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News Central Asia, Turkmenistan, 12 December 2004
The Political and Economic Situation in Turkmenistan.
Summary of an article by Shabir Ahmad Khan

Turkmenistan wants to increase its gas exports to world markets. After the breakup of the Soviet Union in 1991, Russia assigned Turkmenistan a modest export quota of 11 billion mł per year for its gas exports to Western Europe. However, due to commercial and political pressures, Gazprom stopped shipping the now rival Turkmen gas to the West in 1994 and in April 1997, suspended its deliveries to Ukraine.

Thus, Turkmenistan's big and well-developed gas export potential was completely blocked. Consequently, gas production, which totaled 55.9 billion mł in 1992, dropped to 2.9 billion mł in 1997, the worst year in the economic history of independent Turkmenistan, with a decline of 25.9% in real GDP.

The wild swings in Turkmenistan's GDP are caused by the dependence of the country's economy on natural gas. Only in December 1997 could minor gas shipments be started to northern Iran through the newly commissioned Korpeje-Kurt-Kui line, the only one by-passing Russia. However, at the very end of 1998 Niyazov and Kuchma signed the first bilateral agreement on the supply of 20 billion mł of Turkmen gas to Ukraine. Since then, Turkmenistan has been jerkily building up its gas exports - mostly to Ukraine. Ukraine currently receives 45% of its gas requirements from Turkmenistan under a 5-year agreement signed in May 2001. Last year Turkmenistan was due to supply Ukraine with 36 billion mł, bought at the Turkmen-Uzbek border for $44 per 1,000 mł, with half the payment in hard currency and the rest offset against goods or services.

In January 2004, Russia started importing Turkmen gas under a 25-year agreement for 2004-2028, and is committed to buy another 1 trillion mł under an additional agreement signed in April 2003 between Gazprom and state-owned Turkmengaz. Under initial terms of the deal, Gazprom is to buy 5-6 billion mł this year, rising to 6-7 billion mł in 2005. The goal is to supply up to 80 billion mł per year by 2009. Despite the looming shipping problems, Ashgabat intends to accelerate gas shipments to Russia, pumping up to 80 billion mł per year already in 2007. Due to the agreements to supply Russia and Ukraine, Turkmen gas production skyrocketed to 59.9 billion mł in 2004.

Iran is currently the third largest buyer of Turkmen gas. According to the Ashgabat National Statistics Institute, Iran imported nearly 5 billion mł of Turkmen gas in the first 11 months of 2003, 14.5% more than in 2002. Turkmenistan has also a 25-year contract to supply gas to Iran, dating back to July 1995 and valid until 2018. The Korpeje-Kurt-Kui 124-mile gas pipeline, reported to have current available capacity of 8 billion mł per year, is designed to move up to 13 billion mł per year. Ashkabad is supplying gas to Iran at a price of $40 per 1000 mł, while 35% of the delivered gas constitutes payment for the Iranian contribution to a $190 million project. Besides, Ashkabad has initiated oil swap deals with Iran, delivering oil in tankers to refineries in Iran's northern regions in exchange for similar volumes of crude at Iranian ports in the Persian Gulf.

At present, Turkmenistan's natural gas exports to Russia, Ukraine and Europe are totally dependent on the Central Asia-Center (CAC), a network of five separate pipelines, commissioned between 1966 and 1987. The smaller branch (CAC-3) traverses Kazakhstan, and four threads of the larger one (CAC-1, 2, 4 and 5) accounting for the bulk of CAC capacity, pass through Uzbekistan.

The initial capacity of CAC in its heyday was 90 billion mł per year, but sometimes it managed to squeeze through up to 120 billion mł per year. Since then, wear and tear and poor maintenance have considerably cut capacity. No reliable recent study to determine current capacity exists, but it could be up to 48 billion mł per year if Gazprom officials are to be believed and no more than 40 billion mł per year if the word of Uzbek experts is preferred. To make things worse, not all this capacity is at the disposal of Turkmenistan, because downstream Uzbekistan can exercise its right to put its own gas in the pipe and intends to so this year. Late last year, Uzbekistan declared that it would sell its own gas to customers in the northern direction and Turkmenistan would be allowed no more than 20 billion mł per year of exports through the main, Uzbek-controlled branch. Besides, Russia does not want Turkmen gas to compete with its own in Europe.

So Turkmenistan will be unable to accelerate the development of its gas sector. To fully utilize it, a project vigorously pursued by Niazov is the construction of the proposed trans-Afghan pipeline (TAP), 1464 km long with a capacity of 30 billion mł, enabling exports of Turkmen gas to Pakistan and perhaps to India. As presently designed, TAP would run from the Dauletabad field in Turkmenistan to Herat in Afghanistan, turning right to touch Kandahar before entering Pakistan near Chaman. In Pakistan, the line may split into two branches, one going to Multan to connect with the main distribution junction, the other to Gawadar seaport where an LNG export plant may be set up to cater for demand in South Korea, Japan, India and other areas. The capital cost of TAP could exceed $2 billion.

In December 2003, Niyazov nominated a delegation to participate in the seventh meeting of the TAP project steering committee, which, inter alia, was to consider a new independent audit report on the Dauletabad gas reserves feeding the line. Though previously audited by the Dallas-based consulting firm DeGolyer and MacNaughton in 1996, recent doubts about the adequacy of these reserves for the larger pipeline slowed progress with the project. Turkmenistan paid $250,000 for the new assessment, but no concrete findings having been submitted so far.

The steering committee was also to discuss a report on a feasibility study of the line sponsored by the Asian Development Bank (ADB) and prepared by Penspen, a British consulting firm ADB hired, but the committee failed to draw definite conclusions and suggested that Turkmenistan was to provide a "letter of comfort" on the availability of gas to support the project. Then ADB called for additional feasibility studies, further delaying the project.

However, the commercial viability of the project is obvious. Only political issues are delaying it on the excuse of security in Afghanistan. Longer pipelines passing through unstable regions of the former Soviet Union have been operating successfully.

Pakistan should update its gas infrastructure in Pakistan for local consumption and promote the project by persuading America and Russia to take an interest in it. Pakistan has much more influence in international organizations than Turkmenistan and plays a front line role in America's war against terrorism. Its failure to aid this project by trying to interest the United States may cause serious losses to the entire region - and also to the big oil and gas companies, which could earn billions from it. But since the withdrawal of Unocal in 1998, US companies have shown little interest.

In 2002, President Niyazov unsuccessfully tried to interest the Russian oil company Rosneft and gas trader Itera in the project.

The volume of trade between Pakistan and Turkmenistan never exceeded $8 million during the last decade. At its height, it totaled $7.75 million in 1997-98, and then declined to $4.212 million in 2001-2002. Turkmenistan focused only on its transit gateway position and has not tried to capitalize the Turkmen market, which remains dependent on imports of basic commodities. Pakistan's textile and leather products are popular for their quality and can easily compete with Turkish and Iranian products, but the Turkmen businessmen who went there after independence attained cheap quality goods that ruined our reputation. Nevertheless, there is mutual respect between the two countries.

Note: Business conditions appear to be the reason why Western companies shun Turkmenistan but are eager to invest in neighboring Kazakhstan. Shabir Ahmad Khan is a Research Associate at the Area Study Centre, University of Peshawar, Pakistan.

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