Growing Russian-Turkmen Tensions Provide New Opportunities for Western Energy Firms

Turkmen energy officials have angrily rejected suggestions from Russia's Gazprom that the country has exaggerated its estimated reserves of natural gas.

The latest public dispute comes in the aftermath of the rapidly deteriorating relationship between the two countries, centred to a large extent on the disagreement of gas export prices. Russia has also been antagonised by Turkmenistan's effort to find alternate transit routes for its growing gas exports, which would undermine Russia's dominant position within the country's energy sector. Deteriorating bilateral relations with Russia along with the growing need for enhanced capital and technical investment to sustain the growth of the country's energy sector, have created new investment opportunities in this previously reclusive and resource rich state.

Despite Turkmenistan's sizable energy resources, overdependence on Russian transit routes has limited export potential and provided Moscow with leverage to negotiate favourable pricing terms. In 2010 Turkmenistan produced around 75 billion cubic meters (bcm) of gas, of which over 50bcm were sold to Russia's Gazprom - at a significantly reduced market rate. Reliance on Russia's transit infrastructure for exports has also exposed the country to fluctuating demand, contributing to economic volatility in the country. On 9 April 2009, Gazprom suddenly and unilaterally reduced its imports of Turkmen gas by up to 90% as global demand for natural gas was reduced due to the global recession.

Growing foreign investor interest in Turkmenistan's gas industry, however, has provided the country with better means to establish alternate transit routes and to develop its energy resources. According to British Petroleum‘s 2010 world energy data, Turkmenistan's gas reserves are the world's fourth largest at an estimated 71.21bn tons. New gas discoveries since 2006 have more than doubled Turkmenistan's proven gas reserves and solidified the country as a major energy export market, according to auditors Gaffney, Cline & Associates.

The country also has sizable oil deposits that, if developed, could transform the country into a major petroleum producer. The need for market diversification has been brought into focus by ambitious new plans to more than triple natural gas output by 2030. This would require not only alternate transit routes to new consumer markets but also significant new capital investment into underdeveloped energy infrastructure networks.

Investor opportunities

Growing tensions with Russia and the need for new markets have provided new investment opportunities for Western and Asian energy firms in the previously isolated economy of Turkmenistan. Turkmen president Gurbanguly Berdymukhammedov stated in 2011 that increasing energy exports to Europe remains the most important aspect of Turkmenistan's foreign policy. Ashgabat and Europe are in the process of negotiating a US-supported Trans-Caspian pipeline that would deliver gas to Europe through Azerbaijan and in the process bypass Russia. This would support market diversification both for Europe and Turkmenistan away from Russia, which has in the past politicised its monopoly on gas exports. China has already invested billions in a similar venture by building an 8,700 km pipeline from Turkmenistan to western China. By 2016 the pipeline is expected to deliver approximately 25bcm annually. That would take Turkmen annual gas shipments to China to 65bcm, about half of China's gas needs.

As part of Turkmenistan's ambitions to significantly increase gas production, the country has gradually begun implementing market reforms and opening up sectors of the economy for investment that were previously highly regulated or restricted - in particular the energy sector. As a result, foreign investment into the country's energy sector doubled in 2011 from the previous year to US$4bn. The Turkmenistan government is currently in the process of negotiating new gas development projects with major western energy firms, including BP Plc, Chevron Corp as well as Russian gas producer Itera, which if finalised should increase foreign investment in the country significantly in the years to come.

Forecast

Turkmen ambitions to consolidate its position as a major global gas power will necessitate enhanced foreign investment into its energy sector as well as continued efforts to diversify away from reliance on Russia as a transit source. The China-Turkmen pipeline, along with plans to build the trans-Caspian transit route to Europe, are significant steps towards enhancing Turkmenistan's presence on the international gas market. President Berdymukhammedov's commitment to market reforms, including enhanced property rights for investors and greater access to previously restricted sectors of the economy, will also be critical to meeting the country's ambitious goal of trebling gas production by 2030.

While the country gradually moves towards greater integration into the global economy - and increased economic independence from Russia - growing tensions can be expected with Moscow. As Russia strongly opposes plans for a trans-Caspian pipeline, it will likely seek to dissuade through a combination of political and economic pressures the trend towards greater economic cooperation between the West and Ashgabat. Despite these anticipated tactics, the benefits of market diversification and increased foreign direct investment will likely supersede efforts to limit Russia's deteriorating relationship with Turkmenistan.

This article by Maplecroft Analyst Matthew Schulz was republished with permission.