FARHAD AHMEDOV BELIEVES RUSSIA SHOULD SHARE PART OF ITS EUROPEAN MARKETS WITH TURKMENISTAN, KAZAKHSTAN AND UZBEKISTAN
The long-term calculation of Central Asian gas in the balance of Open Joint Stock Company Gazprom is justified only on condition that Russia will urgently start large-scale development of its own gas resources, engaging all oil and gas companies.
By giving Turkmenistan, Uzbekistan and Kazakhstan a "preferential" regime of gas exports to Europe for a definite period of time, which is justified by Russia's energy security, and thus creating a "Central Asian gas pause", Gazprom could redirect disengaged forces and means for the development of new sales markets, not being afraid of any competition from the post Soviet neighbors.
Losses "here" would be compensated by profits "there", and "the wolves and sheep would be both safe and full", remaining, God forbid, who they are.
It is absolutely clear today that boosting Central Asian gas deliveries to Russia, including for resale in Europe, is a strategic priority of Gazprom. Views of the monopoly's bosses are clear evidence of that.
Alexander Ryazanov begins: "For Gazprom it is more economic and expedient to export Central Asian rather than Russian gas. In fact, everything depends on those who control the export market, namely Gazexport. We don't have to pay the excise tax for Central Asian gas exports. We make bigger profits on this gas."
"The single gas supply system of the Soviet Union was designed for two sources of raw material: deposits of Western Siberia and the Central Asian republics - Turkmenistan, Uzbekistan and Kazakhstan. Last year, we finished rather complex spadework on optimization of our export potential by attracting Central Asian gas, which resulted in signing of a 25-year agreement with Turkmenistan on the purchase of up to 70-80 billion cubic meters of gas a year. We also signed contracts with Uzbekistan and Kazakhstan. Thus, we have an opportunity to engage the Central Asian export direction," Jury Komarov added.
Gazprom surely has calculations proving that the company's capital investments in implementation of the Yamal program will be much less profitable than trade schemes on swapping Russian gas for Central Asian gas at the other end of gas main in Europe.
Central Asian priority
After reconstruction of the Central Asia - Center (CAC) main Gazprom intends to import up to 100 billion cubic meters of Central Asian gas a year in Russia, including for exports to the western markets.
According to Valery Gulev, general director of Zarubejneft (Gazprom's foreign projects operator and CAC reconstruction participant), Gazprom, in fact, has plans to purchase annually up to 80 billion cubic meters of gas in Turkmenistan, up to 10 billion cubic meters of gas in Uzbekistan and up to 7 billion cubic meters of gas in Kazakhstan. The project on reconstruction of CAC provides for the 2,2-time increase in throughput of the main from 45 bcm up to 100 bcm per year. "For this, we will have to construct a new line and reconstruct the entire infrastructure of the pipeline," Valery Gulev says. At the same time, the project's cost is about US$ 2 bln.
Even if to take into account Gazprom's expenses related to implementation of a number of gas projects in Central Asia, a total sum of investments necessary for realization of the company's Central Asian strategy will be far less than that for realization of both the Yamal program (US$ 69,7 bln ) and the program of development of Eastern Siberia and Far East resources (about US$ 30-35 bln). If Gazprom's specific actions both in Yamal, Eastern Siberia and Far East are still limited to statements and declarations of intention, the Central Asian direction is a sphere of real and progressing business. Gazprom has significantly expanded its presence in Central Asia over the last two years.
Turkmenistan and Uzbekistan
As is known, in April 2003, during Turkmen president Saparmurat Niyazov's official visit to Russia a long-term agreement on cooperation in the fuel and energy complex was signed between the Russian Federation and Turkmenistan. The two countries' monopolies - Open Joint-Stock Company Gazprom and State trading corporation Turkmenneft - were authorized to implement the agreement. The agreement is valid until December 31, 2028. The agreement took effect on January 1, 2004, and Gazprom started reconstruction of CAC in the same month. The company is planning to increase the main's throughput up to 56 bcm of gas a year by 2006 as opposed to current 45 bcm. By 2007, it is expected that the main's new line with a capacity of 15-20 bcm of gas a year will be launched.
Already by 2009, according to the agreement with Turkmenneftgas, the volume of gas supplies to Russia should make about 80 bcm of gas. In 2004, Gazprom will purchase 5-6 bcm of gas (The actual figure is 4,5 bcm - Turkmenistan.ru). And by 2007, gas purchases are expected to rise over 10 times. Such growth is possible owing to the fact that a 5-year contract on Turkmen gas supplies to Ukraine will expire by that time. And Gazprom wants to use this chance to make Turkmen gas flow to Ukraine only through their system.
