The leaders of Russia and Turkmenistan have been unable to agree on terms for the (re)construction of a Soviet-era gas pipeline in western Turkmenistan. While subsequent negotiations are not excluded, Ashgabat has declared its intent to allow companies other than Gazprom, including Western companies, to bid for the work. In the context of recent developments, a pattern begins to form that may signify the breaking of what is left of Russia’s hold on Central Asian gas transport, to which its relationship with Turkmenistan has been central in the post-Soviet era.

BACKGROUND: The Caspian Coastal Pipeline (CCP, also called by its Russian name the “Prikaspii” and sometimes, by erroneous translation, the “pre-Caspian”) is part of the western branch of the Central Asia-Center (CAC) pipeline, a spidery network inherited from the Soviet era of which the earliest branches date back to the late 1960s. The CAC’s eastern branch consists of four lines that run to various gas fields in southeast Turkmenistan. They pass northward through western Uzbekistan and then western Kazakhstan before crossing into European Russia. (Another spur originating in Uzbekistan proper shoots more directly northward through west-central Kazakhstan, crossing into European Russia’s southeastern extremity.) The CCP, which runs along the Caspian Sea coast in Turkmenistan and southwest Kazakhstan, is connected to gas fields in eastern Turkmenistan through a pipeline running from east to west across the southern expanse of the country. After reaching the eastern coast of the Caspian Sea, it turns north-northwest and traces the coastline passing west of the Garabogazköl Gulf, an inlet of the Caspian Sea in northwest Turkmenistan, then northward into Kazakhstan before turning northeast to rejoin the CAC’s Russia-bound main trunk.

Constructed over a third of a century ago, the CCP is in such disrepair that it has reportedly carried only 2 billion cubic meters per year (bcm/y) since being re-opened in the middle of the current decade. Nearly all gas exported from Turkmenistan and Uzbekistan to Russia has taken the CAC’s eastern-branch route. In 2003, Turkmenistan’s then-president Saparmurat Niyazov proposed to Russia’s then-president Vladimir Putin that the CCP be refurbished and its volume expanded. Agreement was not reached until mid-May 2007, when Niyazov’s successor Gurbanguly Berdimuhamedow agreed with Putin and Kazakhstani president Nursultan Nazarbaev, and a declaration was signed to this effect. Kazakhstan’s participation was necessary because of the CCP’s transit through that country after leaving Turkmenistani territory before entering Russia. At the time, Putin foresaw the final agreement being signed in July 2007, with work beginning in the first half of 2008 and increasing the route’s capacity by at least 12 bcm/y by 2012.

IMPLICATIONS: It was only seven months later, in mid-December 2007, that a draft agreement for the CCP was signed among state officials of Russia, Turkmenistan, and Kazakhstan. According to it, the three main national trusts (respectively Gazprom, Turkmengaz, and KazMunaiGaz) would construct a pipeline to carry 30 bcm/y along the land route, of which the first stage of the project would foresee at least 10 bcm/y that Russia would commit to purchase. This would include an upgrade of the existing CCP where feasible and appropriate but joining the main CAC trunk at the Kazakhstan-Russia border rather than further south, as does the present line, and moreover construction of an offshore pipeline to carry an additional 10 bcm/y (which latter the Russian media have taken to calling the “trans-Caspian” gas pipeline in their English publications, as if to confuse it in readers’ minds with the undersea Turkmenistan-Azerbaijan pipeline project long under discussion but not yet agreed).

With the December 2007 agreement, the construction that Putin foresaw beginning in the first half of 2008 had already been pushed back to the second half of 2009. It was with a view toward agreeing terms for that construction to start, that planned meetings took place between the Russian and Turkmenistani sides at the end of March. It was expected, in line with previous agreements to agree, and especially given an early July 2008 Memorandum of Understanding over bilateral energy relations more generally, that Gazprom would be tasked to coordinate and execute the lion’s share of the work concerned. But that was all before world energy prices crashed, followed by world stock exchanges in the ongoing global financial crisis that has severely restricted the availability of investment capital even for such asset-laden firms as Gazprom, the stock price of which had dropped in Moscow from 14 in early July 2008 to just below 3 last week. Gas sales to Europe are off by between one-quarter and one-third. Russia’s energy ministry, which was reportedly projecting sales of gas to Europe at US$280 per thousand cubic meters (tcm) has revised that figure down by almost 10%, and this following an average price of over US$ 400/tcm in 2008. An effect of this would be that Russia is less dependent upon Turkmenistan’s gas than in the past and may have offered a lower price for it than Turkmenistan expected.

A contract from the Niyazov era gives Gazprom the right to buy up specified quantities out until 2028, although prices must always be negotiated. The last agreement, signed in September 2006, covered only the years 2007-2009, during which Russia’s entitlement had been set at 50 bcm at $100/tcm. By last year, the prices demanded by Ashgabat and paid by Moscow had exceeded $300/tcm, and the figure must now be renegotiated to take effect from as from 2010. It is this price that Moscow apparently sought to lower in the most recent unsuccessful talks held in Moscow at the end of March. Those talks were expected by observers in Moscow to end with agreement on the so-called East-West gas pipeline that runs across southern Turkmenistan from the eastern gas fields to the beginning of the CCP. Berdimuhamedow would have had good reason to doubt Gazprom’s ability to finish the original grand project as first conceived: the cost of the East-West pipeline alone was originally estimated to run to US$ 1.5 billion, and when Putin finally signed the authorizing Russian draft legislation over to the Duma late last year, the terms included only the construction of a 20 bcm/y refurbished overland CCP and omitted mention of the offshore parallel segment.

CONCLUSIONS: The original tripartite agreement among Turkmenistan, Kazakhstan, and Russia provided that each party would be responsible for conducting the work for the CCP on its own national territory. It was in this context, and taking into account Turkmenistan’s longstanding ties with Gazprom, that it was anticipated that Gazprom would get the nod from Ashgabat to execute the work planned. However, now that terms have not been agreed as anticipated (and it is possible that Gazprom was the party that declined), Turkmenistan now indicates that it will seek other bids for the pipeline work. Of course it is possible that this is merely a negotiating tactic designed to extract better conditions from the Russian side. But reports from Moscow suggest that Berdimuhamedow had begun to doubt Gazprom’s ability to complete the work in its new financial situation, and had therefore hesitated to allow Gazprom monopsonistic control of volumes of gas to be transported through the CCP; and the move presents Western companies the opportunity to bid for the work.

Already in November 2007 Berdimuhamedow visited Brussels on a three-day state visit during which he engaged the highest-level EU officials in intensive discussions over a wide range of issues. A year later, the German energy giant RWE embarked on a joint venture with Austria’s OMV to pursue projects for bringing Caspian Sea region energy resources to Europe and began working with Turkmenistan in other energy-related industries such as the electricity sector. Ashgabat signed an agreement to begin supplying 10 bcm/y to Europe through interconnecting its sources to Azerbaijani offshore rigs. Together with the ground-breaking for construction of an agreed pipeline to from Turkmenistan to China and Berdimuhamedow’s continuing evocation of interest in a Turkmenistan-Afghanistan-Pakistan pipeline, a pattern is forming for Russia’s grip on Central Asian gas to be at least significantly weakened. Such a development would naturally increase the quantities available for export to Europe through an eventual Trans-Caspian Gas Pipeline as part of the Nabucco project, or else through the White Stream project from Azerbaijan to Ukraine under the Black Sea, whence further westward also on to Europe.

AUTHOR’S BIO: Robert M. Cutler (http://www.robertcutler.org) is senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada.