Turkmen Leader Wins on Gas Deal

Thursday, 24 November, 2005

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IWPR staff

After long-running negotiations, Ukraine and Turkmenistan seem to have hammered out pricing arrangements for the gas supplied by the Central Asian state – and President Saparmurat Niazov looks to have come out the clear winner.

But the Turkmen leader’s position in this complex poker game is weaker than it looks, because it is not clear just how much gas he has under the ground, and in reality it is Russia, the region’s biggest gas producer, that is setting the stakes.

When Ukrainian prime minister Yuri Yekhanurov visited Ashgabat at the end of October, his energy minister Ivan Plachkov signed a memorandum with Turkmen oil and gas minister Guichnazar Tachnazarov that was intended to sort out a nagging payments dispute once and for all.

The Ukrainians promised to pay outstanding debts covering gas supplied over the last year or so, and also agreed terms for future deliveries.

Those past debts are both substantial and contested, but at the talks the Ukrainians accepted the Turkmen view that the sum amounts to almost half a billion US dollars.

At the beginning of 2005, Turkmenistan raised the price of its gas from 44 to 58 dollars per 1,000 cubic metres – a move which some analysts believe was an opportunistic attempt to capitalise on Ukraine’s continuing domestic economic problems following the “Orange Revolution”.

But even at this higher price, the Turkmen were only getting half in cash; the rest came in the form of barter goods – and this is where the debt has accumulated. Ashgabat says the goods have not been delivered at all, but in October – before the final deal was signed – Plachkov blamed Turkmen customs officers for failing to clear goods waiting on the border.

The outcome of these complex negotiations looks wholly positive for Niazov, better known as Turkmenbashi, as the debt issue should be resolved by early next year, and he is now in a stronger position to demand more money for his gas.

Under an earlier agreement signed in June, Ukraine will go back to paying just 44 dollars per 1,000 cu m, but it will all be in cash and thus probably represents a net gain for Turkmenistan. One reason for this is that dollar revenues are always preferable to receiving an assortment of goods, but in addition, the notional pricing of barter items is generally held to have given rise to massive corruption, as officials in both countries pocketed the difference between the contracted and actual costs.

In a TV interview, Yekhanurov agreed it would better to shift to a more transparent payment system, saying, “We no longer need those games.” But in practice his government will find it hard to find the extra money, and the manufacturers who have lost a guaranteed market for their goods will also be unhappy. As a concession, the Turkmen have offered some extra gas in return for Ukrainian commercial investments.

Come the end of 2006, Turkmenbashi will be able to insist on another price hike, safe in the knowledge that the Ukrainians have few other energy options.

There is a third factor in the game – Russia, which not only buys Turkmen gas for itself but is also the region’s dominant producer and is thus in a position to direct trends and policies. In May, Moscow agreed to the same pricing deal that the Ukrainians have – 44 dollars per cu m, all in cash – but crucially it enjoys enormous leverage because of a deal signed in 2003 which gave the Russian industrial giant Gazprom prior rights to buy Turkmen gas over a 25-year period.

The Ukrainians have also been seeking some kind of long-term arrangement, but despite overtures from President Viktor Yushchenko, none has yet been forthcoming from Ashgabat. Their position is weakened further by the fact that their other supplier, Gazprom, is threatening to require them to pay three times the 80 dollar per 1,000 cu m it already charges. Although this would only bring the price into line with world rates, the Kremlin – to which Gazprom is close – will be well aware such an increase would put the squeeze on Yushchenko’s government, as it would be unable to sustain cheap gas prices for industry and the public.

Given the current strength of the Turkmen position in dealing with Kiev, more wrangling over prices may occur sooner rather than later. Deputy Prime Minister Atamyrat Berdyev said earlier this month that prices might go up from the start of 2006. Since the Russians already have a deal in place, that increase is likely to target Ukraine.

In a sign of their weak position, the Ukrainians have now agreed to a Turkmen request for Moscow to be involved in future pricing and supply talks.

In reality, though, neither Ashgabat nor Kiev is the major player. That fact was underlined by a deal signed last week which will place Gazprom in control of all gas pipelines out of Central Asia, leaving Turkmenistan in a weaker bargaining position when it comes to exports.

Underlying all the talk of strategic long-term deals there is one great unknown – whether Turkmenistan actually has enough gas to deliver on promises to both Russia and Ukraine.

Turkmen officials say yes, citing their claims of untold reserves. However, the problem is that no one outside the country has seen – or at least reported publicly on - the surveys that would confirm these ambitious estimates.

External assessments of the country’s gas wealth are much more sober. Turkmenistan’s proven reserves, as estimated by the US Department of Energy, make it a world player but not within the top ten producers. Figures cited by Ashgabat, however, claim much higher figures.