During a visit to Ashgabat this April by Alexey Miller, Alexander Ryazanov, Jury Komarov and general director of Gazexport Alexander Medvedev, President of Turkmenistan Saparmurat Niyazov agreed that only Gazprom is fit to supervise exports of Turkmen gas. The Turkmen leader also agreed that Gazprom would participate in the development of oil-and-gas deposits on the Turkmen shelf of the Caspian Sea, which is estimated to contain 6 billion tons of oil and 2 bcm of gas. This is another evidence of reinforcement of Gasprom's positions in Central Asia.
Along with building up relations with oil-and-gas rich Turkmenistan, Gasprom expands its presence in transit Central Asian states which also have significant gas reserves.
In December 2002, Gazprom signed an agreement on strategic cooperation in the gas field with the National holding company of Uzbekistan, Uzbekneftegaz. The agreement, in fact, provides for the long-term supply of Uzbek gas for the period of 2003-2012. Under the agreement, Russia already received 3 bcm of gas in 2003. Gas supplies are expected to reach 7,7 bcm in 2004, and 10 bcm starting 2005, taking into account that Gazexport becomes the owner of all gas delivered by Uzbekistan to resale it at European markets. The current purchase price in Uzbekistan is US$ 40 per 1000 cubic meters.
Besides, according to the agreement with Uzbekneftegaz, Zarubezhneftgaz is inspecting the gas-transportation system of Uzbekistan and implementing contracts on delivery of equipment for the gas fields of the republic. In 2004, Gazprom and Uzbekneftegaz kicked off prospecting works at Ustugyurt deposits. Under the agreement with the cabinet of ministers of Uzbekistan, the development of deposits is being carried out on the basis of production sharing agreement (PSA). First of them was signed in Spring 2004 for the period of 15 years, providing for extraction of gas at Shahpahty deposit and equal sharing of production. Gazprom started extraction of gas at Shahpahty already this August.
Cooperation of Gazprom with Uzbekistan resulted in awarding the company the operator status to transit gas through this country that gave it an additional lever to control Turkmen gas transportation.
Complexities in Kazakhstan
Gazprom has a little bit complicated situation in Kazakhstan. In May 2002, Russia signed an intergovernmental agreement with Kazakhstan on reaching the consensus on the Caspian Sea status and also on cooperation in the gas sphere as well as on the considerable increase in export of Kazakhstan gas through the Russian territory. In the same year, Gazprom and the national company of Kazakhstan, Kazmunaigaz established a joint venture, KazRosGaz, on the parity basis which was to realize an idea of Kazah gas exports to near and far abroad.
An original scheme of the JV's activity is simple. The enterprise should annually send 5 bcm of Kazakh natural gas from Karachaganak, Tengiz and Tolkinsk deposits for refining at the refinery of Gazprom's branch, Orenburggazprom. It is expected that 2 bcm of this gas should be sent back to Kazakhstan for sale to local consumers, and the rest 3 bcm should be given to Gazexport for sale at the markets of far abroad.
As for now, however, there have emerged contradictions in positions of founders of KazRosGaz. The Kazakh side wants Orenburggazprom out of the scheme, building its own refinery within the framework of the third phase of development of the Karachaganak project, and insists that Gazprom ensure direct access for Kazakh gas to Ukrainian and EU markets against payment for transit services by Kazakhstan.
Nevertheless, Gazprom believes that the monopoly will purchase gas in Kazakhstan as a trade dealer and sell it later at option as it does with Turkmen and Uzbek gas. "We hope to sign a long-term contract with Kazakhstan for 7 bcm of gas a year, Alexander Ryazanov said. It would be good if we could purchase all gas from Karachaganak and Tengiz deposits for export." But Kazakhstan categorically disagrees with Gazprom's role as trade dealer. Minister of power engineering and natural resources of Kazakhstan Vladimir Shkolnik talks straight: "Russia must share markets under its control". According to him, "Kazakhstan is ready even to invest US$2 bln in reconstruction of Kazakh stretch of CAC in exchange for such sharing so that Gazprom doesn't have problems with shipping Turkmen gas through its territory.
So, Gazprom chose exactly Central Asian gas as a means of replenishing the company's gas balance. But the thing is that this approach, meeting commercial interests of Gazprom, may pose threats to power safety of Russia and the development of the Russian gas sector because of rather shaky basis of the Central Asian strategy.
This strategy is based just on the fact that there are no other routes of export of Caspian gas, except for the Russian mains. With this in mind, Gazprom expects to keep a role as trading dealer in resale of Central Asian gas at the markets of near and far abroad. Based on the company's experience of dealing with Kazakhstan, it is obvious that it will be really hard to keep such role. There is no doubt that the similar situation will develop both in Turkmenistan and Uzbekistan. As a matter of fact, events are already developing in this direction.
We have to remember that access to the European gas market is a common and main strategic policy of all Caspian states - owners of gas reserves. This policy is grounded on the fact that gas exports make a basis of these states' economies that were founded in Soviet times. After disintegration of the USSR former Soviet Caspian republics were unable to export energy resources which caused sharp recession in their economies.
