Why does Gazprom need Turkmen gas?

Gazprom doesn't need to import Turkmen gas. So why its CEO Alexey Miller announced on October 9th the resumption of its purchases next January? That seems to be a mix of geopolitics and of commercial calculation

That's probably not a coincidence: Gazprom announced that it will resume its gas purchase in Turkmenistan from the 1st of January 2019, the exact day when Ashgabat will stop providing free gas, but also free electricity, drinking water and salt to its 5.7 million citizens.

President Gurbanguly Berdimuhamedov decided to curb the subsidies which were in place for years. The measure is presented in Ashgabat as a new step towards the free market economy. But no one can exclude that the end of subsidies is first of all motivated by the urgent need to address the difficult economic and budgetary conditions that Turkmenistan is going through, as the gas prices collapsed after 2014 due to the dynamics of the global oil and gas prices.

Ashgabat also lost two of its three clients who were buying its natural gas, namely Russia (which totally stop its 4 billion cubic meters per year imports in 2016, after in 2009 drastically decreased them, from 10 bcm a year) and Iran (Ashgabat stopped in 2017 to provide gas to its Southern neighbor over a 1.5 billion dollars debt dispute).

We are talking about the resumption of purchases of Turkmen gas by Gazprom in the very near future � from January 1, 2019, said the Gazprom CEO Alexey Miller on October 9th, adding that details of the new deal still must be finalized. It seems that the volumes bought by the giant Russian company will be low, probably few billion cubic meters (bcm) per year. This matter was under discussion since a couple of years. According to our sources, Mr. Berdimuhamedov originally expected that Mr. Putin would make the decision in October 2017, when he came on visit to Ashgabat. But it didn't happen then.

Several observers in the business and diplomatic circles told us, that the Russian decision has been announced now, because many things are changing in the region. First of all, there was the Caspian Deal, on August 12th. On the security side, Moscow made sure with that no external power would put a feet in the Caspian Sea, but it had to make some concessions on the question of the Trans-Caspian gas pipeline. At least, Moscow formally left the other States the possibility to lay a pipe in the Sea. By resuming Turkmen gas purchase, Moscow helps the country in a critical moment, discourages Ashgabat to try to get a Trans-Caspian gas pipeline to be built in the near future, and � most importantly � makes Turkmenistan dependent on the Russian network to export its production, says a Western businessman working in the hydrocarbon sector.

The maneuver gives Ashgabat hope of cash in the coming months and breaks dependence on its current single client, China. Beijing imported 31.7 bcm from Turkmenistan in 2017. But a large part of the revenues it generates for Ashgabat are believed to be used to pay off the debt of loans which were granted while Beijing was building the Central Asia-China pipeline, that was commissioned in 2009. This monopolist situation could have pushed China to force a discount on the gas it buys from Turkmenistan, which was 340 $/1,000 bcm at the Turkmen border in 2012, 215 $ in 2015 and, probably 185 $ in 2017, according to assumptions of the energy expert on the region Simon Pirani, partly based on Chinese customs information.

But, adds Pirani, to move Turkmen gas out of the country westward, it is commercially more logical to do it through Russia. This route is shorter than the one via Azerbaijan and Turkey. Then the real question is: Why Gazprom agrees to get this gas to compete with its own one? My understanding is that Gazprom would prefer not to encourage a direct competitor, and might prefer to profit from offering that competitor a limited access to a route to Europe that it controls, rather than allowing a new route to be opened up. It is unlikely that Russia will be paying the high prices it paid prior to 2009 for Turkmen gas. The proposal by Miller to buy Turkmen gas has a political side, in that it helps to repair the damage done to Russia's political relationship with Turkmenistan by the cessation of gas purchases in 2016. This is important for Russia as part of its broader strategy for maintaining its political and diplomatic influence in Central Asia.

Some suggest that Gazprom might have been worrying that Turkmen gas could compete with its own one on the Chinese market. Igor Yushkov, leading analyst at the National Energy Security Foundation, declared the following on October 10th to the NSN radio: [Russia] still can, in addition to what we extract, extract about 150 billion cubic meters of gas a year from existing fields, so we do not need Turkmen gas. It is possible that Gazprom is trying to push China to conclude a contract with us, by limiting the possibility of gas supplies from Turkmenistan to China*.

But many other experts are putting emphasis on another thing. According to Thierry Bros, Senior Research Fellow at the Oxford Institute for Energy Studies, if the price of Turkmen gas is lower than the cost of Russian production, including the Mineral Extraction Tax plus the export duty on gas, then it makes sense for Gazprom to call Turkmen gas instead of producing more. And as the export duty is 30% of the price sold in Europe with prices increasing, it could soon become more interesting to call Turkmen gas. This would also reduce Gazprom needs to invest in Yamal fields to maintain its spare capacity. We should probably add that it could be a way to soften a bit the effect of the Western sanctions that badly impede Russian companies to invest in the hydrocarbon sector. The incentive of the 30% export duties is also what makes Mikhail Krutikhin, from the consulting firm RusEnergy, think that Gazprom, disguised as a JV with Turkmengas, will export this gas free of the export tax to its trading subsidiaries in Europe. They will sell it at the regular price and hoard the extra profit in interests of Russia's political elite. That's exactly the same scheme that was used with KazRosGaz for example, the JV that was created with Kazakhstan in 2007.

Source: Chronicles of Turkmenistan