Shift in Turkmen export and upstream prospects

by Simon Pirani

Turkmenistan’s acting head of state, Gurbanguly Berdymukhammedov, is expected to win a presidential election comfortably on 11 February. Observers are cautiously hoping that central Asia’s largest gas producer may move towards more predictable, open government, and a more reliable, diverse export strategy. The death on 21 December of president Saparmurat Niyazov, the ruthless and eccentric dictator who ruled Turkmenistan for 21 years, at first gave rise to fears that gas exports might be reduced or disrupted by political instability. These soon proved to be exaggerated: Niyazov’s successors need the revenues as much as he did.

More important are prospects for a change of direction over the long term, which might lead Turkmenistan to seek new gas export markets or to redraw its upstream investment policy. Gas people are watching closely: Turkmenistan, hobbled by gross mismanagement and even occasional jailing of industry executives, produces about 60 bcm/year. That could increase.

The immediate battle for political succession was settled within hours of Niyazov’s death. Parliamentary chairman Ovezgeldy Ataev, acting head of state under the constitution, was arrested and replaced by Berdymukhammedov, a deputy prime minister.

Opposition forces abroad see Berdymukhammedov as a front man for the security services: Farkhad Ilyasov, editor of the Moscow-based newspaper Turkmenskaya Iskra, went so far as to say there had “effectively been a military coup”.

Western observers acknowledge that Berdymukhammedov depends on the backing of such security chiefs as Akmurad Redzhepov, head of the presidential guard, and Agageldy Mamedgeldiev, defence minister. The risk of instability is seen as minimal: it might arise from conflict over such issues as the appointment of lower-level officials or the disposal of Niyazov’s personal fortune.

Berdymukhammedov is expected to win the 11 February election because he is the only nationally-known politician among the six candidates approved by the People’s Council of Turkmenistan, and has the support of the entire government. Turkmenistan’s political opposition leaders are in jail or exile, and western observers reckon they are too weak to make an impact.

Berdymukhammedov is not expected to make significant policy changes, or to introduce democratic reform, in a hurry. But there are important indications that government will be more open and will promote economic development: in campaign speeches Berdymukhammedov has mentioned universal internet access (which would be a bombshell in such a closed country) and educational reform (which could undo the unprecedented reduction in schooling ordered by Niyazov).

Shirin Akiner, a central Asia specialist at the University of London, said that if Berdymukhammedov is elected, “there will be a certain amount of liberalisation, but in a controlled way”.

Government is expected to become more predictable and rational. It would be easy to improve on Niyazov’s record in this respect: in his final years, as analyst Begmurad Annageldyev pointed out in the central Asian news magazine Oazis, Niyazov took to intervening arbitrarily in the micro-management of the economy and personally checking “even the smallest contract with foreign companies”.

Stephen O’Sullivan, oil and gas analyst at Deutsche UFG in Moscow, says that the political change may be good news for Gazprom, which buys nearly all of Turkmenistan’s export gas. The Russian company “has always had concerns that, first, Turkmenistan may not want to deliver the volumes promised, and, second, that it may not have sufficient reserves to do so”, and will surely welcome “more sensible policies, such as sticking by contracts”. O’Sullivan added that “Gazprom is also presumably hoping that it will now be able to do its own audit of reserves”.

In the months ahead, the gas industry will be looking for signs of change in specific areas including: 

*  Upstream regime and openness about reserves. While Maersk of Denmark, Wintershall of Germany and Petronas of Malaysia, and some smaller companies, are developing offshore blocks under PSAs, most international oil companies want better investment conditions and/or access to onshore fields, which Niyazov’s Turkmenistan was not prepared to give.

Investors also claim that Niyazov, who kept audit results secret, exaggerated the volume of reserves. There was especially widespread scepticism about the true size of reserves at the Gunorta Yoloten field, which Niyazov claimed was the world’s largest, and for which a three-year exploration contract was signed by China National Petroleum Corporation in November last year.

