Turkmenistan, but any significant boost will have to wait. China could help in other ways as pipeline projects get under way, including offering direct financial assistance. Beijing promised Turkmenistan a $5 billion loan upon the signing of the first pipeline deal in 2009, but a year has passed since that promise was made, and no cash has been disbursed. China is currently reconsidering this loan for two reasons. The first is Russia — which demonstrated its influence and reach in Central Asia through the April 7 uprising in Kyrgyzstan, which unnerved Beijing. The second is that the Chinese have promised many such loans in their efforts to gain access to strategic resources around the world, and are now thinking carefully about which loans they should actually commit to. This leaves Turkmenistan without options, except for one: Russia. There is no pipeline in the next year or two that can help Turkmenistan significantly boost its exports to other countries, except for the one that was originally cut with Russia that served as the primary outlet to export its natural gas. While Russia still does not need the natural gas, it may be willing to consider increasing its imports for a price. For Moscow, that price comes in the form of complete political loyalty from Turkmenistan. With no other options, Ashgabat may very well be forced to accept that.