BP Statistical Review of World Energy 2016 announced that Turkmenistan’s gas output increased by 4.5 % to 72.4 billion cubic meters (bcm) in 2015. This positive trend is however accompanied by a number of significant challenges faced by the gas industry of the Central Asian country. Despite sharp growth in domestic consumption – in 2015 Turkmenistan’s consumed went up by 23.9 % to 34.3 bcm – there is quite an urgent need to commercialize increasingly important gas output.

The “gas glut” observed in Gazprom’s key markets - Russia and Europe – forced the Russian gas company to reduce its gas output for the third year in a row. Henceforth, Gazprom’s gas production fell from 487.4 bcm in 2013 to 418.5 bcm in 2015. This trend explains Russia’s diminishing interest in accessing Turkmenistan’s hydrocarbon resources. Gazprom, previously the largest buyer of Turkmenistan gas, no longer needs Central Asian gas to balance Russia’s and Europe’s demand in “blue fuel”. Consequently, Turkmenistan’s gas exports to Gazprom gradually went down from 40 bcm in 2012 to 4 bcm in 2015. In January 2016 the Russian gas conglomerate stopped purchasing natural gas from Turkmenistan altogether. That move deprived Ashgabat from a significant source of the hard currency revenue.

Iran is also an important buyer of Turkmenistan’s natural gas, but gas sold to Iran - 6 bcm in 2015 - is usually paid in Iranian goods, not in cash. Ashgabat’s attempts to reverse this trend have so far been unsuccessful. In June 2016, Turkmenistan gave up on its attempt to ‘commercialize’ its gas exports to Iran, and Ashgabat and Teheran finalized a barter agreement. According to this deal, Iran will import gas worth $30bn from Turkmenistan over the next ten years in exchange for Iranian goods and services. China – Turkmenistan’s largest client – shows alarming signs of economic slowdown, which might reduce Beijing’s interest in Turkmenistan’s gas despite proclaimed goals of increasing gas imports from Turkmenistan and recent statistics showing increased natural gas flows from this Central Asian country to China. Increased supplies to China were therefore only able to partly compensate the loss of Gazprom’s contract.

A slower growth of the Chinese economy is affecting the country’s energy consumption and oil and gas imports. In 2015, China’s overall energy demand grew by only 2.5%, although gas consumption and imports, increased at a faster pace (gas consumption went up by 3.7% to 190.9 billion cubic meters (bcm) and imports rose by 4.7 % to 62.4 bcm). Nevertheless, for China this is the lowest natural gas consumption growth rate in more than a decade and this is potentially not good news for the Central Asian natural gas exporters despite all official declarations and statistics indicating growth in shipments from Turkmenistan to China. The Central Asia–China gas pipeline – almost exclusively dedicated to import from Turkmenistan – transported 20.9 bcm of gas in the first seven months of 2016 which is 23.3 % more than in January – July 2015. According to the preliminary estimates, Turkmenistan exported around 40 bcm of gas to China. However, according to Chinese customs statistics only 20.4 bcm out of 40 bcm were sold under commercial agreement between China National Petroleum Corporation (CNPC) and Turkmengaz, the rest of the gas was shipped in exchange for weapons supplies from China to Turkmenistan, as a repayment of Chinese credits or as a cost/profit gas from CNPC’s Bagtyyarlyk Product Sharing Agreement (PSA) in eastern Turkmenistan. The price paid by China for Turkmen gas also went down from around $180/1000 cubic meters (cm) in Feb. 2015 to $140-$150/1000 cm in Feb. 2016 and declined further in the summer of 2016. Recent data indicates that China’s border price for the Central Asian gas in June 2016 reached only $4.45 per MMBtu or circa $158 per 1000 cm, meaning that Turkmengaz is receiving less than $135 - $140/1000 cm for its ‘commercial’ gas at the Turkmenistan-Uzbekistan border. In January 2015, prices were twice as high as in June 2016. The decline in natural gas prices caused the increase of the country’s current account deficit, which reached – according the Asian Development Bank data – 11.8 % in 2015.

CNPC is also reticent when it comes to speed up work on the second phase of Galkynysh field, clearly preferring to focus on its own PSA project at Bagtyyarlyk field. The data presented by CNPC’s general manager Deng Minmin at the annual Turkmenistan Gas Conference on 19-20 May 2016 [1] indicates that CNPC privileges its own projects over commercial shipments from Turkmengaz’s fields. Between November 2015 and May 2016, Bagtyyarlyk accounted for 7.5 bcm of Turkmenistan’s exports to China. This number indicated that CNPC’s project is operating at full capacity – 15 bcm/year. Furthermore, CNPC manager indicated that CNPC is deploying some 8,697 local staff at Bagtyyarlyk and only 447 at Turkmegaz’s Galkynysh.

Last, but not least: post-sanctions Iran is emerging as Turkmenistan’s key competitor: Teheran is eager to sell gas in South Asia, as well as in Europe. As a result, Ashgabat is risking running out of cash due to decreased exports and lower gas prices, leading to a change in the attitude of the Turkmen leadership towards the TAPI pipeline and exports to the European Union. Diversification of supplies – used before rather as a political tool than a real business scenario – is becoming crucial for landlocked Turkmenistan, which hitherto relied heavily on gas exports (75%) to China, providing it with an opportunity to diversify its gas exports.

