GAZPROM LOSES IN THE EAST TO WIN IN THE WEST

MOSCOW. (Igor Tomberg for RIA Novosti)

Under its August 5 agreement with the Turkmen government, the Russian monopolist Gazprom decided to buy Turkmen gas at a price of $100 per a thousand cubic meters in 2007-2009. It will purchase 12 billion cubic meters in 2006 and 50 billion cubic meters every year in 2007-2009. In other words, it will pay $6 billion more than it was going to, but will control all Central Asian gas exports to Europe.

The press has not failed to notice the new price. Only two months ago Gazprom flatly refused to pay it, and even walked out of the talks, but now has changed its tune. Apparently, a serious change in the world gas market compelled the Russian monopolist to give in. There are several factors influencing the major players in the world market today.

China has become much more active in the Caspian region. The efforts of the Chinese companies to gain a foothold in the energy industries of Turkmenistan, Kazakhstan and Uzbekistan are starting to threaten Gazprom’s domination in Central Asia, which rests on its monopoly ownership of the Europe-bound gas pipelines. The Chinese have offered Ashgabat to build an eastward-bound export pipeline with a capacity of 30 billion cubic meters of gas per year. They are going to sign a production-sharing agreement for the right bank of the Amu Darya River, which is going to become a new gas province. They have also stepped up their involvement in developing gas resources in Uzbekistan and Kazakhstan with a view to transporting gas to China’s western provinces.

These steps have given Central Asian countries more room for maneuver. Turkmen President Saparmurat Niyazov has spoken more than once about the strategic importance of the Russian direction of the Turkmen gas exports. He has made the point that the construction of new pipelines, including the one going to China, which he promised to commission by 2009, will not prejudice cooperation with Moscow. Nevertheless, Ashgabat has definitely gained more bargaining chips in talking with Gazprom.

Apart from eastern-bound exports, the discussion of a pipeline under the Caspian Sea to supply Europe with gas bypassing Russian routes has become markedly more active. The Kommersant newspaper reported on September 6 that Polish Prime Minister Jaroslaw Kaczynski is going to visit Washington with the proposal on a joint construction a trans-Caspian pipeline to supply Europe with gas bypassing Russia. The Polish newspaper Rzeczpospolita wrote that in order to receive $5 billion for this project, the Polish authorities are ready to sign with the U.S. an emphyteutic lease for the construction of a missile base to become part of the U.S. ABM system.

Although in Kazakhstan the subject is avidly discussed at government level, only Turkmenistan has the resources for this gas project. Apparently, Gazprom will now pay to freeze it as well. Niyazov emphasized: “We’ll primarily supply gas to Russia. Don’t worry that Turkmenistan will walk away with its gas. We are not ready to discuss the trans-Caspian pipeline.”

Higher Turkmen gas prices will not be a big problem for Russia. Europe pays $230-$250 for a thousand cubic meters of gas, and Gazprom will have its share of the profit anyway. Moreover, having contracted almost all of Turkmenistan’s export resources until 2009, it has actually protected itself against competition in Central Asian gas supplies. A panic demand for gas in Europe, generated by the recent apprehensions about its near shortage, is bound to send gas prices even higher. Today, Europe’s major energy concerns are lining up to extend long-term contracts with Gazprom, but it is not likely to meet this demand without Central Asian gas. In the last few years, Gazprom has launched its own gas industry and blocked a speedy growth of its independent production in Russia. It is now compelled to negotiate with Ashgabat for this reason.

Many commentaries analyze possible changes of gas prices for Ukraine. There are several indicators that it will have to pay much more starting in January 2007. After the talks between prime ministers Mikhail Fradkov and Viktor Yanukovych in middle August, it became clear that Ukraine is ready to pay more than $95 per a thousand cubic meters. Yanukovych quoted $110 as an acceptable price for the local economy. On August 28, his deputy Nikolay Azarov reported that the Ukrainian budget for 2007 is based on the price of $135. Perhaps, he wanted to warn his compatriots in advance that they should expect a price rise next January.

One gets the impression that Moscow already has tentative agreements on gas prices for Ukraine in 2007. This is probably why the Russian gas giant has so easily accepted Niyazov’s terms. In this case, Gazprom’s concession becomes a clever tactical step in the difficult struggle for control over Ukraine’s gas transportation system, which, regardless of color, none of its governments wants to share if the price stands at $95. Now it will grow to no less than $150.

New prices in Turkmen-Russian gas cooperation are the first sign of change on the post-Soviet gas market. For the time being, Gazprom has been quite prompt and flexible. The market situation has helped as well. But the competition for resources keeps growing, and control costs more and more. Moreover, stepping up its efforts in the foreign market, Gazprom is neglecting its own production. In January-July 2006 gas production went up by 2.5% over the relevant period in 2005, whereas gas exports went up by 24.9%.

Igor Tomberg, Ph.D. in economics, is a leading researcher at the Center for Energy Studies at the Institute of World Economy and International Relations of the Russian Academy of Sciences. -0-