Russia takes control of Turkmen (world?) gas
By M K Bhadrakumar
From the details coming out of Ashgabat in Turkmenistan and Moscow over the
weekend, it is apparent that the great game over Caspian energy has taken a
dramatic turn. In the geopolitics of energy security, nothing like this has
happened before. The United States has suffered a huge defeat in the race for
Caspian gas. The question now is how much longer Washington could afford to
keep Iran out of the energy market.
Gazprom, Russia's energy leviathan, signed two major agreements in Ashgabat on
Friday outlining a new scheme for purchase of Turkmen gas. The first one
elaborates the price formation principles that will be guiding the Russian gas
purchase from Turkmenistan during the next 20-year period. The second
agreement is a unique one, making Gazprom the donor for local Turkmen energy
projects. In essence, the two agreements ensure that Russia will keep control
over Turkmen gas exports.
The new pricing principle lays out that starting from next year, Russia has
agreed to pay to Turkmenistan a base gas purchasing price that is a mix of the
average wholesale price in Europe and Ukraine. In effect, as compared to the
current price of US$140 per thousand cubic meters of Turkmen gas, from 2009
onward Russia will be paying $225-295 under the new formula. This works out to
an additional annual payment of something like $9.4 billion to $12.4 billion.
But the transition to market principles of pricing will take place within the
framework of a long-term contract running up to the year 2028.
The second agreement stipulates that Gazprom will finance and build gas
transportation facilities and develop gas fields in Turkmenistan. Experts have
estimated that Gazprom will finance Turkmen projects costing $4-6 billion.
Gazprom chief Alexei Miller said, "We have reached agreement regarding Gazprom
financing and building the new main gas pipelines from the east of the country,
developing gas fields and boosting the capacity of the Turkmen sector of the
Caspian gas pipeline to 30 billion cubic meters." Interestingly, Gazprom will
provide financing in the form of 0% credits for these local projects. The net
gain for Turkmenistan is estimated to be in the region of $240-480 million.
From all appearance, Gazprom, which was headed by Russian President Dmitry
Medvedev for eight years from 2000 to May 2008, has taken an audacious
initiative. It could only have happened thanks to a strategic decision taken at
the highest level in the Kremlin. In fact, Medvedev had traveled to Ashgabat on
July 4-5 en route to the Group of Eight summit meeting in Hokkaido, Japan.
Curiously, the agreements reached in Ashgabat on Friday are unlikely to enable
Gazprom to make revenue from reselling Turkmen gas. Quite possibly, Gazprom may
now have to concede similar terms to Kazakhstan and Uzbekistan, the two other
major gas producing countries in Central Asia. In other words, plain
money-making was not the motivation for Gazprom. The Kremlin has a grand
Coincidence or not, Russian Deputy Prime Minister Igor Sechin traveled to
Beijing at the weekend to launch with his Chinese counterpart, Vice Premier
Wang Oishan, an energy initiative - a so-called "energy negotiation mechanism".
The first round of negotiations within this framework took place on Saturday in
Beijing. There has been an inexplicable media blackout of the event, but
Beijing finally decided to break the news. The government-owned China Daily
admitted on Monday, "Both China and Russia kept silent on the details of the
consensus they reached on energy cooperation in the first round of their
negotiation in Beijing on the weekend."
Without getting into details, China Daily merely took note of the talks as "a
good beginning" and commented, "It seems that a shift of Russia's energy export
policy is under way. Russia might turn its eyes from the Western countries to
the Asia-Pacific region ... The cooperation in the energy sector is an issue of
great significance for Sino-Russian relations ... the political and geographic
closeness of the two countries would put their energy cooperation under a safe
umbrella and make it a win-win deal. China-Russia ties are at their best times
... The two sides settled their lingering border disputes, held joint military
exercises, and enjoyed rapidly increasing bilateral trade."
It is unclear whether Gazprom's agreements in Ashgabat and Sechin's talks in
Beijing were inter-related. Conceivably, they overlapped in so far as China had
signed a long-term agreement with Turkmenistan whereby the latter would supply
30 billion cubic meters of gas to China annually for the 30-year period
starting from 2009. The construction work on the gas pipeline leading from
Turkmenistan to China's Xinjiang Autonomous region has already begun. China had
agreed on the price for Turkmen gas at $195 per thousand cubic meters. Now, the
agreement in Ashgabat on Friday puts Gazprom in the driving seat for handling
all of Turkmenistan's gas exports, including to China.