The Gazprom's Central Asian stake in the absence of efforts on large-scale development of its own production is not only unreliable but also wrong. It will be wrong to expect that Russia will remain the only territory for transit export shipments of Caspian gas. One should not underestimate "national interests" of the U.S and EU in the Caspian Sea as a powerful political factor.
Both the U.S., EU, Turkmenistan, Kazakhstan, Uzbekistan and Azerbaijan have a common understanding of the necessity to follow the strategy of multiple export routes for Caspian hydrocarbons which would ensure their access to the world markets bypassing, first of all, Russia.
As for today, there are three main projects on the export of Central Asian gas as an alternative to the Russian gas mains: the Trans-Caspian gas pipeline (TCGP) - running under the Caspian sea through Azerbaijan and Georgia to Turkey; the Afghan route (Dowletabat-Kandagar-Multan) and also the well-known project of BTE, implementation of which causes no problems for western companies working in Azerbaijan.
All three projects are supported by the EU and the United States as opposition to Russia in the Caspian Sea. EIA experts have already estimated the cost of the TCGP project at US$ 2,5-3 billion, the Afghani route - at US$ 1,8 billion. And nobody can say for sure that America will stay out of financing, for example, the Afghani project as it did as regards bypassing Russia oil pipeline BTD, which was started in 2002, despite doubts about commercial viability of the project.
Russia, as is known, spares no effort to lessen influence of non-Caspian states like Turkey, the USA and the Great Britain in the Caspian Sea. Azerbaijan is the only former Soviet republic among all Caspian states to take a clear pro-western position And Kazakhstan, Turkmenistan and Uzbekistan, much richer in hydrocarbon reserves countries, take a balanced position toward the West and Russia. Will Gazprom be able to keep this fragile political balance? And should this commercial company deal with such problems?
We had it before
Gazprom is afraid for understandable reasons of competition with much cheaper Central Asian gas in Europe: "We have two options: to purchase and transport Central Asian gas, or it will get to Europe through other gas pipelines sooner or later that will break the entire balance of prices in Europe." Everything is fine except for one thing: "to purchase and transport" will not work. We will have to make concessions on purchase prices for Central Asian gas as a minimum and on sharing the European market and gas pipelines for transportation, a clause which Energy Charter has been long insisting on, as a maximum.
According to Kazakhstan's forecasts, the country will extract 45-50 bcm of gas by 2015, of which 30-35 bcm it wants to export. Turkmenistan can easily achieve pre-perestroyka production level of 90 bcm of gas. So, when Niyazov says that his country can export 60-100 bcm of gas it is not far from the reality. Let us add 10 more bcm of Uzbek gas, which "Gazprom" is going to buy for resale. Thus, volumes of Central Asian gas, which is potentially competitive for Russia, are rather impressive - 100-145 bcm. Production cost of this gas is certainly lower than in Yamal. Therefore, temptation to include it in the gas balance of Gazprom is great.
We have to understand, however, that after letting Central Asian gas out for export (even from one of the republics), it will be then impossible to stop it. Otherwise, Russia will not keep its positions in the Caspian Sea and will spoil relations with Turkmenistan, Uzbekistan and Kazakhstan. And if the Caspian countries will independently increase gas exports to Europe, with Gazprom's permission, up to 145 bcm or even up to 100 bcm, the Russian Federation will inevitably lose its geopolitical positions in Europe.
Central Asian gas pause
This is, certainly, a hypothetical situation. There are still no alternative routes to Russian mains for transportation of Central Asian gas. Gasprom will sooner or later have to share part of its European markets with Central Asia to ensure they never emerge. Is it dangerous? Bearing in mind Russian strategic interests, we believe it is not. There is only one condition, which is urgent large-scale development of our own gas reserves by all Russian gas companies.
Thus, a well-thought "Central Asian pause" could help speed up Russian efforts on finding new sales markets where demand for gas grows much faster than in Europe, where modern LGP-trends are more visible and where Central Asian gas cannot be considered our competitor at all.
In fact, it is quite possible to compose such Russian gas balance, in which Gazprom's production would make 530 bcm of gas, production of independent companies - about 200 bcm of gas plus 100-145 bcm of Central Asian gas. These volumes would be enough to meet domestic needs, keep European (present and future) gas status quo and ensure supply of gas (pipeline and LGP) to the new markets.
Having lost part of their profits in Europe, Gazprom is quite capable to make up leeway in the U.S and Asian-Pacific region countries. The good part of the story is that "the Caspian boiler will steam" and the likely construction of gas mains from Central Asia, bypassing Russia, could be averted, and "dispersal fields" could be established at the same time.
President of Nortgas company, member of the Upper House of the Russian Parliament
"OIL AND GAS VERTICAL" magazine, issue N 17, 2004 (published with insignificant reductions)