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Medvedev Brings A Strong Hand To Gas Negotiations With Turkmenistan


Russian President Dmitry Medvedev and Turkmen President Gurbanguly Berdymukhammedov meeting in Ashgabad, 2009
Russian President Dmitry Medvedev and Turkmen President Gurbanguly Berdymukhammedov meeting in Ashgabad, 2009
Not so long ago Russia, or rather the state-owned gas company Gazprom, was willing to buy as much Turkmen gas as it could, and was willing to pay top dollar for it.

But that was before the global economic crisis hit, along with a significant reduction in demand and price for natural gas. Now, as Russian President Dmitry Medvedev comes calling on his current two-day visit to Turkmenistan, any bargaining on natural-gas supplies and prices will be from a position of strength.

Jonathan Stern, Gas Program director at the Oxford Institute for Energy Studies, explains that the problem is now the opposite: Russia has contracts for gas it doesn't actually need. "Their problem is that they've actually signed contractual agreements with the Central Asian countries, which, of course, they will probably need again in the future."

But, at the present moment, Stern says, "With the oversupply of gas still with us, demand still not recovered, they really don't need this gas."

On-Again, Off-Again

When Medvedev last visited Ashgabat in December 2009, relations between Ashgabat and Moscow had soured significantly, stemming largely from the fall of gas prices over the course of the previous two years.

When prices dipped, Russia managed to renegotiate the price it paid for natural gas imported from Uzbekistan and Kazakhstan. But Turkmenistan, which boasts the world's fourth-largest gas reserves and sent 90 percent of its exports to Russia, continued to insist on "European prices."

In April of 2009, a gas shutoff caused Turkmenistan's main export pipeline to burst, an event Ashgabat blamed on Russia, and which cost it an estimated $1 billion for every month the pipeline was out of operation.

Stern says when the pipeline broke down for eight months, from April to December 2009, Turkmenistan realized it had to look for markets outside Russia.

By December, when Medvedev last visited the Turkmen capital, Turkmenistan had strengthened its hand by embarking on an effort to diversify its gas exports and reduce its dependence on Russia.

Medvedev's trip resulted in the resumption of Turkmen gas supplies, although only some 11 billion cubic meters (bcm) annually. That was just a quarter of the previous volume of 40 million bcm before their dispute and far short of the 65 bcm that Gazprom had discussed purchasing annually just years ago. But Turkmen officials sensed a degree of success during the Russian president's visit, seen in Turkmenistan's decision to, as Stern puts it, "sell less gas at a higher price."

Shortly after the visit, Turkmenistan made good on its diversification efforts by opening a new pipeline capable of sending 40 bcm to China. In addition, another new pipeline upped exports to Iran by 12 bcm, adding to the 8 bcm already being exported.

Promise Of A New Year

This year, Turkmenistan continued to try to strengthen its bargaining position through a policy of diversification.

Recently, the Turkmen government has spoken often about projects that would bring its gas to Europe -- such as the European Union-backed Nabucco pipeline, and President Gurbanguly Berdymukhammedov has actively championed the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, despite lingering security concerns about the project.

But no contracts have been signed for any of those projects, putting a damper on Berdymukhammedov's stated aim of increasing annual gas exports drastically. If the Turkmen president hopes to realize his goal of upping exports from their current 25-30 bcm to 180 bcm by 2030, then he needs Russia. And if Ashgabat wants Moscow to import more gas, then it will likely have to drop its price.

Complicating things is that several of Russia's large new gas fields are starting to come on line, reducing its need for Turkmen gas. The Yamal Peninsula deposit in far northern Russia is believed to hold some 16 trillion cubic meters of gas.

In 2011 production from Yamal could reach 15 bcm. Just one of the Yamal fields, the Bovanenkovo field, should eventually have a yearly output of more than 100 bcm. All of this gas is earmarked for Europe and combined gas from Yamal fields would easily fill the new Nord Stream (55 bcm at full capacity) and South Stream (63 bcm at full capacity) pipelines with some to spare.

Window Of Opportunity

Despite this, Turkmenistan does have a small window of opportunity to exploit during talks. Russia's plans to develop fields located in such northern latitudes as Yamal require building infrastructure that can withstand harsh conditions and that will be costly.

Stern says Turkmenistan's best approach would be to warn Russia, that such volumes of gas will not be available in the future. ""I think that the only bargaining position that the Turkmen have is to say to the Russians, in as nice a way as they possibly can: 'Don't take us for granted, don't imagine that if you come back to us in 2015 and suddenly say that you need 50 to 100 bcm of gas, which were the kind of volumes you were talking about in the early to mid-2000s. Don't imagine that we'll suddenly have it available for you because we've had to develop these alternative markets in China, in Iran, and possibly in Europe.'"

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