European Energy Security and Turkmenistan

Early last month, Russian President Vladimir Putin announced that South Stream, a proposed gas pipeline from Russia to Europe, would be cancelled. One country that could benefit from the cancellation is Turkmenistan. A country that holds almost 10 percent of the world’s gas reserves, and is home to the globe’s second largest gas field, Turkmenistan certainly has enough gas to supply more markets. After various gas supply disputes with Russia, and a general weakening in geopolitical relations, there is no doubt European energy security would benefit from a boost in supplies from Central Asia.

Recent steps indicate Turkmenistan is showing renewed signs of interest. In November 2014, Turkmengas signed a framework agreement with Turkey to supply the Trans Anatolian Natural Gas Pipeline project (TANAP), a section of the Southern Gas Corridor project, set to be completed by 2018. The project proposes to transport 16 billion cubic meters (bcm) of gas a year from Azerbaijan’s Shah Deniz II field in the Caspian Sea to Europe via Turkey, aiming to reach a capacity of 31 bcm by 2026.

There are very few details in the public domain about the Turkish-Turkmen deal. And it all sounds a bit familiar. It is not the first time that such a Turkish-Turkmen agreement to cooperate has been signed, and it is unclear if anything concrete has actually been decided.

Moreover, there are many challenges to Turkmenistan’s participation in the project, the key one pertaining to the longstanding dispute over the legal status of the Caspian Sea. Turkmenistan’s involvement in the TANAP project would mean building a pipeline through the Caspian Sea to Azerbaijan. The Caspian littoral states, including Russia, Turkmenistan, Kazakhstan, Azerbaijan and Iran, are yet to decide on the Caspian Sea’s status as either a sea or a lake, which in turn determines the extent of each state’s access to the body of water and, more importantly, the rich resources contained within. Even at the recent Caspian Summit in Astrakhan in September 2014, Putin was only hopeful that a formal agreement would be signed at the next summit, the timing of which has not yet been decided. Iran and Russia have expressed their opposition in particular to a pipeline running through the Caspian, citing both the status question and environmental concerns. More recently, Russia’s opposition has been more directly targeted towards Europe, accusing Europe of interfering in Caspian Sea affairs, presumably referring to discussions over TANAP.

Diversification

Some might question why Turkmenistan needs a European market when one of this Central Asian state’s key partners is energy-hungry China. Turkmenistan is already China’s largest foreign gas supplier, and China plans to import as much as 65 bcm from Turkmenistan by 2020. China has helped to fund a large part of Turkmenistan’s gas infrastructure, including $4 billion of investment into the industrial development of Bagtyyarlyk area, and assistance in funding and constructing the four pipelines to transport gas mainly from Turkmenistan to China. Lines A, B and C are operational, with construction of line D underway.

However, Turkmenistan’s need to diversify away from a single customer in China has grown in 2014. There may be a new competitive dynamic to supplying China now that Russia has agreed to build the “Power of Siberia” pipeline from Eastern Siberia to China. A source familiar with the deal said that there may be future delays to line D’s construction, due to be completed in 2016, as a concession to Russia as part of the historic Siberian gas deal. Over-reliance on one market, such as China, is not in Turkmenistan’s ultimate interests. CNPC is the only foreign company to be allowed an onshore Production Sharing Agreement (PSA) in Turkmenistan. There are rumors of some concerns that Turkmenistan’s government is not completely satisfied with some of the PSA’s conditions. Turkmenistan will therefore be aware of the vulnerabilities this opens itself up to, particularly given its previous dependence on Russia.

New markets are particularly important given recent comments from Turkmenistan’s other customers. Gazprom recently announced that it would cease buying gas from Turkmenistan and Uzbekistan after current contracts ended. Although supplies have dwindled following a mysterious explosion in 2009 on the pipeline supplying Russia from Turkmenistan, in 2013 Gazprom still purchased 10.95 bcm from Turkmenistan. In August 2014, Iran said it does not need to purchase gas from Turkmenistan and only does so to expand political and economic ties with the country, indicating that this may not be a reliable future supply route. Europe is a very promising option, particularly given how difficult progress has been on other major alternative projects, such as TAPI.

The Importance of Turkey

There are numerous challenges to Turkmenistan participating in TANAP, plus a good deal of skepticism that either Europe or Turkmenistan can make it happen. Although the ministry of foreign affairs in Turkmenistan has openly articulated its desire to diversify international partners for energy supply, there has been little progress. The question of the Caspian Sea is an important one. Turkmenistan’s President Gurbanguly Berdymukhamedov is unlikely to do anything without the agreement of the other four countries. Another option could be the transport of Turkmen gas through Iran to Turkey, although this is currently a complex question, particularly given international sanctions.

A key player in any negotiations will be Turkey. The shared culture and long business cooperation between Turkey and Turkmenistan means there is a great deal of mutual trust between the two countries. Moreover, Turkey may hold more leverage in pipeline politics after Russia expressed interest in building a South Stream alternative under the Black Sea to Turkey. Although Turkish company Botas and Gazprom signed a memorandum of understanding for such a project, the Turkish foreign minister emphasized that TANAP remains the priority project. It is certainly in Turkmenistan’s own interests to have a truly multi-vector energy policy, particularly given the knock-on effects of Russia’s economic downturn on Central Asia.