LNG PROVIDES NEW OPTIONS FOR TURKMEN GAS EXPORT TO EASTERN EUROPE

By Dmitry Shlapentokh (01/09/2013 issue of the CACI Analyst)

The rapid development of Liquefied Natural Gas (LNG) technology has spurred a renewed interest in the vast untapped reserves of Turkmenistan. In late fall 2012, a Romanian delegation visited Turkmenistan to emphasize Bucharest’s interest in importing Turkmen gas, while Ukraine has increasingly made similar overtures after starting the construction of an LNG terminal near Odessa in late November 2012. Exporting gas to European markets is an attractive option for Turkmenistan, and LNG technology is increasingly presenting the country and its potential customers with an opportunity to override Russian objections, a fact clearly demonstrated by the renewed interest among East European countries such as Romania and Ukraine.

BACKGROUND: Turkmenistan’s political elite has long entertained a desire to establish export channels for natural gas to Europe. Yet, disagreement with Baku over the ownership of important gas fields in the Caspian Sea and even more importantly objections by Moscow reinforced by a constant display of force in the Caspian Sea, have so far prevented such plans from materializing. Until recently, Turkmenistan’s only option has been to export gas through the planned but unrealized trans-Caspian pipeline on the bottom of the Caspian Sea. In comparison to LNG, transport by pipeline has remained a comparatively cheaper alternative, explaining the reliance on this pipeline in any scheme for Turkmen gas exports to Europe outside the Russian network.

Yet, gas delivery by pipeline also has serious economic and geopolitical setbacks. Not only does it limit the room for maneuver of customers who currently depend on only a few sources of gas; it also creates a serious problem for suppliers who need to secure long term contracts to compensate for the huge investment in constructing the pipelines. LNG technology eliminates both these problems. It provides alternatives not only for consumers but also for suppliers, who can send exact amounts of gas to a variety of customers.

Conversely, the problem of LNG is the significant technological investments required and enormous costs involved in processing and transporting large amounts of gas, which explains the continued dominance of gas transported by pipeline on the market. Yet, the situation is changing as technology progresses and an increasing number of countries demonstrate interest in LNG, with prospective economic as well as geopolitical implications for Central Asia. This is especially true for Turkmenistan and its potential customers in East Europe.

IMPLICATIONS: The introduction of LNG technology in Turkmenistan promises to eliminate many of the problems attached to the trans-Caspian pipeline and will deprive Russia of much of its leverage over Turkmen gas exports, as it cannot easily prevent Turkmen ships from shipping LNG to the western shores of the Caspian. Ashgabat demonstrated its understanding of the importance of LNG several years ago when the major state company Turkmengaz started to build a liquefaction terminal. While Turkmenistan has entertained different plans for delivering gas to Europe, the LNG solution has in time become increasingly popular.

The plan to increase LNG capability has opened for Turkmenistan’s involvement in the Azerbaijan-Georgia-Romania Interconnector (AGRI) project and Turkmenistan’s cooperation with Azerbaijan. AGRI was first presented in the so-called Baku declaration, signed on September 14, 2010. The project involves Azerbaijan’s SOCAR, Georgia’s GOGC, Hungary’s MVM, and Romania’s Romgaz. Georgia’s involvement will provide it with a key function as a transit port for LNG. The gas will be transported from the Caspian shore in Baku to the Georgian Black Sea shore and then shipped to Constanta in Romania. The port of Kulevi in Georgia is considered crucial to the enterprise and its LNG terminal can process between 10 and 20 billion cubic meters of gas per year.

Turkmenistan was early regarded as a partner in the project, as demonstrated by the Romanian president’s visit to the country in 2009, where the delivery of Turkmen gas was one of the major topics for discussion. Ashgabat has subsequently taken several steps to improve its capacity for LNG export and its potential as a partner in AGRI. In 2009, Turkmenistan built an LNG terminal on its Caspian Sea shore, constituting the first such terminal in the area. It has also increased its production of LNG from 2010, coupled with constantly increasing the capacity of its tanker fleet. The interest in Turkmen LNG was reemphasized in negotiations between Bucharest and Ashgabat in October 2012, during the Romanian delegation’s visit to Turkmenistan.

Georgia’s essential role as a link between the Caspian and Black Seas has underlined the importance in preparing other Georgian ports in addition to Kulevi for LNG processing. One of Ashgabat’s concerns regarding Kulevi is that the terminal is owned by Azerbaijani SOCAR. Consequently, Ashgabat also regards Batumi and/or Poti as alternative ports on the Black Sea shore to which Turkmen LNG could be delivered in special containers by railroad from Azerbaijan. From Poti and/or Batumi, the LNG can then be shipped to Constanta.

If Turkmenistan will indeed be able to enter European markets through Romania or other destinations, this could imply a significant change on the European gas market. The change would stem from the availability of large quantities of Turkmen gas, possibly implying a decline of gas prices and a challenge to Moscow’s dominant standing as a supplier. In fact, the prospect of delivering Turkmen gas to Europe via Azerbaijan will have a much larger impact on European gas supply that the quantities already available for export in Azerbaijan itself. Ashgabat clearly understands its significance as a potential LNG exporter to Europe and the advantages of such a development to Turkmenistan itself.

CONCLUSIONS: If the AGRI project is implemented, it will be revolutionary not only to the economics involved but also to regional energy geopolitics. Most importantly, it would make Moscow’s objections to gas transport across the Caspian Sea null and void since such transport would be carried out by ships instead of pipelines. Any Russian move to prevent such traffic by military means would constitute an act of unprovoked aggression and could provide opportunities for the U.S. or NATO forces to emerge on Caspian Sea shores, a prospect that Moscow is unlikely to risk.

The materialization of sufficient amounts of Turkmen gas for LNG traffic would provide a clear alternative source also for Central and West European countries, including for Germany, which has become increasingly unhappy with Moscow’s monopoly. Yet, AGRI has even more important implications for some of the former Soviet republics, most notably Ukraine. Anxious to reduce its vulnerability to Moscow’s energy leverage, Kiev has engaged in building a LNG terminal near Odessa and regards Turkmenistan as one of its major potential suppliers. The increased energy independence of Ukraine and Romania would not only reduce Moscow’s ability to exercise pressure on these countries but could also have implications for Belarus if Ukraine would be able to sell large amounts of gas further to the West. Finally, Georgia’s critical position as a transit country would reinforce its western orientation at a time of uncertainty regarding its foreign policy choices and future relationship to Moscow.

AUTHOR’S BIO: Dmitry Shlapentokh is Associate Professor of History, Indiana University at South Bend.