Turkmenistan is rapidly emerging as one of the key natural gas producers with abundant and relatively cheap gas reserves. The country possesses the fourth-largest natural proved gas reserves in the world, estimated by BP Statistical Review – 2014 at 17.5 trillion cubic meters (tcm).

Turkmenistan’s already sizable gas output is set to increase even more in the nearest future. In 2014, Turkmenistan produced over 76 billion cubic metres (bcm) of gas. Natural gas output is expected to increase to 83.8 bcm in 2015, beating late Soviet era record of 81.36 bcm in 1989. While it is too early to say whether the production goal of 230 bcm per year will be reached by 2030, it is obvious that Turkmenistan will be able to satisfy China’s growing appetite for natural gas and expand to new markets. This move will be facilitated by the decrease of Russia’s interest in Turkmenistan’s gas. Gazprom’s imports of Turkmen gas went down from around 40 bcm in 2008 to about 10.5 bcm in 2014. These volumes are expected to fall to 4 bcm in 2015. Imports to Iran – 9 bcm in 2014 – may substantially decrease in the near- and mid-term future when domestic natural gas production kicks off in case of softening of Iran’s sanctions regime. Furthermore, Business Monitor International (BMI) forecast Turkmenistan’s gas exports reaching 75.4 bcm in 2020. These volumes will largely suffice to honour Chinese export contracts - 65 bcm per year by 2020 – and satisfy decreasing Iranian and Russian interest in the Turkmen gas. According to Chinese Customs’ statistics released this January, last year Turkmenistan’s gas exports to China reached 25.9 bcm which represented almost 44 % of China’s total gas imports.

Natural gas is cheap in Turkmenistan


Turkmenistan’s gas reserves possess another important advantage – they are relatively cheap to develop. According to the Wood Mackenzie assessment, an average cost for the Galkynysh gas (phases I & II) composed of CAPEX (US$3.68 per barrel of oil equivalent (boe) - in 2014 US dollars) and OPEX (US$4.82/boe) is below $US9/boe. Sulfur-rich gas from ‘Greenfield’ developments such as Bagtyyarlyk and Galkynysh requires pre-sale treatment. Three gas treatments plants at Galkynysh with a total capacity of 30 bcm were completed by CNPC, Petrofac and LGI/Hyundai Engineering. Furthermore, two additional CNPC’s gas treatment plants with a 15 bcm/year are operational at Bagyyarlyk field. Obviously such a gold mine as Galkynysh – phase I & II of this project will produce 65 bcm/year by 2032 – fuels interest of international energy companies in Turkmenistan’s upstream.

First past the post?


Since Turkmenistan’s independence, Ashgabat has always been ‘energy Mecca’ for international energy investors. All major energy companies opened their representative offices in Turkmenistan’s capital city. However, despite some obvious success stories, none of the ambitious undertakings proposed by the western companies were realized - mostly due to a combination of various factors such as landlocked position of the country, instability in neighboring Afghanistan and complicated business environment in Turkmenistan.

The arrival of China’s CNPC to Turkmenistan in 2002 dramatically changed the country’s energy landscape. In July 2007, CNPC signed a production sharing agreement (PSA) to develop gas fields in Bagtyyarlyk contract area on the right bank of Amu Darya river and a gas supply contract with the Turkmen State Agency for Management and Use of Hydrocarbon Resources and Turkmengaz. CNPC is the only foreign company to have been awarded a fully onshore full-scale PSA. Gas reserves in Bagtyyarlyk –the main production unit of the CNPC’s PSA - are estimated at 1.3 trillion cubic meters (tcm) of natural gas. In 2013, Bagtyyarlyk’s output went up to 6 bcm/year. CNPC has already invested over $4 billion in this project.

CNPC’s expansion to Turkmenistan was supported by key China’s financial institutions. China Development Bank (CDB) helped finance the Central Asia – China gas pipeline and financed $9.4 billion-worth I phase of the Galkynysh project, possibly in hope for CNPC to sign PSAs for larger and more lucrative gas fields, but hopes are not always realized – CNPC was only awarded a technical service agreement, while Turkmengaz remained the sole operator of the product sharing contract for Galkynysh. Nevertheless, CNPC will continue to enjoy a first-mover advantage over western companies in the competition for access to Turkmenistan’s gas reserves.

European presence in Turkmenistan: quo vadis?