The TAPI gas pipeline has been in the making since the 1990s and suffered a number of halts due to the security situation in the region and geopolitical concerns of the stakeholders involved. In the early 2000s the project slowly started to come into being, and only recently the implementation of the project seems to have gained momentum. In November 2014 the joint venture to implement the project was incorporated in Dubai. Initially, its stakeholders tried to secure the involvement of the western international oil companies in the project, but these attempts failed. The absence of interest from international oil companies may have led towards the designation of Turkmenistan’s state gas company Turkmengaz as the Consortium Leader of TAPI in August 2015. Under the agreed setup, Turkmengaz is the main shareholder (85% of shares), while the rest of the Consortium members, namely Afghan Gas Enterprise, Pakistan’s Inter State Gas Systems Ltd and GAIL Ltd. (India) will each hold a 5% share. A groundbreaking ceremony was held on December 13, 2015 in the presence of the leaders of Afghanistan, India and Pakistan, and construction started shortly thereafter. The project is expected to cost over $10 billion and to be operational by 2021.

Ashgabat is also looking westwards hoping to ship its gas into EU-promoted Southern Gas Corridor (SGC). Turkmenistan plans to hold a summit of heads of Azerbaijan, Turkmenistan and Turkey by the end of 2016, in order to discuss the Trans-Caspian gas pipeline construction. On May 1 2015, Azerbaijan, the EU, Turkey and Turkmenistan signed the declaration of cooperation in the field of energy aimed on facilitating exports of natural gas from Turkmenistan to the European Union.

Theoretically, Turkmenistan’s low lifting costs allow the country to compete in Europe with other low cost producers such as Russia or Qatar. WoodMackenzie estimated average operating costs (OPEX) for the Galkynysh gas field at around $3.5-$3.6/barrel of oil equivalent (boe) in 2016 prices. Despite the fact that the lifting costs for the older fields are significantly higher, these numbers are extremely low allowing Gaklynysh to be competitive at virtually any market in the world. However, reality paints us a less rosy picture when transportation costs come into play.

On current assessment, transportation costs via TANAP would likely be around $2 – $2.9/MMBtu, transit via Georgia and Azerbaijan would cost up to 10% of the shipped volume (estimates based on Georgia’s transit arrangements for gas from the first phase of Shah Deniz) and transportation from the Turkish-Bulgarian border to Baumgarten would cost an additional $1/MMBtu. In June 2016 the commercial price of Turkmen gas sold to CNPC at Turkmenistan/Uzbekistan border was at least $3.5/MMBtu. The price of Turkmenistan’s gas in Austria will need to be at least $6.85 – $7.75/MMBtu for Turkmen exports to work under the CNPC commercial scheme. Under current European hub prices, Turkmenistan’s border price should not exceed $0.8-$0.7/MMBtu to be sold under commercial conditions. Furthermore, Iran’s and Russia’s objections will certainly complicate the realization of trans-Caspian pipeline and further increase the cost of transportation as well as the final price of Turkmenistan’s gas in Europe. The future of Turkmenistan’s gas in India and Pakistan is less bleak but Turkmengaz’s profit margin in South Asia is also likely to be drastically reduced by cheap LNG supplies.

One the one hand, the future of Turkmenistan as an emerging gas exporter looks bright – despite certain financial difficulties and low energy prices, the country keeps increasing its natural gas output. Ashgabat has been also courted by key energy importers such as Europe, China, India and Pakistan. The country’s leadership is also eager to diversify its energy exports towards Europe and South Asia. On the other hand, the reality on the ground is a bit different and a number of internal (lack of access to onshore upstream for foreign investors) and external challenges (lower energy prices and increased competition between natural gas exporters) complicates Turkmenistan’s diversification.

In this context, the future of non-China exports of Turkmenistan will depend on the the three key conditions:

  • Increase in LNG Asian prices as well as the end of the gas glut in Europe;

  • Decision of the Turkmenistan’s leadership to open up its land-based upstream sector for foreign investors, especially under the PSA regime, thus making it competitive in the low price environment. Despite low lifting costs ($4.7/boe - $6.1/boe), under current pricing conditions in the EU and transportation costs, Turkmenistan gas would not be able to compete on the European market unless the government allows foreign investors to extract gas onshore and ship it abroad under the PSA regime.

  • Turkmenistan’s energy clients should be ready to co-finance exports pipelines in order to bring the gas into new markets.

It would not be very surprising if the TAPI project is completed ahead of the Trans-Caspian link – despite instability in Afghanistan, there is an appetite for Turkmen gas in South Asia, while Europe already has a vast choice of (cheaper) supplies and might be less inclined to invest political and financial capital into the trans-Caspian route.

1. Quoted on 30 May 2016 by Natural Gas Europe.

Danila Bochkarev is a Senior Fellow at the EastWest Institute in Brussels.
Disclaimer: The views expressed here are solely those of the author and do not represent views of his organization.

Immage: Ashgabat, Turkmenistan. Source: Ashgabat.us.