Turkmenistan’s hold on European energy security

In the wake of the “gas war” between Russia and Ukraine in early 2006, and the brief interruption it caused in supplies to Europe, the world awoke to the increasing importance of Central Asian natural gas for European energy security. After all, the bulk of the natural gas that Ukraine imports through Russia comes from Turkmenistan.

Now, with international ratings agency Fitch warning that the elements are in place for a “perfect storm” of an energy crisis, news comes on 30 July that talks between Turkmenistan and Ukraine over an independent agreement for gas supplies in the fourth quarter of 2006 have bumped up against the issue of transit through Russia. The previous day, Turkmenistan and Russia’s state-controlled Gazprom broke off talks on late-2006 shipments to Russia amid Turkmen threats to cut off supplies in September. Is the storm fast approaching?

Ukrainian Fuel and Energy Minister Ivan Plachkov arrived in Ashgabat on 29 June, as Turkmenistan and Gazprom both reported that negotiations between Gazprom Chairman Aleksei Miller and Turkmen President Saparmurat Niyazov were “broken off.” Gazprom’s press release stated that the breakdown occurred after the sides “failed to reach an agreement” over Turkmenistan’s insistence that Gazprom pay US$100 per 1,000 cubic meters for 2007 shipments and additional 2006 shipments. Until now, Gazprom has paid US$65 per 1,000 cubic meters of Turkmen gas. Turkmenistan’s official TDH news agency reported that Turkmenistan will finish deliveries of a previously contracted 30 billion cubic meters (bcm) at US$65 per 1,000 cubic meters by September. After that, Turkmenistan threatened, it will halt shipments to Russia.

Feeling the effects in Kiev The Gazprom-Turkmenistan price tiff had direct implications for Ukraine, which consumes 76 bcm of gas a year but produces only 20 bcm. It imports the remainder, with 41 bcm in Turkmen imports planned for 2006. The January compromise that ended the Russian-Ukrainian gas showdown set up a complex scheme for Ukrainian imports. Ukraine buys gas at US$95 per 1,000 cubic meters from Rosukrenergo, a Swiss-registered trading company owned half by Gazprom and half by two Ukrainian businessmen. Rosukrenergo buys gas from Gazprom, which sells the trader a mixture of Russian gas at over US$200 per 1,000 cubic meters and much cheaper Central Asian gas (primarily Turkmen, with lesser quantities from Kazakhstan and Uzbekistan).

For Ukraine, the upside of the January compromise was the final price of US$95 per 1,000 cubic meters, lower than prices elsewhere in the former Soviet Union (outside Russia and Belarus) and far lower than the EU average price of $240 per 1,000 cubic meters. And price matters – analysts forecast a grim fate for Ukraine’s energy-intensive chemical industry if the price of gas edges above US$100, and tough times for the metal industry if it goes higher. Which brings us to two significant downsides of the January compromise: 1) its reliance on cheap Central Asian gas, and 2) its susceptibility to renegotiation after six months.

ISN Security Watch