The biggest uncertainty surrounds Dauletabad, the country’s largest gas field, which is crucial not only for the future of supplies to the former Soviet Union but also because it is the basis for a long-planned project to lay a pipeline south and east through Afghanistan to Pakistan.

This year, the US company DeGolyer & MacNaughton and Britain’s Gaffney, Cline & Associates were contracted to do an independent audit of Turkmenistan’s resource potential.

Meanwhile, industry insiders in Turkmenistan cast doubt on their own government’s claims.

“The current state of our gas fields makes it questionable whether Turkmenistan will fulfil its obligations to Gazprom,” said an official with gas producer Turkmengaz who asked not to be named. “We’ve announced that reserves at Dauletabad, the largest gas field, are around 1.7 trillion cubic metres. This is said to be enough to make [future] supplies to Russia, Pakistan and Ukraine a reality. But it’s pure bluff – an audit conducted by western companies in 2004 shows different figures, at least 700 billion cubic metres lower. And it isn’t envisaged that any new fields of a similar magnitude will be opened up.”

According to this official, Turkmenbashi has overplayed his hand by suggesting that massive amounts of gas are available for relatively little additional investment.

“The results are already clear: there really is a lot of gas in Turkmenistan, but it is located in fields that are on a much more modest scale than Dauletabad. That means major investments will be required to develop them, so the gas will cost more,” said an official with the state geological exploration agency Turkmengeologia. “But that won’t stop Niazov from continuing to deceive the international community.”

At an October 31 cabinet meeting, Turkmenbashi acknowledged for the first time that the rate at which new fields were being discovered was not enough to match its export hopes. As things stand now, his country had a serious problem with export routes. Russia will continue to make the running in all northwards exports including sales to Ukraine. The Afghan-Pakistan line will not look viable unless the international auditors’ findings are unexpectedly optimistic, and a third option – the pipeline south to Iran – looks like a non-starter given that country’s deteriorating relationship with the United States

The shift to cash-only payments in dealing with Ukraine has had a major impact on Turkmen domestic politics. Oil and Gas Minister Tachnazarov had only been in the job since May when his predecessor Yolly Gurbanmuradov was removed, but Turkmenbashi sacked him at the same cabinet meeting at the end of October.

The Ukrainians must be hoping Tachnazarov’s removal will not affect the deal he signed with them in October.

According to the president, Tachnazarov was guilty not only of embezzling nearly a quarter of a million dollars from the treasury but also of giving away confidential information about the true size of Dauletabad’s reserves to the Asian Development Bank.

Tachnazarov is likely to share his predecessor’s fate - Kurbanmuradov has been charged with stealing government funds although it is unclear whether he has been sentenced. Other key figures in the sector have also gone in recent months –Saparmamed Valiev, head of the Turkmenneft oil production firm, has already been charged with corruption in August; Ilyas Charyev, head of the oil and gas trading firm Turkmenneftegaz, was sacked at the same time; and Orazmuhammed Otageldyev, head of Turkmengeologia, has also been removed.

For several months now, Turkmenbashi has been purging many of his top officials, including close allies, in what analysts see as warning to anyone who might harbour ambitions to replace him.

But the decapitation of the entire oil and gas sector is, say some observers, a convenient way for him to tidy up after the years of corruption surrounding the “in kind” payments made by countries like Ukraine.

The so-called “clearing goods trade” arose in the early Nineties when it became obvious that the various newly-independent states did not have the cash to maintain their Soviet-era economic relationships. As a result, Ashgabat found itself receiving bulk shipments of anything from boots to tractors and telephone kiosks in exchange for its gas.

Apart from the money to be made by overcharging for these goods, businessmen and officials in Ukraine and Turkmenistan built up personal fortunes from the kickbacks and money-laundering that were part of the trade.

“These people were dangerous witnesses,” said a Turkmenneftegaz official who requested anonymity. “They amassed enormous fortunes from the clearing business and [thus] became doubly dangerous for Niazov.”

Ukraine’s SBU security service has been looking into corruption on the Ukrainian side of the gas trade, and although the investigation has reportedly stalled because of resistance by powerful local interests, it could yet produce some embarrassing revelations for officials in Ashgabat as well as local officials.

According to the Turkmenneftegaz official, “In light of the anti-corruption investigations beginning in Ukraine… Niazov has simply taken precautions and covered his tracks.”

A member of the Ukrainian delegation which signed the gas deal in October took a similar view. Speaking on condition of anonymity, the official said, “The shift to 100 per cent [cash] payment for Turkmen gas is a serious reverse for us. On his side, Niazov has removed all the witnesses to the murky schemes involving clearing accounts, and now he’s effectively demanding that we do the same.”