Turkmenistan’s Asian Pivot: Implications for the European Energy Dynamic
Background
In the past month, the international spotlight has been on the 400 billion USD gas deal reached between Russia and China. In the context of broader geo-political and economic developments, though, this focus has neglected to properly account for the ambitious announcement made by the Turkmen President during his visit to China, Gurbanguly Berdimuhamedow stated that the country would boost its natural gas exports to China to 65 billion cubic meters per year by 2020.
During the past month, Turkmenistan has also been busy engaging in high-level consultations with Azerbaijan and Turkey. These talks have taken place at not only the bilateral and trilateral levels – among Turkish, Azerbaijani and Turkmen foreign ministers, but also multilaterally via the Cooperation Council of Turkic-speaking States.
In light of these important developments, this policy brief will explore the significance of Turkmenistan’s engagement with China and the likely impact of such an agreement on the Russia-China deal. The potential consequences of a Turkmen pivot to Asia in the context of the opportunities represented by the European gas market will also be evaluated.
Analysis
In the first week of May, before his visit to China, Turkmenistan’s President presided over the official opening ceremony for a processing plant at the Bagtyarlyk field. Based on the capacity of this gas field, Turkmen gas exports to China are expected to reach 40 bcm/a in 2016. Then after the transmission of gas from the Galkynbysh gas field is realized, Turkmenistan’s exports to China will reach its peak (65 bcm/a) by 2020.
However, as the old energy sector dictum says, ‘never believe in a gusher’. According to statistics disseminated by the China National Petroleum Corporation (CNPC) between December 2009 and April 2014, Turkmenistan supplied 78.3 billion cubic meters (bcm) of gas to the Central Asia-China Gas pipeline, which in annual terms is roughly 20 bcm. The expected transmission capacity of the Central Asia-China Gas pipeline is 55 bcm/a by the end of 2015, and in this case Turkmenistan’s gas export to China will be 65 bcm/a by 2020. To come to this export peak (65 bcm by 2020), the transfer capacity of this pipeline needs to be extended. The plan envisions four lines, and only two of them have been realized and are working at full capacity (Lines A and B are already operational, C is under construction, and feasibility studies for D are ongoing). After the construction is completed, this network - the Central Asia-China Gas pipeline - will be able to supply China with 80-85 billion cu m/year of gas.
Based on these estimates, Turkmenistan and other Central Asian countries will become increasingly more significant for China as natural gas exporters. China expects its domestic natural gas demand to reach 420 Bcm/year by 2020. Thus if Beijing is importing 65 bcm from Turkmenistan by 2020, Turkmenistan alone will be supplying 15 percent of Chinese natural gas demand. Then if we add the other Central Asian countries into the mix, taking pipeline capacity into account (80-85 bcm/a), we can see that collectively the Central Asian countries will by 2020 supply a full 20 percent of China’s gas use.
Despite the attention received by the milestone Russia-China gas deal, for which the first deliveries will not start until 2019, Russia will only be supplying 9 per cent of China’s gas demand (38 bcm) by 2020. Turkmenistan’s strategy is not necessarily superior to Russia’s, just very different. In order to fully realize its gas export capacity, Russia needs to invest massively in its fields in Siberia. By comparison, Turkmenistan has relatively little to do. In its presentation to investors in February 2014, Gazprom estimated the realizable value of the “Asian” approach (which includes the development of both the fields and gas pipeline construction from Siberia) at 60 billion USD. But it should be noted that under the Russia-China deal, inclusive of infrastructure costs, supplies to China would cost no less than 400 USD for 1,000 cubic meters, while Turkmenistan will export its gas to China at a price ranging from 100 to 140 USD per 1000 cubic meters.
In principle, if Russia manages to successfully develop its “Asian” strategy, it will become the key player in Asian energy markets and it diminish the role of LNG suppliers from the Middle East and North America. Beijing will also gain a stronger bargaining position against LNG suppliers from Qatar, Australia and others. In addition, shale gas is expected to reduce the market value of natural gas in the long term, and according to BP’s Energy Outlook, China is “the [most] promising country for shale growth outside North America, accounting for 13 percent of world shale gas growth […] by 2035”.