Russia and China have a heavy agenda to discuss in energy cooperation far
beyond the price of Turkmen gas supplies. But suffice it to say that Gazprom's
new stature as the sole buyer of Turkmen gas strengthens Russia's hands in
setting the price in the world gas (and oil) market. And that has implications
for China. Moscow would be keen to ensure that Russian and Chinese interests
are harmonized in Central Asia.
Besides, Russia is taking a renewed interest in the idea of a "gas cartel".
Medvedev referred to the idea during the visit of Venezuelan President Hugo
Chavez to Moscow last week. The Russian newspaper Nezavisimaya Gazeta reported
on Friday that "Moscow finds the idea of coordination of gas production and
pricing policy with other gas exporters to be too tempting to abandon". The
daily quoted Miller as saying, "This forum of gas exporters will set up the
global gas balance. It will give answers to the questions concerning when,
where and how much gas should be produced."
Until fairly recently Moscow was sensitive about the European Union's
opposition to the idea of a gas cartel. (Washington has openly warned that it
would legislate against countries that lined up behind a gas cartel). But high
gas prices have weakened the European Union's negotiating position.
The agreements with Turkmenistan further consolidate Russia's control of
Central Asia's gas exports. Gazprom recently offered to buy all of Azerbaijan's
gas at European prices. (Medvedev visited Baku on July 3-4.) Baku will study
with keen interest the agreements signed in Ashgabat on Friday. The overall
implications of these Russian moves are very serious for the US and EU campaign
to get the Nabucco gas pipeline project going.
Nabucco, which would run from Turkey to Austria via Bulgaria, Rumania and
Hungary, was hoping to tap Turkmen gas by linking Turkmenistan and Azerbaijan
via a pipeline across the Caspian Sea that would be connected to the pipeline
networks through the Caucasus to Turkey already existing, such as the
But with access denied to Turkmen gas, Nabucco's viability becomes doubtful.
And, without Nabucco, the entire US strategy of reducing Europe's dependence on
Russian energy supplies makes no sense. Therefore, Washington is faced with
Hobson's choice. Friday's agreements in Ashgabat mean that Nabucco's
realization will now critically depend on gas supplies from the Middle East -
Iran, in particular. Turkey is pursuing the idea of Iran supplying gas to
Europe and has offered to mediate in the US-Iran standoff.
The geopolitics of energy makes strange bedfellows. Russia will be watching
with anxiety the Turkish-Iranian-US tango. An understanding with Iran on gas
pricing, production and market-sharing is vital for the success of Russia's
overall gas export strategy. But Tehran visualizes the Nabucco as its passport
for integration with Europe. Again, Russia's control of Turkmen gas cannot be
to Tehran's liking. Tehran had keenly pursed with Ashgabat the idea of
evacuation of Turkmen gas to the world market via Iranian territory.
There must be deep frustration in Washington. In sum, Russia has greatly
strengthened its standing as the principal gas supplier to Europe. It not only
controls Central Asia's gas exports but has ensured that gas from the region
passes across Russia and not through the alternative trans-Caspian pipelines
mooted by the US and EU. Also, a defining moment has come. The era of cheap gas
is ending. Other gas exporters will cite the precedent of the price for Turkmen
gas. European companies cannot match Gazprom's muscle. Azerbaijan becomes a
test case. Equally, Russia places itself in a commanding position to influence
the price of gas in the world market. A gas cartel is surely in the making. The
geopolitical implications are simply profound for the US.
Moreover, Russian oil and gas companies are now spreading their wings into
Latin America, which has been the US's traditional backyard. During Chavez's
visit to Moscow on July 22, three Russian energy companies - Gazprom, LUKoil
and TNK-BP - signed agreements with the Venezuelan state-owned petroleum
company PDVSA. They will replace the American oil giants ExxonMobil and
ConocoPhillips in Venezuela.
At the signing ceremony, Medvedev said, "We have not only approved these
agreements but have also decided to supervise their implementation." Chavez
responded, "I look forward to seeing all of you in Venezuela."
Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign
Service. His assignments included the Soviet Union, South Korea, Sri Lanka,
Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.