China Undercuts Russia and Europe with New Turkmen Gas Deal

A new gas deal between Turkmenistan and China suggests that Beijing is seeking to steal a march on both Russia and Europe for Turkmen gas supplies. Further signs of an eastward shift by Turkmenistan could have a profound impact on regional energy geopolitics, but there may be less to the latest news than meets the eye.

In China for a state visit on 22nd-25th November, Turkmen President Gurbanguly Berdimuhamedov signed a new gas deal with his Chinese counterpart Hu Jintao. The deal is an expansion of their earlier gas deals, the first of which was signed by Berdimuhamedov’s isolationist predecessor Saparmurat Niyazov, in 2006.

The previous framework provided for the export of 30 billion cubic metres (bcm) of Turkmen gas to China. The gas is provided through a new purpose-built pipeline which runs from eastern Turkmenistan to western China and was completed – with the speed typical of Chinese infrastructure projects – by December 2009.

Before the gas was even flowing, the two sides decided to boost the volumes under contract, to 40bcm. The pipeline was built with a total capacity of 40bcm although the deal to utilise it fully was not signed until July 2009.

This reflected three trends which still continue today: Ashgabat’s self-confidence that its gas reserves were big enough to keep upgrading export volumes; China’s soaring appetite for gas; and long-running price disputes between Russia and China on gas imports.

The latest upgrade boosts the contracted gas exports to 65bcm: a similar figure had been suggested by Turkmenistan’s Deputy Prime Minister Baymurat Hojamuhamedov in March, but few analysts expected anything serious to emerge from his prediction. 65bcm is a remarkable volume; Turkmenistan’s gas production in 2010 was 42bcm (the peak, in 2008, was 66bcm).

Output will rise as new gasfields are brought onstream and new pipelines built, but Turkmen exports to China last year are estimated at 2-3bcm, far below existing capacity (and Chinese predictions), and will be for years. So why the new contract?

Firstly, because of Europe. The lion’s share of Turkmen exports to China are expected to come from the South Yolotan-Osman structure (now renamed ‘Galkynysh’, or revival); Beijing has given over $8 billion in soft loans to help develop the giant field, which contains between 13 and 21 trillion cubic metres.

However, Berdimuhamedov has also said that the field will supply Europe’s Nabucco pipeline. The obstacles to doing so are myriad, and the size of the structure means it could probably support both east and west, but China appears determined to ensure that it gets priority for the field’s supplies. Increasing contract volumes will help to lock in the South Yolotan-Osman supplies for China in the long term, and at the least will decrease Turkmenistan’s leverage on pricing.

The second reason is Russia. The gas dispute between Moscow and Beijing continues to drag on. In Beijing in October, Vladimir Putin said that negotiations on the mammoth supply contract were “close to the final stage”, which means little in this long-running drama – Dmitry Medvedev said the same thing four months earlier.

The sticking point remains price. Russia wants to sell gas from Siberian fields for no less than it sells gas to Europe, around $400 / thousand cubic metres at present depending on the price of oil to which rates are indexed. China is reputedly buying Turkmen gas for closer to $250. Neither can budge too much on the price without risking complaints from other buyers (in Russia’s case) or sellers (in China’s).

But in this case Beijing is in the stronger position. As well as ramping up Central Asian imports at a decent price, it is also boosting unconventional gas exploration and building new terminals for LNG, further reducing the appeal of expensive Russian gas. The bottom line is that China can find other suppliers; Russia cannot easily find other buyers, particularly for gas locked up in remote East Siberia.

So Turkmenistan is the ace up China’s sleeve, giving it extra influence in the game-changing negotiations with Russia. All it has to do is stop Turkmen gas going to Europe, which some expeditious contract upgrades will fix. In fact, Moscow is helping out here, lobbying actively against a Trans-Caspian pipeline which would allow Turkmen gas to go west. No doubt China’s leaders can see the irony in that blessing.

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region.