Therefore, while Turkmenistan’s Asian pivot may appear modest, it also demonstrates an ambitious vision for the country own future as an energy exporter. In the long term, this gradual integration into the Asian markets, avoiding any direct confrontations, will strengthen Turkmenistan’s foreign policy. China is not only destination for Turkmen gas; despite questions about feasibility from the security perspective, the Trans-Afghanistan Pipeline or TAPI pipeline is still on the agenda. Importantly, since the recent Ukraine crisis, Moscow has made clear its support for this project, which it sees as an opportunity to reduce Europe’s options in diversifying its energy imports away from Moscow.
The Trans Caspian Pipeline and Turkish, Azerbaijani Engagement with Turkmenistan: More Questions Than Answers
Turkmenistan’s engagement with Turkey and Azerbaijan has sparked commentary based more on political than market speculation. While Turkmenistan’s energy policy is based on a business approach, we should not ignore the additional implications of Turkmenistan’s current strategy.
First of all, at Turkey’s initiative, a trilateral format for engagement between the Turkish, Azerbaijani and Turkmenistan’s foreign ministers was recently established. The first such meeting took place last month in Baku and the second one is expected in second half of this year in Ashgabat. The agenda is not exclusively energy oriented, as neither Azerbaijan nor Turkey is in any particular hurry to persuade Turkmenistan to send its gas to Europe via the Trans Caspian Pipeline. In the official statement following the first trilateral meeting mentions cooperation in various fields, but also mentions importance of “participation in joint large-scale projects with the aim of ensuring the energy security and energy diversification.” While to interpret this format as purely energy oriented would entail a limited perspective, it is also true that the platform offers an opportunity to discuss energy issues at a very high level and in greater detail. Azerbaijan has made it clear that it has an open door policy with regard to Turkmenistan exporting its gas to Europe via Azerbaijan. Energy Minister, Natig Aliyev recently repeated that “in the case of Turkmenistan's intention to export its gas to Europe, Azerbaijan is ready to provide all necessary infrastructure in this regard.”
This cooperation could provide additional impetus to the resolution of the legally contested status of the Caspian Sea; Turkmenistan has indicated its opposition to the construction of the Trans Caspian pipeline before the issue has been resolved.
Furthermore, with the anticipated Shah Deniz II gas exports from 2018, the transmission capacity of TANAP is sufficient to transport Azerbaijani gas to European market. By 2023, the transmission capacity of TANAP pipeline will reach 23 bcm/a, taking into account Azerbaijan’s perspective that from an economic point of view – in terms of selling its own gas - there is no need to rush to encourage Turkmenistan’s participation. The Trans Caspian Pipeline, needs investment for construction, which a recent study has put at around 5 billion USD. Although the US Kellog Brown & Root (KBR) company won the tender for the Trans Caspian pipeline project in 2008, under which it is obliged to prepare the pipeline layout, the consequences of the study – if indeed it was ever completed - have remained unpublished. Baku and Ashgabat, though they have never said this officially, are probably expecting the EU to cover the construction cost, given that the construction will serve the EU’s interests. Generally, Turkmenistan never involves itself in commitments outside its borders and prefers to sell gas on the border. Thereby, it is most likely that Azerbaijan with some western companies have to take a financial burden of the construction, not mentioning its geopolitical risks.
The positive development at this juncture is that President Berdimuhamedov stated on May 20 2014 that an East-West gas pipeline, designed to export Turkmen gas to world markets, will be constructed in the near future. The costs for this are estimated at 2 billion USD. The pipeline is designed to bring reserves from the Shatlyk field in the south-east of the country to the Caspian coast, and will mainly help with domestic demand. It will also be essential in the future, if Turkmenistan intends to export its gas to European markets via Azerbaijan, through the Trans Caspian pipeline.
Conclusion
By way of conclusion, there is a strong likelihood that in the long-term – if not the mid-term – Turkmenistan could be exporting its gas via the Trans Caspian pipeline. This would require several more years of negotiations among possible project partners and customers, but more importantly the resolution of the Caspian Sea’s legal status. It will also be contingent on the success of Ashgabat’s Asian gas strategy. The current perspective reveals that Turkmenistan, through its tiny investments, and business-oriented strategy, is seeking to export as much and as quickly as possible, though there have not been significant increase in the annual gas production for the last several years that could hint the capability of feeding all existing and projected pipelines.
Policy Brief published with thanks to the Caspian Center for Energy and Environment of ADA University, a Natural Gas Europe Knowledge Partner