Forsaking Russia’s gas monopoly Gazprom, Turkmenistan has turned East to cooperate with China on a major pipeline and has enthusiastically proposed to Kabul help with peace talks and reconstruction to build the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Ashgabat has also put out feelers to the West with an offer to U.S. companies Chevron and ConocoPhilips to submit tenders for offshore drilling, and has intriguingly offered the Italian oil company Eni the opportunity for a production-sharing agreement onshore in the Nebit-dag gas and oil field. Meanwhile, the Russian company Lukoil, which had courted Turkmenistan when Gazprom was in disfavor, is finding itself left out of all the deals.

Maksim Khrustalev, writing for the Russian Internet business portal km.ru, says the British Petroleum announcement that Turkmen oil has begun to go to the Baku-Tbilisi-Ceyhan pipeline means that Turkmenistan can now deliver its hydrocarbon resources to Europe, bypassing Russian territory

"Turkmenistan lately is demonstrating more frequently that Russia is no longer a strategic partner for her," says Khrustalev. President Berdymukhamedov is giving preference to companies from the U.S. and United Arab Emirates to develop the Caspian Sea shelf, and Russia's Lukoil was not even allowed in the tender, he noted.

The Turkmen leader said at a government meeting August 12 that he would invite Chevron, TX Oil, ConocoPhillips and Mubadala Development to submit proposals.

"Lukoil has been making attempts for several years to get into the oil sector of Turkmenistan, but it has not been successful. And now the Turkmen authorities prefer to reject our participation," a source in Lukoil told RBK, the Russian business daily. The source said that for a long time Lukoil has been trying to negotiate with Ashgabat on the very same sea blocks -- nos. 9 and 20 -- which were now being given away to other foreigners.

"Getting into the Turkmenistan market is not so easy; they are now completely oriented toward the West. We offered the Turkmens more investments and comfortable terms of work, but our efforts were in vain," the source added, in what may be a cautionary tale.

Lukoil also tried to form a joint venture, but the Turkmen officials would not give their consent for registration, and refused to discuss their reasons. Apparently Russian companies were not able to compete with Western companies because the blocks were more complex to drill, and the Turkmen government wanted the companies that have the most modern equipment and greater investment capacity, says Khrustalev.

A Lukoil source told him that he believed this was just an excuse on the part of the Turkmen government, however, as Lukoil said they had the technology and the investment ready. Only Itera is left among Russian companies working now in Turkmenistan in the oil and gas sector, after relations soured with Gazprom over the April 2009 pipeline explosion, for which the Turkmen leadership blamed the Russian company -- a claim Gazprom denied.

Under a 2008 contract, Gazprom was supposed to buy 50 million cubic meters (bcm) for $300/1,000 cubic meters. But due to the global recession, Gazprom faced having to re-export at a loss -- and the Turkmen government demanded a clause to be inserted into the contract denying Gazprom the right to re-export Turkmen gas.

Previously, Gazprom had re-sold Turkmen gas to Ukraine and the EU, and did not pay export taxes which made up 30 percent of the price. Turkmenistan then began to insist that Russia sell Turkmen gas inside Russia, and sell its own gas abroad, and also pay the full export tax. Gazprom, facing falling demand, decided it was not worth it to buy Turkmen gas. Ashgabat continued to insist that Russia adhere to its original contracted planned purchases at the agreed prices. When Moscow refused, Turkmenistan turned to China, which gave a loan to build a pipeline quickly that opened in December 2009.

Khrustalev says that the price of Turkmen gas for China is still not settled, despite the opening of the pipeline. According to his information, China is counting on buying gas at the Turkmen-Uzbek border for $100-130/1,000 cubic meters. Although the Chinese border is only 1,700 kilometers from Turkmenistan's gas fields, the areas of greatest Chinese consumption are 6,000 kilometers away, and thus cost Beijing more to ship. China handily exploited the Russian-Turkmen disagreement to get a price that Russia wouldn't give China in negotiations to build a pipeline to China through Altay Territory in Russia.

Sources say that out of the first $4 billion loan from China, $1 billion went to stabilize Turkmenistan's budget, and $3 billion went to buy Chinese goods and services for extracting gas. Ashgabat is now seeking a second loan from Beijing for $4.1 billion.

Konstantin Simonov, general director for the Foundation for National Energy Security, says Russian-Turkmen relations have been strained, and only President Dmitry Medvedev's visit to Ashgabat last December enabled them to be somewhat improved, Khrustalev reports. But the price Turkmenistan is demanding from Russia is just not being met. Gazprom contracted to buy only 10 bcm from Turkmenistan this year, less than Russia buys from Uzbekistan. Simonov believes that the plan to transport liquefied natural gas in tankers across the Caspian is too dangerous, and carries the risk of large-scale disasters without highly-sophisticated technology at terminals and on tankers. No serious business will invest in the Trans-Caspian pipeline while Turkmenistan and Azerbaijan have not agreed, he says.

The delivery of oil to Baku is not such a big deal, says Simonov, and Turkmenistan only produces 10 billion tons of oil a year, far less than Azerbaijan and Kazakhstan, and would make up only 5 percent of the flow on the Baku line.

It's interesting that Lukoil should see Turkmenistan’s recent moves as "orientation to the West" given the Chinese pipeline and the enthusiasm for TAPI. There’s also the fact that offshore drilling permits do not yield very much for oil companies. They seek a production-sharing agreement that would allow them rights to onshore exploration and equity in the revenue -- not just a service contract to provide test probes or supply the new technology President Berdymukhamedov is always urging his ministers to adapt. The facts so far are that now that Russia is no longer Ashgabat's best customer, Turkmen gas and oil have moved to Iran, China, and Azerbaijan, and the rest remains to be seen when the spigots are turned on.