Leadership in Turkmenistan, one of the Caspian Sea countries, has yet to recognize the importance of the Trans-Caspian Pipeline (TCP) in creating opportunities for a linked Turkey and Turkmenistan.
In Turkmenistan, instead of a push to achieve the TCP link, dangerous time has been wasted in gamesmanship. If this opportunity is lost for the country, the winners will be its neighbors and competitors, Russia and Iran.
This article looks at Turkmenistan with a view to explaining its lack of success in attracting foreign investment in its oil sector.
The region
Fig. 1 shows how Turkmenistan is tucked behind the eastern shore of the Caspian Sea and between Russia on the north and Iran on the south. The map also shows Turkmenistan's two more-northern neighbors-both gas producers-Kazakhstan and Uzbekistan.
Fig. 2 shows the effects of post-Soviet geopolitics on the oil and natural gas production of Turkmenistan.
Fig. 2 also demonstrates that Turkmenistan's traditional customers are slipping away, either by Turkmenistan's choice because of the customers' inabilities to pay hard cash or by Russia's choice because Turkmen gas requires access to Russian pipelines and hence competes with Russian gas.
It is a hard lesson to recognize that Russia does not owe Turkmenistan access to its pipelines just because Turkmenistan has a large supply of gas. Fig. 3 shows that Russia has an even larger supply of gas than Turkmenistan does.
It also clearly shows that the gas reserves in Turkmenistan are not significantly higher than those of its neighbors. If Azerbaijan's gas reserves were to include the recently discovered gas field of Shah Daniz of 700-1,000 billion cu m (24.7-35.3 tcf), then it would be a strong competitor to Turkmenistan in exporting gas from the Caspian.
Besides gas reserves, we need to consider two other things:
- Uzbekistan has managed to increase its gas production and is now self-sufficient.
- Kazakhstan has yet to tap its Karachaganak field, which probably contains more reserves than are reflected in Fig. 3.
Markets
Fig. 4 shows the region-wide demand for natural gas.
With Uzbekistan and Kazakhstan potentially self-sufficient because of their adequate gas reserves, Turkmenistan will have lost the two largest regional markets.
It is true that, because of the present pipeline infrastructure-a legacy of the former Soviet Union's centralized planning system-both Kazakhstan and Uzbekistan are importing small quantities of gas today. But this is unlikely to lead to greater gas exports from Turkmenistan to these two economically dominant Central Asian countries.
Out of necessity, therefore, Turkmenistan will be forced to look outside the region for new markets. What are the most likely markets, given Turkmenistan's location?
One obvious possibility, evident in Fig. 1, would be Pakistan and India. Fig. 5 shows the Pakistan-India market.
But what would not appear either on Fig. 4 or Fig. 1 are the intransigent animosities between the two countries, principally over the Kashmir question. Also, there is a serious question whether international funding could be obtained, given the political risk in the country that would have to be traversed en route.
Only a few years ago, the Pakistani gas market looked within the grasp of Turkmenistan because of strong historic and religious ties, despite the well-known problem of constructing a pipeline through Afghanistan. But with its own new gas discoveries, Pakistan may not need gas from Turkmenistan for the next few years.
With the loss of the Pakistan gas market, which was small to start with, Turkmenistan was looking towards India. In terms of potential, India has a gas market of more than 100 billion cu m. But to have access to that huge market, Turkmenistan must leap two hurdles: the civil war and Taliban problem in Afghanistan and the continuing political enmity and distrust between Pakistan and India.
In addition, should there be an improvement in the relationship between Pakistan and India, Iran will have competitive advantage over Turkmenistan.
Iran has the second largest gas reserves in the world, and its cost of producing gas is more or less the same as for Turkmenistan. But Iran will be able to move gas to India at lower cost because a pipeline to India from Iran will be cheaper than from Turkmenistan to India.
Thus Turkmenistan cannot depend upon Indian and Pakistani markets. Iran is already discussing with India construction of a gas pipeline to India.
Fig. 6 suggests another possible market, China.
A close analysis of the costs involved in building a pipeline to China, however, indicates they could reach $10 billion. As a result, most knowledgeable analysts have discounted the possibility of such a line ever being built.
Europe, including Turkey, would be the next logical choice. Fig. 7 shows European demand projections. In terms of sheer market potential, the European market indeed looks attractive to Turkmenistan.
But the cost of supplying a competitive market like Europe puts Turkmen gas at a huge disadvantage today with respect to existing competitors, not the least of which would be Russia. Other competitors would include existing North Sea production, as well as African producers, including those nations with LNG export capacity, especially Algeria and Nigeria.
Turkey possibility
Most analysts feel that it would be too costly and competitively difficult for Turkmenistan to attempt to export to Western Europe without some customers along the way.
Turkey is in fact such a customer. Fig. 8 projects Turkish market demand.
Turkmenistan's main problem is timing: If it is going to compete for the Turkish market, it must get its production on line before other pipelines soak up demand (Fig. 9).
One projection of the relationship of Turkmenistan's supply shows that if the Blue Stream pipeline, under construction now, is completed and if the "low" projection of Turkey's gas demand (35 billion cu m; Fig. 8) holds, there will be no need for Turkmen gas.
