Petroleum Review Editorial February 2009
Interesting times – is the South Yoletan–Osman field the real answer to the Ukrainian gas cut-off?
Finally, Russia’s spat with Ukraine appears to be over and the flow of gas to Europe reinstated after almost a fortnight. As the article on p18 clearly shows, this is a dispute with many threads and many convolutions.
The simple question ‘who won?’ does not have a ready answer. Initial press reaction awards the prize to Russia on the grounds that Ukraine will have to pay world prices by 2010, and that the interests of pro-Russian politicians in the Ukraine have been advanced. In addition, Ukraine would have been punished for supplying arms to Georgia and aspiring to join the European Union and NATO.
However, this ignores two key considerations – Gazprom’s finances and the relationship with Turkmenistan. In the case of the latter, a new chapter of ‘The Great Game’ may have just started.
Gazprom still derives the bulk of its profits from gas exports to Europe. The bulk of these are sold on lagged oil price related formulae. Gazprom is currently enjoying the gas price benefits of the summer oil price peak. It is now set to experience six to nine months of declining export gas prices – whatever the oil price. Gazprom, however, has massive investment requirements to develop expensive new gas supplies on the Yamal peninsula and in the Barents Sea.
As if that was not enough, Russia/Gazprom is also very keen to build the Nord Stream pipeline under the Baltic to give direct supply to Germany and the South Stream pipeline across the Black Sea to directly supply southern Europe through to Austria. One purpose of the latter being to pre-empt the EU promoted Nabucco pipeline (see p24). At the moment the economics of all three pipeline proposals are somewhat problematic.
Some have even suggested that a factor in the recent standoff was to demonstrate the unreliability of the Ukraine as a gas supply route in order to increase acceptance of, and encourage, investment in Nord Stream and South Stream.
Whatever the motivations and their relative weights, what is clear is that Gazprom has a massive investment requirement at a time of falling gas prices and when its ability to borrow commercially is problematical.
The real key
Completely unremarked, however, has been the role of Turkmenistan in the recent dispute with Ukraine. Yet this may transpire to be the real key. The basis of the discounted gas supply to Ukraine used to be Gazprom buying relatively low cost gas from Turkmenistan and then supplying it via shadowy intermediaries (see p19). It has been suggested that these intermediaries have now been removed.
In 2007, Russia signed long-term contracts with Turkmenistan to take increasing volumes of gas and also agreed to build a new export pipeline along the Caspian to take Turkmen and Kazakh gas to southern Russia. This pipeline will have an eventual capacity of 80bn cm/y. Russia is currently buying around 50bn cm/y from Turkmenistan under a 25-year agreement. The Turkmens also have a small export pipeline to Iran, with a capacity of 8bn cm/y, through which they typically supply Iran with between 6bn and 7bn cm/y. The Turkmens also have a 40bn cm/y supply contract with the Chinese and deliveries are now about to start through a newly built pipeline.
For many years there has been great debate about the real size of Turkmen gas reserves. Western sources peg them at around 2.7–2.8tn cm while the Turkmens have claimed 20–22.4tn cm.
In April 2007 the new Turkmen President Gurbanguli Berdymukhamedov contracted Gaffney Cline & Associates to audit the country’s gas reserves. The first reported audit indicated that the South Yolotan–Osman gas field had reserves of between 4tn and 14tn cm, with a most likely figure of 6tn cm. This makes the field the fourth or fifth largest in the world. Alone, it would have tripled Turkmen gas reserves. The audit also showed that the Yashlar gas field contained 675bn cm. Clearly, Turkmenistan has much larger gas reserves than most have believed which means it, potentially, becomes a gas supply rival to Gazprom.
In the late summer Turkmenistan was sufficiently emboldened to start discussing supplying up to 10bn cm/y to Europe and potentially offering the sort of volumes that would allow the Nabucco pipeline to become more than a pipe dream.
Over recent years Gazprom/Russia has made strenuous efforts to stymie the Nabucco project by contracting for all available Kazakh and Turkmen supplies – most recently attempting to buy Azerbaijani gas. It has steadfastly blocked all attempts to build trans-Caspian pipelines by invoking a USSR–Iran treaty from the 1920s that defines the Caspian as a lake and therefore under the jurisdiction of the littoral powers (USSR and Iran), claiming Russia to be the legal successor to the USSR. It has also aimed to ensure that South Stream was built ahead of Nabucco.
Now the massive reserves of South Yolotan–Osman throw everything back into the melting pot. It also creates a major geopolitical challenge as the field is very close to the Afghan border. This takes us back to the Central Asia Gas pipeline consortium (CentGas) led by Unocal, that aimed to transport Central Asian gas to the Indian Ocean via Afghanistan to supply Asian markets.
Although work was suspended/abandoned by Unocal in 1998 – and Unocal has since been taken over by Chevron – it would seem the requirement for the pipeline has not gone away and western interests in Afghanistan have just increased.
Chris Skrebowski
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
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