turkmenistan_pipelineJudged by statistics alone, Turkmenistan has the potential to be one of the world’s major natural gas exporters. According to the U.S. government’s Energy Information Agency, as of January 2015, Turkmenistan has estimated natural gas reserves of 265 trillion cubic feet (tcf), giving it the world’s fourth to sixth largest natural gas reserve holders, depending on which statistical yardstick is used. BP data now ranks Turkmenistan’s natural gas reserves as the world’s fourth largest, exceeded only by those of the Russian Federation, Iran and Qatar. Having steadily ramped up production since achieving independence in 1991, Turkmenistan is now among the top 15 natural gas producers.

But Turkmenistan’s export options are steadily shrinking; as both Russia and Iran are cutting back on imports of Turkmen gas, the country is increasingly reliant on exports to China. But that market, too, is in turbulence, as on November 18, China’s government moved to shore up ailing demand for natural gas across its economy with deep pricing cuts, which will impact the cost of its imports. Further heightening anxiety in Ashgabat, a week later state-owned firm PetroChina announced plans to sell its pipelines business, as the country’s biggest oil and gas producer struggles to meet its annual profit target amid weak crude prices.

PetroChina’s board has approved a plan to sell 50 percent of its Trans-Asia Gas Pipeline Company to a firm controlled by the investment arm of China Reform Holdings for $2.4 billion before the end of the year to help meet the profit target set by the government. Due to the global oil price drop, PetroChina saw its net profit for January-September 2015 slump by 68.1 percent from a year earlier. Accordingly, Turkmenistan can expect to see China press for negotiating gas import prices downwards.

In 2014 Turkmenistan produced more than 2.5 tcf of natural gas. The country has several of the world’s largest natural gas fields, including 10 with over 3.5 tcf of reserves located in the Amu Darya basin in the southeast, the Murgab Basin in the south, and the South Caspian basin in the western part of the country.

The Galkynysh Natural Gas Field, which began production in September 2013, is the world’s second largest gas field. Under its phase one development, commercial production at Galkynysh will produce more than one trillion cubic feet annually, which will rise to two tcf under a future second phase of development.

What is causing rising concern to the Turkmen government is that, despite its massive hydrocarbon reserves, the country lacks sufficient pipeline infrastructure to export greater volumes of natural gas and its traditional markets are in flux.

Turkmenistan’s current export markets are Russia, Iran, and China, but turbulence in their purchases has changed the dynamic of Turkmen exports, leaving the government anxious to develop alternatives, the most important being a westward Trans-Caspian subsea pipeline (TCP) and the long planned southeastern Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. The former would allow Turkmenistan potential access not only to Turkey, but eventually the European Union, while the latter could supply the Pakistan-India market of nearly 1.5 billion people.

Turkmenistan’s relationship with Russia has been a long and unhappy one, dating back to the Soviet era. After 1991 Turkmenistan had to grapple with the fact that Russia’s colonialist legacy meant that it controlled, and still does, the Central Asia-Center (SATS) pipeline system. Russia’s natural gas monopoly Gazprom controls the SATS complex of pipelines, which run from Turkmenistan via Uzbekistan and Kazakhstan to Russia. The SATS eastern branch consists of SATS-1, 2, 4, and 5 pipelines, which were built between 1960 and 1988. Construction began after the discovery of Turkmenistan’s Dzharkak field, with the first SATS section coming online in 1960, while SATS-4 was commissioned in 1973.

After the 1991 collapse of the USSR, Central Asia’s sole opportunity for energy exports was controlled by Russia, which was determined to obey its newfound capitalist mantra of “buy cheap and sell dear.”

Turkmenistan’s then-president, Saparmurat “Turkmenbashi” Niyazov, increasingly irritated by Gazprom’s low-balling prices, considered other options for gas exports and in 1997 opened the 125-mile Korpeje-Kord-Kuy pipeline to Iran, capable of carrying about 8 billion cubic meters (bcm) annually. Looking eastwards, Niyazov in April 2006 signed a deal with China for a Turkmenistan-China natural gas pipeline capable of handling 30 bcm annually.

On April 9, 2009, hit by declining sales due to the global recession, Gazprom suddenly and unilaterally reduced its imports of Turkmen gas via the SATS-4 Davletbat-Daryalik pipeline by 90-95 percent. The antiquated Soviet-era network was unable to cope with the sudden pressure diminution and exploded at the SATS-4 302nd-mile segment between the Ilyaly and Deryalyk compressor stations near the Turkmen-Uzbek border, halting Turkmen natural gas exports to Russia, which had been running at 42-45 billion cubic meters (bcm) per annum.

When Turkmen natural gas exports to Russia finally resumed in January 2010, they did so at a much lower level, about 10 bcm annually, and at a lower price, which had been roughly $300 per thousand cubic meters (tcm) in the first quarter of 2009 prior to the explosion, to a price less than $200 per tcm through 2010.

Eight months after Gazprom cavalierly turned off the taps, on 14 December 2009 China and Turkmenistan formally opened the first section of a 1,139 mile-long, 40 bcm per year natural gas pipeline, financed by China National Petroleum Corporation (CNPC), China’s largest oil and gas producer and supplier. The Turkmenistan-China pipeline has since been expanded to carry Uzbek and Kazakh natural gas. In June 2011 China announced its second pipeline with Turkmenistan, a $22 billion, 5,370 mile-long pipeline with an annual capacity of 30 bcm had begun operations.

In July relations between Gazprom and Turkmenistan hit their nadir when Turkmenistan’s Oil and Gas Ministry said in a statement on its official website, www.oilgas.gov.tm, “Since the beginning of 2015, OAO Gazprom has not paid for its debts to state concern Turkmengas for the shipped volumes of Turkmen natural gas.” The news followed an announcement by Gazprom late last year that it would cap its purchase of Turkmen natural gas to 4 bcm in 2015, a fraction of its imports of roughly 11 bcm in 2014.

Iran, which now purchases 6-7 bcm of Turkmen gas annually, is also set to end purchases in the near future as it ramps up its own production for export. Iran is already the world’s fourth largest producer of natural gas, producing 173 bcm annually, and intends with the imminent lifting of sanctions to double output to more than 1 bcm a day in the next four years.

China is the most successful foreign investor in Turkmenistan and is the only foreign investor that has been given access to a major onshore gas field, but the Turkmen government is anxious about China becoming Turkmenistan sole export market, hence its focus on alternative pipelines. Negotiations on the TCP among the EU, Azerbaijan and Turkmenistan began in September 2011 and Turkmenistan has announced that it will begin construction on TAPI later this month.

Despite Turkmenistan’s fervent wish for both TCP and TAPI to be built, both pipelines suffer from geopolitical conflict, financing issues, and, particularly in the case of TAPI, security issues surrounding its 480-mile transit of Afghanistan.

As a fallback option, Turkmenistan is developing its gas-based chemical industry, with the government hoping to export natural gas derived products such as ammonia and synthetic gasoline. Given the constraints listed above, along with rising competition, this is Turkmenistan’s best option, as China buying its gas at rock bottom prices will remain Turkmenistan’s sole export market for the foreseeable future.