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April 18, 2005

East: Ukraine, Russia Spar Over Turkmen Gas

by Roman Kupchinsky

18 April 2005 (RFE/RL) -- A number of unpublished agreements purportedly signed between the governments of Ukraine and Turkmenistan for the purchase of natural gas have inflamed the conflict between Kyiv and Moscow over natural-gas deliveries from Turkmenistan.
The Russian newspaper "Kommersant-Daily" on 14 April reported that during Ukrainian President Viktor Yushchenko's visit to Ashgabat on 22-23 March, he signed a long-term agreement set to begin in 2006 by which Ukraine would purchase 50-60 billion cubic meters (bcm) of Turkmen gas annually through 2026. Ukraine would buy 38 bcm for its own use, while the remaining 12-22 bcm would be sold to Western Europe.

The contract is potentially problematic because a similar volume of gas had already been earmarked for sale to Russia's Gazprom. Turkmenistan, which presently produces 58 bcm per year, does not currently have the capacity to sell such a large amount of gas to both Ukraine and to Russia. Moreover, Turkmen President Saparmurat Niyazov has promised to supply 15 bcm of gas annually for 30 years via Afghanistan to Pakistan.

Turkmenistan has proven reserves of 2.86 trillion cubic meters (tcm) of natural gas, according to the U.S. International Energy Agency, while Russian industry sources place those reserves at 2.1 tcm.

A Blow To Moscow's Plans?

A loss of Turkmen gas supplies would be a serious blow to the Russian leadership's geopolitical plans.

"Turkmenistan's gas reserves were critical to Russia's domination of the European gas market," Martha Brill Olcott, a specialist on the problems of transitions in Central Asia and the Caucasus, wrote in a 2004 study of Central Asia's gas trade in Central Asia, adding: "Moscow wanted to retain control over the gas spigots of several Commonwealth of Independent States (CIS) states, including fractious Georgia and independent-minded Ukraine. Buying and then reselling Turkmen gas allowed Moscow to supply these states while keeping the lucrative markets of Europe largely to itself."

Russia and Turkmenistan signed a 25-year agreement in April 2003 that was to take effect in 2006 whereby Russia, over time, would effectively buy all Turkmen gas production. This agreement now appears to have been abandoned -- or at least is in danger of collapsing.


The new Ukrainian-Turkmen agreement, if implemented, would effectively shut Gazprom out of purchases of Turkmen gas for 20 years. The Ukrainian government neither confirmed nor denied the "Kommersant-Daily" report.

Such an agreement could lead to gas shortages in Russia and see Turkmenistan entering the European gas market, where it would compete with Gazprom. Such a deal with Ukraine would also help diversify European gas supplies, something that the European Union and the United States have been encouraging for some time.

The Men From RUE

In addition to buying most of Turkmenistan's gas production, "Kommersant-Daily" reported that Ukraine is also insisting that its own gas monopoly, Naftohaz Ukrayiny, become the operator for Turkmen gas deliveries to Ukraine. That could force the present operator, RosUkrEnergo (RUE), out of business -- thus ending a murky scheme that appears to benefit only Gazprom and the Kremlin. Meanwhile, the role of the Austrian partner in RUE, RaiffeisenInvest, is unclear. The prospect of losing a lucrative contract worth some 15 bcm, or an annual profit of approximately $300 million, is upsetting Gazprom management and the Kremlin. It might also have repercussions for Ukrainian-Russian relations.

It is altogether possible that Russia is pressuring Ukraine to allow RUE to remain as the operator. The cancellation of Ukrainian Prime Minister Yuliya Tymoshenko's recent visit to Moscow could well be connected to the gas dispute -- as few people believe that Russian authorities would arrest her as soon as she stepped onto Russian soil or that she was truly needed in Kyiv to make arrangements for spring planting.

In early January, Turkmenistan halted deliveries of gas to Gazprom over a price disagreement. Ukraine agreed in January to pay Ashgabat $58 per 1,000 cubic meters of gas instead of the earlier price of $44, but Russia has refused to cut a deal at the new price. Taking advantage of this situation, Yushchenko made a long-term proposal at the higher price (which is bound to continue going up) and ensured supplies for Ukraine for the next 20 years.

Soon after the announcement of the Ukrainian deal, Gazprom CEO Aleksei Miller flew to Ashgabat and, according to "The Moscow Times" of 18 April, agreed with Turkmen President Niyazov to continue to pay the old price for gas -- $44 per 1,000 cubic meters -- but to pay it all in cash and not 50 percent in the form of a barter. The Turkmen side agreed to turn on the spigot but did not say when this would take place. This contract is to end in January 2006.

In 2005, Ukraine is under contract to purchase 38 bcm of Turkmen gas, of which it gets only 23 bcm after paying RosUkrEnergo its 15 bcm commission.

However, Turkmenistan is notorious for making promises that it cannot or does not keep.

"The government of Turkmenistan under President Niyazov is unquestionably an unreliable partner, offering little protection to ensure the sanctity of contracts," Olcott wrote in 2004. "The political future of the country is very uncertain, and the successor regime to that of Niyazov may well try to overturn the decisions of its predecessor."

One major obstacle to the Ukrainian-Turkmen deal is the matter of transporting the gas to Ukraine. The only pipeline presently capable of transporting this gas is the Gazprom-controlled Central Asia-Center trunk pipeline, which has a capacity of 90 bcm per year.

Russia could well forbid the use of its pipeline in order to sabotage the Ukrainian deal by constraining Ukraine and Turkmenistan to construct an expensive alternative route.
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