Gazprom Deal Imperils Hopes For Trans-Caspian Pipeline

A landmark deal reached this month between Russian gas giant Gazprom and three energy-rich Central Asian states is likely to usher in dramatically higher prices for countries reliant on Russia for their natural gas.

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The agreement will virtually double the price of gas in 2009 and could signal the end of European plans to transport gas across the Caspian Sea and away from Russian control.

Gazprom's desire has been to maintain as much control over the export of Central Asian energy resources as it can -- and this deal, bringing Central Asia's energy exporters closer to Gazprom, seems to guarantee that such control will last well into the foreseeable future.

Gazprom CEO Aleksei Miller agreed on March 11 with the heads of state-controlled gas companies from Kazakhstan, Uzbekistan, and Turkmenistan that those countries will receive "European prices" for their deliveries in 2009 -- somewhere between $350 and $400 per 1,000 cubic meters of gas.

That is more than double the price that Gazprom is currently paying for Central Asian gas, spelling huge new profits for Kazmunaigaz, Uzbekneftegaz, and Turkmengaz.

The deal is likely to hit European consumers soon after the new prices kick in on January 1.

New Tack

It was a surprising move for Gazprom, which runs all the current functioning gas pipelines running out of Central Asia except for one modest pipeline between Turkmenistan and Iran and a partially opened pipeline between Kazakhstan and China.

Mindful of its virtual monopoly on the region's gas exports, Gazprom had spent more than a decade resisting calls for higher prices and signing long-term contracts at below-market prices.

Gazprom was paying Central Asian states less than $70 per 1,000 cubic meters of natural gas at the start of 2006. Less than 12 months later, Gazprom had agreed to pay $100 per 1,000 cubic meters for 2007; by the end of this year, the figure will rise to $150.

Uzbekneftegaz's Sobir Salimov tells RFE/RL's Uzbek Service that as far as Uzbekistan is concerned, Gazprom has finally made the right decision.

"Prices were always different. We had one price, the Turkmen had another. And if we say $120, you know that Russia sells it for $300," Salimov says. "Uzbekistan is now strengthening its position to balance this situation. Uzbekistan will remain firm on this position and if we stay firm Gazprom will have to accept it."

The view was similarly positive from KazMunaiGaz spokesman Arzhan Takachev, who expressed the satisfaction of all three Central Asian countries at the new Gazprom price for their gas.

"We had a situation where we were not able to sell our gas at prices that suited us, and finally we came to an agreement with Gazprom," Takachev says. "This matter is in the common interest of all three republics, and it was a common initiative inasmuch as the gas from our three countries goes through Russia, so all the [Central Asian] parties had an interest [in higher prices]."

Aiming High

Numerous articles in the Russian press put the "European price" for natural gas this year at $300-$350 per 1,000 cubic meters, with some forecasts of $400 by year-end.

Russian analysts said that by hiking the price it pays for gas, Gazprom will see a cut in its profits. But many -- like Matthew Clements, the Eurasia editor at London-based Jane's Information Group -- also expect Gazprom to defray some of the increased expenses by passing the cost on to consumers.

"It's obviously Gazprom who is the intermediary and who is going to be buying the Central Asian gas and pushing it forward on to Western customers and who is going to be making its own profits," Clements says. "And obviously if it's facing increased supply costs, it's going to be increasing its own prices for the Western customers."

Most European consumers already pay "European" prices for Gazprom's gas. But within the Commonwealth of Independent States (CIS) there are countries that have enjoyed beneficial pricing for their gas imports. One is Ukraine, which this year is paying $179.50 per 1,000 cubic meters of gas.

Aleksandr Yakovlev, an analyst for the RosBusiness Consulting Center in Moscow, notes that Ukraine buys its gas from Turkmenistan and tells RFE/RL's Turkmen Service that Gazprom is unlikely to give Ukraine any more special deals on gas. "From Gazprom's point of view, they are not losing anything," Yakovlev says. Gazprom "will load those expenses on the shoulders of Ukrainian consumers."

Oleksy Ivchenko, the former director of Ukrainian national gas company Naftohaz Ukrayiny, tells RFE/RL's Ukrainian Service that the country can cope with higher prices stemming from the recent deal.

"This will not create a major problem for Ukraine. The Ukrainian economy is ready today to buy gas at European prices," Ivchenko says. "The only thing that the scheme of delivery should mean is that the price of gas for Ukraine has to be balanced with the transit-fee payments: the European price for gas minus the [Western] European transit fee."

Clements disagrees with Ivchenko regarding Ukraine's ability to pay $300-$400 per 1,000 cubic meters of gas. "I think there's going to be serious concerns for the Ukrainian economy for this kind of rise [in price]," he says. "Last year the Ukrainians were putting forward figures of less than $200 for 1,000 cubic meters, which the economy could safely absorb. It's already $179 for this year; if it goes much beyond this, then the Ukrainian economy is going to face some pretty severe difficulties."

