BACKGROUND: Gas sales represent about two-fifths of the Turkmenistan’s total exports. These exports increased by two-thirds in the first half of 1999, from 13.3 in the first half of 1998 to 22.4 billion cubic meters, primarily because of exports to Ukraine. Ukraine is historically the largest consumer of Turkmenistan’s gas but it has endemic cash-flow problems. These cash-flow problems led to the cancellation of the export deal, but a December 1999 contract with Russia for 20 bcm in 2000 took up the slack. Last year, Azerbaijan discovered enormous natural gas deposits in the offshore Shah-Deniz field, a field originally thought to produce only petroleum. Two exploratory wells at Shah-Deniz indicate reserves of over 1,000 bcm (1 trillion cubic meters) though a third well will be drilled in late summer and is likely to produce even more.

The conflict between Azerbaijan and Turkmenistan developed when Azerbaijan sought to put the previously unknown gas from its Shah-Deniz field into the TCGP and asked for 14 bcm per year, nearly half of the TCGP’s projected volume of 30 bcm per year. According to the original projections, Turkey contracted for 16 bcm per year of TCGP’s total 30 bcm volume for its domestic market. Turkmenistan was planning on using the remaining 14 bcm volume for gas re-exports from Turkey to Europe, to obtain mush needed hard-currency earnings. After the TCGP talks in Ashgabat faltered in mid-February, Azerbaijan and Turkmenistan clashed. Azerbaijan threatened to construct its own pipeline with the BP-Amoco led Shah-Deniz consortium. Turkmenistan President Niyazov announced his intention to sign a long-term contract with the Russian firm Gazprom but offered a window in the negotiations by extending the mandate for PSG Corporation and the TCGP consortium until March 20.

At the end of February, Turkmenistan’s Oil and Gas Minster Orazov stated that Azerbaijan’s demand to use 50% of the TCGP pipeline constituted a violation of the Declaration of Intent signed last November by the governments of Turkmenistan, Azerbaijan, Georgia and Turkey. Meanwhile, in a stinging rebuke to U.S. President Clinton, Turkmen President Niyazov blamed Clinton’s Caspian advisor and U.S. negotiator John Wolf for "deliberately delaying the US $2.5 billion project and pressing Ashgabat to accept unfavorable conditions from Baku." The conflict was resolved a few weeks later on March 9, when Niyazov was shown on Ashgabat television announcing an agreement with Azerbaijan President Heydar Aliyev to scale down Azerbaijan’s demands for 14 bcm to only 5 bcm, one-sixth of the pipeline’s capacity. This figure is in fact the export volume earlier foreseen by Azerbaijan in the initial stages of developing the Shah-Deniz deposit and it is the figure that Niyazov claims Aliyev agreed to as an overall quota.

IMPLICATIONS: The Chairman of the Board of Gazprom Rem Vyakhirev was actually in Ashgabat waiting for TCGP talks to fail in mid-February. But a long-term Turkmenistan-Russia agreement to fill the gap was always in doubt because of economic friction between the two countries. Russia habitually sees Turkmenistan as a competitor in international energy markets, and limited the Turkmenistan’s access to its own pipeline system throughout the 1990s. In fact, Turkmenistan cancelled an agreement with Gazprom in 1997 because the price it demanded was unacceptably low. Price is a constant source of friction. Russia contracted from Turkmenistan 20 bcm of gas in 1999 for delivery in 2000 with a compromise price of US $36 per 1000 cubic meters. However, Itera, the Russian company that was to transport the gas, soon stated that this price was be too high for any new long-term agreement especially given that Niyazov’s opening asking price was US $46 per 1000 cubic meters.

claim on the offshore Kyapaz/Serdar oilfield, that was part of the "contract of the century" under development by the Azerbaijan International Operating Company (AIOC). That issue was settled at the mid-November 1999 OSCE summit in Istanbul. Azerbaijan simply wanted to negotiate throughput quotas for its maximum TCGP production ahead of time, even if it would take several years to reach a higher figure.

Presidents Niyazov and Aliyev reportedly agreed, in their telephone conversation, that Turkmenistan would take the lead in drawing up the facilitating inter-governmental agreements. The inter-governmental agreements for the Baku-Ceyhan Main Export Pipeline (MEP) will undoubtedly be used as a template. Should further tensions and disagreements slow the development of the TCGP or should Azerbaijan’s Shah-Deniz gas production ramp up above initial volumes, a separate gas pipeline to Turkey originating in Azerbaijan is still possible.

AUTHOR BIO: Dr. Robert M. Cutler is a Montreal-based analyst of European and Eurasian affairs. He is Research Fellow of the Institute of European and Russian Studies, Carleton University in Ottawa, Canada. , http://www.robertcutler.org

HOME

Copyright 2000 The Analyst All rights reserved