A consortium of Russian companies has stalled on a major production-sharing deal with Turkmenistan, throwing the prospects for Russian investment there in doubt. The economics of such investment may face another test, as Ukraine is reportedly seeking access to the same gas fields Russia hopes to tap.
December 12 had looked like a watershed date for Turkmenistan's gas sector, which has lured fewer investors than other states on the Caspian Sea. [For background see the Eurasia Insight archives.] The Russian oil consortium Zarit, which includes state-owned firms Rosneft and Zarubezhneft and private gas trader Itera, was due to sign a production-sharing agreement with Turkmenistan's government in the capital, Ashgabat. The 25-year agreement would involve four oil-and gas-rich blocks in the southern part of the Caspian shelf near the Iranian border. But the deal did not close. Wire services reported that parties were still negotiating.
The Zarit leaders seem intent on exploiting Turkmenistan's corner of the Caspian: Itera head Igor Makarov reportedly pledged to start drilling at the offshore blocs in 2004, and Zarubezhneft head Nikolai Tokarev issued a statement promising to execute a deal "in the near future." Both men reportedly met Niyazov on December 12 to discuss the deal. Zarit came together in 2002, reportedly to attract Turkmenistan's state-owned firms and Iranian businesses. Russia has been keen to mine the Caspian as richly as it can, but may have started approaching that task with fresh urgency after an American-backed oil pipeline from Azerbaijan to Turkey made strides in 2002 and 2003. The pipeline, now under construction, would bypass Russia; its lead private investor, Anglo-American energy conglomerate BP, is trying to build a gas pipeline that would do the same. [For background see the Eurasia Insight Business and Economics archive.]
Russia needs Turkmenistan's gas acutely because it can plug gaps in delivery that plague Gazprom, the Kremlin-controlled natural gas monopoly. Gazprom maintains export commitments to European markets, leaving it short of supply for domestic consumers. Niyazov has claimed that Turkmenistan has 22.5 trillion cubic meters, which would make it the third-largest potential natural gas source on earth. Whatever its real resources, its current exports go almost exclusively to former Soviet states via Russian pipelines. [For background see the Eurasia Insight archives.] While Russia needs transit fees, it also needs a healthy Gazprom. For this reason, Russian executives have consistently courted Niyazov. This courtship appeared to be blooming before December 12.
On April 10, Niyazov traveled to Moscow and signed a framework agreement on gas cooperation with President Vladimir Putin as well as a 25-year contract on gas supplies to Russia with Russian natural gas monopoly Gazprom. Niyazov pledged to supply up 100 billion cubic meters of gas to Russia annually from 2010 onward or 2 trillion cubic meters in 25 years. Russia would pay Turkmenistan $44 per thousand cubic meters, 50 percent in barter and 50 percent in cash. This would be twice the price Gazprom pays domestic suppliers, according to published reports. Niyazov whom detractors have accused of drug trafficking and other economic crimes claimed that the deal would bring Turkmenistan $200 billion and $300 billion to Russia.
At the time the presidents signed the deal, the only other foreign company of any size working Turkmenistan's sector of the Caspian shelf was Dubai-based Dragon Oil. Turkmenistan has also signed development deals with Malaysia's Petronas and Denmark's Maersk Oil. Now, though, Ukraine may be fashioning a deal much like the one Russia wants potentially slowing deals and jacking up prices.
On December 4, Niyazov and Naftogaz Ukrainy head Yury Boiko met in Ashgabat to discuss a 25-year gas supply agreement. Under a current five-year contract, according to Interfax, the Ukraine outfit receives upwards of 150 billion cubic meters at the price Russia agreed to in April. However, Boiko may be interested in crowding out the Kremlin. He has reportedly visited Ashgabat many times in 2003. The deal he discussed with Niyazov reportedly involved 3-4 trillion cubic meters of gas, guaranteed until 2032. Some expect Ukrainian President Leonid Kuchma to sign such an agreement with Niyazov during a visit to Asghabat in February or March.
Russia and Ukraine could eventually clash over these agreements, since the countries' gas companies cannot feasibly work on the same sector at the same time. Gazprom's framework agreement with Turkmenneftegaz implies the Russian company's nearly exclusive rights to purchase all Turkmen gas for the next 20 years. Gazprom has already committed to buy at least 60 billion cubic meters in 2007 and between 70 and 80 billion annually for 20 years from 2009. If these numbers materialize while Ukraine gets the volume it apparently expects, Turkmenistan's monopoly would have to produce around 100 billion cubic meters of gas annually by 2007 and 125-140 billion by 2009. The Moscow newspaper Kommersant and others have analyzed Turkmenistan's supply and called such numbers unrealistic.
Russia has reason to mistrust Ukraine. In 2001, Niyazov promised Russia's Rosoboronexport and Itera that Turkmenistan would accept gas-for-arms barter deals. So far, these deals have failed to materialize, while Ukraine has started importing more weapons to the defense-minded Niyazov. In 2002, Kiev reportedly earned some $50 million in arms deals with Ashgabat.
It is unclear what will happen next in negotiations between Zarit and Turkmenistan. But the arms story reveals how Niyazov's authoritarian ways make investment in Turkmenistan hazardous. [For background on the country, consult the Turkmenistan Project.] The president, who calls himself the "Head of All Turkmen," reportedly keeps a large stockpile of Soviet-era arms. If Russia hopes to circumvent other Caspian investors by plowing into Turkmenistan, it may face higher opportunity costs than a contract can reflect.
Sergei Blagov is a Moscow-based specialist in affairs of the Commonwealth of Independent States.