Ukrainian Prime Minister Yulia Tymoshenko had tried to reach a four-year agreement with Gazprom that would allow a gradual increase in gas prices for her country. But Gazprom said on March 13 that it had agreed with Ukraine that gas supplies for January and February would be charged at $315 per 1,000 cubic meters, but for the remainder of the year the price will be $179.50 per 1,000 cubic meters.

Watching Closely

Two other CIS countries, Kyrgyzstan and Tajikistan, were closely watching Tymoshenko's talks with Gazprom. They both receive their gas from Uzbekistan via agreements that are renegotiated every year. This year, the two countries are paying Uzbekistan $145 per 1,000 cubic meters, while before 2006 they were paying less than $50. Despite their potential to generate hydroelectric power, Kyrgyzstan and Tajikistan are several years away from being able to replace Uzbek natural gas with their own sources of power.

Kyrgyzstan and Tajikistan are often behind on their payments to Uzbekistan and therefore face regular reductions and even cutoffs of Uzbek gas.

Bazarbai Mambetov, the president of Kyrgyzstan's Oil Traders Association and a former deputy prime minister, tells RFE/RL's Kyrgyz Service that Kyrgyzstan would not be able to afford the "European" prices proposed by Gazprom.

"I heard on television that [Aleksei] Miller of Russia's Gazprom will travel to Central Asia and that the Central Asian gas price will double next year," Mambetov says. "If the price doubles, then it will be about $300. We don't have the ability and money to buy it for $300 per 1,000 cubic meters."

Shaukat Shoimov, the deputy director of state-owned Tojikgaz, tells RFE/RL's Tajik Service that Tajik officials were following the Gazprom deal but would not react until later, when gas talks with Uzbekistan would be held. Shoimov says the Uzbek side had not "said anything so far."

"I heard the report about this [Gazprom deal], but we have not received any official news yet," Shoimov says, "so all we can say is that they didn't inform us officially [of a price increase]."

Tajikistan is the poorest of post-Soviet Central Asia's five republics, and consumers are likely to be hard-hit by any significant increase in utilities prices. A resident of Dushanbe tells RFE/RL's Tajik Service that a gas-price rise would "severely affect" Tajiks. But he adds that Uzbekistan frequently shuts off gas supplies in any event.

"Even when we pay for gas in advance, they don't provide gas regularly -- for example, they would give us gas for one month and then for one month they wouldn't," he says. "[Price increases] will be hard for people, and they will suffer more. We already have small salaries, and if they increase gas prices people won't know what to do. If gas prices rose, it would severely affect us and we would suffer."

East And West

China is another important consumer of Central Asian gas. Beijing has contracts for natural-gas supplies from Kazakhstan and Turkmenistan, and China is helping pay to develop gas fields and construct pipelines to bring the gas thousands of kilometers eastward to help fuel its economic boom.

China has signed multidecade contracts with Kazakhstan and Turkmenistan for huge amounts of gas, but Clements of Jane's Information Group says that does not necessarily mean the price won't change. "The Central Asian states have previously shown a willingness to renege on these contracts," he says. "Certainly Turkmenistan has done it to Russia, so why would they not do it to China as well?"

Clements adds that Central Asian countries will be cautious in talks with their giant eastern neighbor, especially since Russia is also competing to sell China gas.

Foremost among those who want to bring more Central Asian gas to their market is the European Union, for whom the Gazprom deal changes the calculus. With strong support from Washington, the EU has been increasing efforts for proposed trans-Caspian pipelines to be built to better connect Central Asian energy resources to

Europe, minus Russia as a middleman.

Recent EU efforts have helped push relations between Azerbaijan and Turkmenistan to new heights, raising hopes for the construction of a pipeline from the eastern side of the Caspian that would eventually go to Europe.

Russian newspapers have suggested that the Gazprom deal eliminates some of the incentive for Kazakhstan, Turkmenistan, and Uzbekistan to get involved in EU pipeline plans. From those countries' point of view, that reasoning goes, the main problem with gas exports to Russia was always the low prices paid by Gazprom. With that problem solved, Russian newspapers have predicted that projects like the proposed Nabucco pipeline -- which would bring Caspian Basin gas to Europe without traversing Russia -- are doomed.

Clements says that for Russia, this month's Gazprom deal is the culmination of a process that has been under way for some time. He calls it "part of a long-term process that Russia has been undertaking to make sure that Europe doesn't find any alternative sources of energy away from its pipeline monopoly."

Clements says EU pipeline plans were not necessarily doomed, however, pointing out that a Caspian pipeline was still in Europe's interest irrespective of price.

"I wouldn't say it completely kills the plans," he says. "I think the European desire is not so much cheaper gas -- it's to get gas that isn't completely controlled by Russia from its source to [Europe]."

RFE/RL Kyrgyz Service Director Tynchtykbek Tchoroev, Tohir Safarov of the Tajik Service, Rozinazar Khoudaiberdiev of the Turkmen Service, Michael Mihalisko of the Ukrainian Service, and Alisher Sidikov of the Uzbek Service contributed to this report

Copyright (c) 2007. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.