It turns out the “European price”, that Uzbekistan and Turkmenistan will receive from Gazprom for natural gas exports in 2009 may only be a fraction of what Brussels pays for imports.
Earlier this year, Gazprom announced it would pay Central Asian natural gas producers “European prices” starting 2009. A specific price, however, was not set at that time, prompting speculation that Turkmenistan and Uzbekistan would seek in excess of $300 per thousand cubic meters (tcm). Initial indicators suggest that Ashgabat and Tashkent won’t be getting anywhere close to that amount.
On April 10, officials at LUKoil, Russia’s major oil conglomerate, spouted off that Uzbekistan would be offered $210/tcm. That news about a gas export price would emanate from an oil company didn’t seem to strike many people as strange. Nevertheless, it soon became clear that not all the pistons inside Moscow’s Ring Road were firing in unison: LUKoil issued a statement on April 15 disavowing the earlier comment about the $210/tcm price, characterizing it as idle banter by “individual employees of the company.” The statement went on to emphasize that Gazprom and its Tashkent-based counterpart Uzbekneftegaz would set the price “proceeding from the existing price for energy on the European market.”
Gazprom so far has been tight-lipped about pricing discussions. Of late, rumors of a $250/tcm price have circulated in Tashkent. According to a source in Tashkent familiar with Uzbekneftegas’s mode of operation, the price will be determined according to formula that factors in the final selling price in Europe, and which subtracts transit fees, along with Gazprom’s 30% fee. If this is accurate, the Russian conglomerate’s bottom line would be much stronger than what many energy analysts initially expected. Provided the price ends up somewhere in the range of $210-$250/tcm, Uzbek officials would be happy, some observers in Tashkent say.
Currently, both Turkmenistan and Uzbekistan are receiving $130/tcm during the first six months of 2008, and will get $150/tcm and $160/tcm respectively for the last half of the year. “Although the [2009 pricing] deal would still leave Gazprom a hefty 30% margin, it also involves a lot of risk for Russia’s energy monopolist,” says the Tashkent analyst with knowledge of Uzbekneftegas operations. “The key problem is, that 85% of Gazprom’s energy exports to EU states go through Ukraine. The new price for Ukraine is estimated at about $300/tcm, up from present $179, and that can send that nation’s industrial sector into coma. Ukraine will likely increase transit fees for Russia’s energy exports to EU to compensate for the price hike. It will, subsequently, significantly raise the price for Europe and give the latter yet another incentive to look for alternatives to Gazprom.”
This, according to the expert, probably explains the relatively “low” starting price of $210/tcm that is likely to be offered to Uzbekistan. A similarly “low” offer will probably be made to Turkmenistan, the expert said. Kazakhstan will get more for its natural gas, because it will not have to pay for transit. This way, Gazprom can keep the final price for Europe tolerable, and prevent deterioration of its positions in the European market. It also gives Gazprom a price advantage over the Chinese competition that pledged to pay $195/tcm. The price of about $210/tcm would be consistent with forecasts made by Russia’s Ministry of Economic Development (MED) for European prices.
According to MED forecasts, Gazprom should get an average of $355.5/tcm in Europe in 2009, a figure that is lower than $381/tcm the conglomerate is receiving in 2008. Gazprom’s own forecasts are even lower, standing at about $316/tcm. Gazprom also expects energy prices to start declining somewhat in 2010. “We call $210 a ‘low price’, but it actually is very high,” continues the Tashkent-based analyst. “Central Asian states were offered just $25/tcm just half a decade ago. They have managed to use competition between Russia, China and the West to increase the price by almost ten fold. They are likely to continue diversifying their export options through new pipelines, like TCP, to increase this competition.” Until there is a deal, nothing is set. And even then, the export price is still subject to upward revision.
Fluctuations in supply and demand are only part of the calculus. Another major factor is the United States, which is continuing with an aggressive lobbying effort to get Turkmenistan, Central Asia’s most important supplier, to join the trans-Caspian pipeline project, which would circumvent Russia. Reuben Jeffrey, US undersecretary of state for economic, energy and agricultural affairs, arrived in Ashgabat on April 20 for a two-day visit. Jeffrey, according to news reports, indicated that Western energy giants -- including British Petroleum, Chevron, ConocoPhillips and Total -- were ready to move forward quickly with energy development projects.
Turkmenistan, according to official sources, intends to boost natural gas production to 250 billion cubic meters (bcm) per year by 2030. This year, production is projected to be 81.5 bcm. The intensive interest on the part of the United States could, at the very least, give Ashgabat leverage to keep driving higher the price Gazprom pays. If the Turkmen projections prove accurate, Central Asian experts believe that Russia could even give its blessing to limited Turkmen and Uzbek participation in a trans-Caspian pipeline. “The Central Asian governments may be able to sell the idea [of joining new pipeline projects] to Russia,” the Tashkent analyst said.
Meanwhile, a bottleneck has developed in Uzbekistan that will delay the opening of a pipeline connecting Turkmenistan to China. Officials in Ashgabat and Beijing had hoped that the pipeline - dubbed the Trans-Asia Gas Pipeline (TAGP) - would become operational in early 2009. Now it appears a 2010 opening is the best that the countries can expect. The deal to build the 530-kilometer Uzbek section of the pipeline was signed in April 2007 and, initially, a joint Uzbek-Chinese working group was supposed to be done with the feasibility study, as well as agree on a pipeline route, by the end of that year. But Tashkent began moving forward with the feasibility study only at the start of 2008. An official announcement has still not been made, but the Tashkent expert with knowledge of Uzbekneftegas dealings revealed that an Uzbek-Chinese joint venture, Asia Trans Gas LLC, has been working to “design, build and exploit” the Uzbek section of the TAGP.
According to a decree issued by Uzbek President Islam Karimov, Uzbekneftegas and a subsidiary of the China National Petroleum Corp. (CNPC) have an equal share in the venture. The JV was due to complete a feasibility analysis, as well as define the final pipeline route, by April 20. Under the tight timetable, bids for supplies and construction contracts were to be solicited by the end of April. Financing for the project needs to be in place by June 1, which is the projected day for groundbreaking. If those deadlines are met, the JV would hope to have the pipeline up and running by January 2010. Given the languid pace of project implementation to date, however, that target date would seem Quixotic. (Eurasianet)
The opinions expressed in this article are the author’s and do not necessarily represent those of BBJ.