Arguments about the audit of the Dauletabad field, one of Turkmenistan’s largest, are thought to have been behind a string of arrests of oil and gas ministry officials in 2005.

*  Possible regional rapprochement. US and European hopes of bringing Turkmen gas westwards outside Russia rely mainly on plans for a Trans-Caspian pipeline from Turkmenistan to Azerbaijan; these plans in turn are stalled by bad relations between the two sides. Part of the problem is a dispute over how to demarcate country boundaries in the Caspian: Turkmenistan uses a different methodology from all other countries.

Warmer relations between Turkmenistan and Azerbaijan could reawaken hopes for a Trans Caspian pipeline. In the longer term, the change of leadership may clear up conflicts with Uzbekistan and Kazakhstan, which have precluded, for example, any united front in dealing with Russia.

*  Renewal of direct talks with Ukraine. The change of regime in Ashgabat raises the possibility of a return to the policy of playing Russia and Ukraine off against each other, which was effectively thwarted by Moscow during last year.

At the height of the Russo-Ukrainian gas conflict last winter, Turkmenistan refused to deliver volumes under direct sales contracts with the Ukrainian national gas company, Naftogaz Ukrainy. Turkmenistan sold, and this year sells, only to Gazprom at the Turkmen-Uzbek border, for resale to Rosukrenergo and thence to Ukraine. Thereby Russia succeeded in severing direct contractual relationships between Turkmenistan and the main consumer of Turkmen gas, Ukraine – a milestone in its efforts to centralise its control over the CIS gas trade.

But the new regime in Ashgabat could seek to mend fences with Kiev. Akiner at the University of London said Turkmenistan would continue to negotiate with both Moscow and Kiev. “Turkmenistan makes its choices. The perception in Ashgabat is that Russia is far more dependent on Turkmenistan than the other way around.”

A week after Niyazov’s death, Viktor Maiko, Ukrainian ambassador to Turkmenistan, expressed optimism in a lengthy interview in Zerkalo Nedeli newspaper. “No-one [in Ashgabat] has crossed us off the list of potential negotiating partners” he said. The negative legacy of gas trade and associated barter and corruption was balanced by positive commercial ties in fields including construction and defence, Maiko said. Ashgabat would listen to “serious, well-thought out” proposals; the hard part would be convincing Moscow.

*  Depoliticised industry management. The Turkmen oil and gas sector has been seriously weakened by rounds of purges, involving sackings and arrests – notoriously, in 2005, up to ministerial level. If future leaders, as is hoped, relax the especially arbitrary aspects of Niyazov’s dictatorship, a management team denuded of talent and oppressed by fear could be rebuilt.

*  Warmer relations with other powers. The big geopolitical question is whether Turkmenistan, which is strongly tied to Russia both by gas exports and other trade relations, will shift its big alliances.

Turkmenistan’s most obvious potential non-Russian partner is China, and Beijing’s long-standing efforts to build closer links paid off in April last year when Niyazov signed an agreement to export 30 bcm of gas per year to China from 2009. Then, scepticism was expressed about whether a pipeline would ever be built for these sales; now, all eyes will be turned to Ashgabat to see how the relationship moves.

The US will continue to push not only for a Trans Caspian pipeline, but also for better all-round relations with Turkmenistan, a possible ally in a region where Washington is short of friends. On the other hand Iran, to which Turkmenistan had briefly exported gas before shutting it off last year, may try to renew ties with Ashgabat.

India is also interested in Caspian friendships and Caspian gas. Last month P.S. Butola, general manager of ONGC Videsh, the overseas arm of India’s national oil company ONGC, said it was close to an agreement to buy a 33% interest in two offshore blocks currently being explored by Maersk and Wintershall.

A version of this article appeared Gas Matters newsletter, January 2007.
Posted January 2007; © 2006 Simon Pirani

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