The presence of EU energy companies is relatively limited, especially if compared with CNPC, Petronas or even Dragon Oil activities. DEA Group – formerly RWE DEA – is conducting exploration activities in offshore Block 23. In November 2014 ENI succeeded in expanding its PSA to the onshore Nebit Dag Area located in West Turkmenistan and extending the agreement to February 2032. Ten per cent stake out of the contractor share is transferred by ENI, operator of the block, to Turkmenneft. This deal signed in the presence of the president of Turkmenistan, Gurbanguly Berdimuhamedov, and the Italian prime minister, Matteo Renzi might be the first step towards the liberalization of Turkmenistan’s licensing and PSA regime. Until present Ashgabat restricted large-scale foreign-owned onshore PSAs with a notable exception of the CNPC’s Bagyyarlyk project.

On the contrary, the European Union - as an institutional actor - is becoming increasingly active in the Caspian. Adoption of the Energy Union package coincided with revival of Brussels’ interest in accessing Turkmenistan’s gas via the trans-Caspian gas pipeline or Iranian pipeline infrastructure. The Trans-Caspian Gas Pipeline is already included in EU’s Projects of Common Interest.

Brussels’ proactive stance on the Caspian follows a newly created Turco-Turkmen ‘natural gas entente’. Last November, Ankara and Ashgabat signed a Memorandum of Understanding on gas supplies via the TANAP pipeline, reviving interest in the westward flows of Turkmen gas.

The Energy Union initiative has two importance indirect references to Turkmenistan.

The Collective Purchase of Gas mechanism mentioned in the Commission Communication may revive the almost forgotten idea of the Caspian Development Corporation (CDC), a concept designed to enable Turkmenistan to sell large volumes of natural gas for delivery in Europe, helping to diversify European gas supply. Though it is still unclear how Collective Purchase of Gas will be compatible with EU Competition and WTO rules, the mention of this mechanism clearly maps European energy interests in the Caspian region.

Promotion of the Southern Gas Corridor is another Turkmenistan-related pillar of the Energy Union. This new infrastructure initiative is unofficially aimed at cutting dependence on Russian gas, perceived as a major security threat in some of EU Member States. In this context, Turkmenistan gas reserves are often presented as the major alternative to Gazprom’s supplies.

On 29 April EU Energy Commissioner Maroš Šefčovič paid an official visit to Turkmenistan in order to discuss natural gas supplies to Europe. Turkmen officials said earlier that negotiations were under way to sell 10 – 30 bcm/year of gas to EU customers. Ashgabat’s attempt to increase its cooperation with the West is explained by a number of commercial and political challenges. Last year did not bring clarity with a realistic construction time frame for the Trans-Afghan gas pipeline. The cost of the gas pipeline has increased from $7.6 billion to $10 billion, and the estimated price based on oil-linked formula dropped from $10-$11 per MMBtu to $7 per MMBtu. Oil-linked gas contracts with CNPC began to generate less cash. According to the Chinese customs statistics, the price of Turkmen gas on the Kazakhstan – China border fell from $9.54/MMBtu in December 2014 to $8.16/MMBtu in February 2015. The February gas shipments still provide Turkmengaz with estimated ~$7.5/MMBtu at the Turkmenistan border based on the transportation cost US$0.64/mcf (2014 terms, Wood Mackenzie estimates) to the Kazakhstan-China border.

Exports to China seem to be a good deal but at present Ashgabat receives only a portion of gas cash – a significant part of CNPC’s payments is still being spent paying off CDB’s credits. Also, according to CNPC approximately 93% of the new imports into China over 2014 and early 2015 have come from the Amu Darya PSA, which perfectly fits commercial logic of a typical PSA operator: ‘cost gas’ (and later on ‘profit gas’) from Bagtyyarlyk is apparently cheaper for CNPC than direct purchases from Turkmengaz. Massive arrival of ‘commercial gas’ from Galkynysh in early 2020s will however reverse this trend.
At this price level, European energy companies are not in any particular hurry to buy Turkmen gas. With an average spot price of $8-9/MMBtu and transportation cost of at least $2/MMBtu, EU companies will not be able to match CNPC’s offer. For example, Azerbaijan’s Shah Deniz – 2 Consortium was able to offer Gas Supply Contracts pegged to the Italian PSV gas hub only because of two major factors: abundance of liquids in the Shah Deniz gas field and a PSA regime offered by Azerbaijani government.

In order to be competitive in Europe, Turkmen gas has to be either directly or indirectly subsidized by the European Union or alternatively Turkmenistan will have to open its strategic upstream – primarily supergiant gas fields for EU’s energy companies. Would European companies succeed where CNPC failed? Is Europe ready for the gas subsidies? Both questions still remain unanswered.

Danila Bochkarev is Senior Fellow at the EastWest Institute in Brussels
Disclaimer: The views expressed here are those of the author.

Image: Gasum Oy CC-SA