Under the low-demand scenario, Turkey will not need all the gas it has contracted for, even from the Blue Stream pipeline. Had the TCP already been started, the situation between it and Blue Stream might very well be reversed, with Blue Stream then behind the timing curve.
Under the high-demand scenario, Turkmen gas would be needed to fill demand but only after 2007. But even this will look less likely with the discovery of Shah Daniz gas field off Azerbaijan.
On the Turkish side of the Caspian, BP PLC is moving quickly to market production from Shah Daniz field by promoting the construction of a gas pipeline across Azerbaijan, Georgia, and into Turkey.
Although BP was originally optimistic of supplying gas into the Turkish market as early as the end of 2002, it looks highly unlikely now. In March of this year, an intergovernmental agreement was signed to supply gas from Shah Daniz starting in 2004 at the rate of 2 billion cu m/year and reaching a high of 6.6 billion cu m/year by 2007.
As pointed out earlier, Turkey may not need this gas, and it is free to sell it to other countries according to the memorandum of understanding signed between Azerbaijan's State Oil Co. of Azerbaijan Republic and Turkey's Boru Hatlari ile Petrol Taintergralima Atrademark (Botas).
Turkmenistan's posturing delays over Caspian boundaries and seeking great limitations on the access of Azerbaijan to the TCP now mean that any chances of its being constructed any time in the near future are limited, despite the signing of many agreements between Turkey and Turkmenistan.
With respect to alternative corridors for getting Turkmen gas to Turkey-meaning Russian and Iranian pipelines-in the long run, both of the countries will drive hard bargains for Turkmen access to the Russian and Iranian pipeline systems.
Indeed, the sharp decline in production following the breakup of the USSR (Fig. 2) should warn Turkmenistan that it is vulnerable to Russian competition. This is notwithstanding the fact that recently Russia has purchased some 30 billion cu m from Turkmenistan.
These recent gas purchases by Russia result from the failure of state-owned gas giant OAO Gazprom over the past few years to invest sufficient funds to keep up with declining gas production in existing developments and also to develop new gas fields.
In other words, this is a temporary shortfall in Russian production that will likely disappear as Gazprom or some other new Russian or foreign-owned gas companies will be able to invest in the future to develop its huge gas reserves.
The end of TCP?
But also importantly, the recent sale of gas to Russia by Turkmenistan just at the time when TCP needed to demonstrate a dedicated gas supply to justify project financing may be the coup de grace for TCP.
There was some confusion at the time of the sale as to how long the commitment ran. Although it turns out that the commitment was short-term, there was a delay associated with clearing up the confusion, and other events may have now outrun Turkmenistan.
Had the sale of Turkmen gas to Russia been long-term and had the amounts exceeded 30-45 billion cu m, there simply would not be enough proven gas reserves to justify expenditure of the sums necessary to build the TCP.
When Pipeline Solutions Group (PSG), an international company formed by a partnership of Bechtel Enterprises Inc. and GE Capital Structured Finance Group, signed a contract to construct TCP, it was welcomed with open arms by Turkmenistan, because Turkmen gas production had fallen to less than 13 billion cu m/year. As first Ukraine, then Russia followed by Iran, however, started to show keen interest in purchasing gas, Turkmenistan started to drive a hard bargain with PSG.
Even when PSG took Royal Dutch/Shell as equal partner, because of the tough bargaining terms demanded by Turkmenistan, economics of TCP continued to remain unattractive.
Still, because of the invisible hand of the US, TCP might have been constructed. But Turkmenistan failed to see the strategic importance of TCP and was influenced more by the short-term sales to Russia and Ukraine.
The Turkmen government could not appreciate the strategic importance of the assistance given by the US government in promoting TCP.
Iran, with the second largest gas supply in the world, can be expected to drive just as hard a bargain for a southern route as Russia would for its northern route. TCP appears to be in its death throes.
As a result, Turkmenistan will fall into the role of a minor spot provider of gas for Russia, Iran, other Central Asia nations, and such noncash purchasers as Ukraine that Russia does not want to supply.
So, our conclusion is that delays from a variety of causes-mostly lack of strategic thinking on the part of Turkmenistan-may have put TCP out of reach. This, in turn, will result in driving away the potential foreign investors who otherwise would have been interested to explore the huge unproven gas reserves of Turkmenistan.
The authors
Bhamy V. Shenoy is principal consultant at PA Consulting Group, Arlington, Va., and senior energy policy advisor for the US Agency International Aid (USAID) funded energy sector reform project in Georgia. Shenoy held various positions at Conoco Inc. during his 21-year career. He holds a BTech in mechanical engineering from the Indian Institute of Technology, Madras; an MS in industrial engineering from Illinois Institute of Technology, Chicago; and a PhD in business administration from the University of Houston. He has also attended the Executive Program in Business Administration at Columbia University, New York.
William James is the resident project manager in PA Consulting's office in Tbilisi, Georgia. With more than 25 years as an oil and gas attorney, he began consulting in 1997 following a 2-year sabbatical to attend graduate school at the University of Chicago. He holds an MBA from Chicago's Graduate School of Business, a Juris Doctor from the University of Denver, and a bachelor's degree in aerospace engineering from the University of Colorado.
