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Analysis: Talking Gas In Turkmenistan

Gas will be on Ukrainian President Viktor Yushchenko's mind on 22 March when he arrives in Ashgabat to meet with Turkmen President Saparmurat Niyazov.

Steady supplies of Turkmen gas are critical for Ukraine as it seeks to reform its energy sector, while diversifying its energy supplies. Yushchenko is hoping to cut a deal that will insure that the pipelines remain filled.

Ukraine's present contract with Turkmenistan for gas expires by the end of 2006. Beginning in January 2007, most Turkmen gas will go to Russia's Gazprom. The Russian energy company has signed a 25-year contract with Ashgabat that allows it to purchase the majority of Turkmenistan's gas production. Ukraine will then be forced to purchase from Gazprom the 36 billion cubic meters of Turkmen gas it needs annually.

In January, Ashgabat unexpectedly raised the price of gas by 32 percent to $58 per thousand cubic meters. Ukraine almost immediately agreed to pay. Gazprom, however, decided not to buy gas at the higher price and does not seem to be in a hurry to negotiate with Niyazov. This situation places Ukraine in a slightly favorable position in the coming negotiations with Turkmenneftegaz, the state oil and gas company.

New Strategy

The new Ukrainian gas strategy seems to be a multifaceted one. Oleksiy Ivchenko, the new head of Ukraine's oil and gas monopoly Naftohaz Ukrayiny, has put forth a proposal to create a Ukrainian-German-Polish group to sell non-Russian gas to the European Union. The group is exploring the possibility of purchasing Turkmen and Kazakh gas for resale to the EU and thus break Gazprom's monopoly on sales to Europe from the former Soviet Union. The major drawback of this plan is that presently all Central Asian gas is carried in the Central Asia Center trunk pipeline, which goes through Russia to Ukraine and then to the EU.

The German gas company EON is said to be involved in discussions with this group, RIA Novosti reported on 11 March. During his visit to Germany in March, Yushchenko met with EON executives along with the head of Ruhrgas, Germany's largest gas company.

Soon after Yushchenko's visit, Deutsche Bank announced a 2 billion euro ($2.6 billion) credit line for Naftohaz, Interfax reported on 9 March. The credit line is to last for five years and the first tranche of $350 million is expected in April.

Another facet of Ukraine's strategy is to expand the number of participants in the consortium that manages the Ukrainian trunk pipeline. This pipeline delivers 80 percent of Russian gas to the EU. The consortium presently consists of Ukraine and Russia, which both hold 50 percent of the shares. The Ukrainian side has proposed to expand the consortium's membership and allow all EU members, as well as Turkmenistan and Kazakhstan, to join.

Branching Out

Ukraine is also exploring the possibility of buying Iranian gas. In an interview with the Ukrainian weekly "Zerkalo Tyzhnya" on 19-25 March, Ivchenko mentioned that there was room for Iran to join the pipeline consortium. Yushchenko has announced his intention of visiting Iran in the first half of the year. One possible topic of discussion in Tehran could be a feasibility study, prepared by the Kyiv-based VNIPI Transgaz Institute, for a 550-kilometer gas pipeline from Iran to Armenia to the Georgian port of Supsa then under the Black Sea to the Crimean town of Feodosia. The cost of the project has been estimated at $5 billion with the capacity to deliver 60 billion cubic meters of gas a year, of which 10 billion would remain in Ukraine.

Also up for discussion is the question of who will be the "operator" of Turkmen gas to Ukraine. Ivchenko told "Zerkalo Tyzhnya" that the present arrangement with the RosUkrEnergo company is not in Ukraine's interests. If Ukraine ends its contract with RosUkrEnergo, it will push Russia's Gazprom out of a very profitable venture. Gazprom is a major shareholder in RosUkrEnergo and, as such, stands to lose millions of dollars. RosUkrEnergo took over the "operator" contract from a Hungarian-registered company, Eural Trans Gas, in January.

The new Ukrainian government is also likely to investigate some of the murkier dealings from the era of former President Leonid Kuchma. On 3 March, Interfax reported that Ukrainian Prime Minister Yuliya Tymoshenko announced that the former senior management of Naftohaz will be investigated by the Ukrainian authorities for "gray schemes" in the transport of Turkmen gas to Ukraine.

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