Turkmenistan - Energy

Turkmenistan has been dependent on gas revenues, and the recent decline in prices for gas has had a negative impact on government finances. After years of surpluses, there is now a budget deficit. In January 2015 the nation’s currency was devalued 19%. Turkmenistan has an extensive welfare system, including free water, electricity, and cooking gas. Some of the country’s leaders called for changes to the program as early as September 2015, to save state finances.

At the start of 2017, Turkmenistan suspended supplies of natural gas to Iran, claiming Tehran owed some $1.8 billion for supplies delivered nearly 10 years before. With Russia having canceled its gas deal with Turkmenistan one year earlier, this left Turkmenistan with one gas customer -- China, a country that had loaned Turkmenistan billions of dollars to develop gas fields that would supply China and build the pipelines to carry that gas to China.

China is Turkmenistan's largest trade partner. Trade hit $10.37 billion in 2012, almost double the figure in 2011. Turkmenistan is China's major supplier of natural gas, and China is the largest overseas market for Turkmenistan's natural gas. The two have put into operation the world's longest natural gas pipeline of more than 8,000 km. Completed in 2009, the pipeline brings vital energy supplies through China's western region. It is estimated that 400 million people in China benefit from natural gas from Turkmenistan.

Turkmenistan has some of the largest natural gas reserves in the world, yet the country faces a myriad of challenges in bringing those reserves to world markets. It is geographically far from end-use markets and lacks sufficient pipeline infrastructure to export more hydrocarbons. Also, other hydrocarbon-rich Central Asian and Caspian states with more favorable investment climates and greater access to markets pose competition for Turkmenistan. The country is eager to diversify export routes for its oil and gas resources outside of the pipelines going to Russia, but must obtain capital, technical assistance, and political support for alternative pipelines.

Outside estimates place Turkmenistan's proven natural gas reserves of 7.94 trillion cubic meters (tcm) among those of the top four of gas-producing countries. A 2008 audit conducted by the British firm Gaffney, Cline and Associates concluded that the three most significant gas fields in the country, Yoloten, Osman, and Yashlar, hold between 4.25 and 15.5 tcm of natural gas.

Turkmenistan has world-class natural gas reserves, but Russia's near monopoly of the country energy export routes made it overly beholden to Russia. The disadvantage of this situation was driven home to the Turkmen following the April 2009 pipeline explosion and subsequent dispute, which halted gas exports to Russia and forced the Turkmen to shut down a large part of its gas production. Pipeline diversification would not only enhance Turkmenistan's economic and political sovereignty, but also help fuel new levels of prosperity throughout the region. In July 2009, Turkmenistan reached an agreement with Iran for increased gas sales. Construction of a new pipeline to Iran was scheduled for completion by the end of 2009. The gas pipeline to China began shipping a limited quantity of gas later in 2009.

One of the biggest challenges that Turkmenistan's hydrocarbon sector will have to face, if it is to succeed in pipeline diversification, is the need for increased natural-gas production. Turkmenistan produced a reported 70.4 billion cubic meters (bcm) in 2008, a figure that barely met its existing domestic needs and export commitments. Large increases would be needed as/if new pipelines come online. While Turkmenistan has welcomed foreign companies to work its offshore (primarily oil) Caspian blocks, it had largely rejected allowing foreign energy companies to work its onshore gas fields, maintaining that it can handle the drilling itself. But onshore natural gas production offers some tough challenges, including ultra-deep, high-pressure, high-sulphur, sub-salt drilling, which requires special skills and technologies and massive investment.

One Western analyst suggested that costs could run as high as $100 billion over the five years 2009-2015. No one outside of the Turkmen government believed Turkmenistan had either the skills or the financial resources needed. US policy had been to promote onshore production by major Western oil companies. President Berdimuhamedov repeatedly told visiting U.S. officials that foreign companies would not be granted production sharing agreements for the development of onshore gas deposits. Given the technological challenges of extracting onshore gas, that policy could change.

US integrated energy companies such as ExxonMobil, Chevron, ConocoPhillips and Marathon continue to express interest in working with the Turkmen to develop energy projects, but the Turkmen have shown little reciprocal interest. Most major firms have proposed onshore production projects that go against Turkmen government policy of controlling onshore development itself. President Berdimuhamedov appeared convinced that, given enough time, the Turkmen themselves will be able to hire the necessary technology and expertise to allow them to manage development of these resources.

In 2008, Turkmenistan was the second-largest gas producer in the former Soviet Union after Russia with estimated production around 70 billion cubic meters (bcm). Turkmenistan’s 2009 production declined to about 34 bcm. Gas production declined significantly when exports to Russia stopped on April 9, 2009, following a blast on the Central Asia-Center gas pipeline. Gas exports to Russia resumed at a reduced level (approximately 10.5 bcm/year) and price in January 2010./p>

Since the end of 2009, Turkmenistan has been exporting natural gas in three directions: to Russia, Iran, and China. In 2010, exports to Russia were expected to total 10-11 bcm, exported through the old pipeline system built during the Soviet era. Gas exports to Iran were expected to reach 7-8 bcm in 2010, exported through two pipelines: Korpeje-Kurtkuyi (built in 1997) and Dowletabat-Sarakhs-Khangiran (built in 2009). The total capacity of the two pipelines is 25 bcm per year, providing room for further increase of exports in the future. At the end of December 2009, Turkmen gas started flowing to China through the newly built Turkmenistan-Uzbekistan-Kazakhstan-China gas pipeline (Central Asia-China pipeline). Turkmen gas exports to China were expected to total 3-4 bcm in 2010. Turkmenistan and China plan to boost gas supplies to 40 bcm by 2014-2015 when the pipeline reaches full capacity./p>

Turkmenistan's 2009 oil production was about 10.3 million tons and was expected to total 10.4 million tons in 2010. Turkmenistan refines almost all of its oil inside the country and exports only petroleum products such as liquefied petroleum gas (LPG) and polypropylene./p>

Lack of sufficient foreign investment, geographical challenges, inadequate export pipeline infrastructure, and a rigid economic structure are factors that have deterred the country from becoming a major hydrocarbon exporter. Oil production from Turkmenistan has increased gradually since 2007 and is highly dependent on new investment and technological capacity to bring new fields online as well as resolving Caspian Sea maritime boundary disputes. The country remains a small net oil exporter. Turkmenistan has large amounts of natural gas reserves, but is currently constrained by the lack of available natural gas transportation infrastructure.

After some 15 years of isolation and a political regime change, Turkmenistan began the process of renewing diplomatic relations with several countries including Russia, China, Europe, the US, and other Central Asian neighbors in 2007. Foreign energy firms experienced extreme political challenges and investment impasses prior to 2007, and several exited the country leaving a dearth of investment. Since then, Turkmenistan created a more business-friendly environment, attempting to attract foreign investment to increase both oil and gas production and expand its export portfolio.

In 1998, Turkmenistan restructured the Oil and Gas Ministry to include five state-run companies, which control the country's hydrocarbon activities. These companies include the following: Turkmenneftegaz (controls purchases, distribution, and exports of both fuels and oil refining); Turkmenneft (produces oil in the western region of the country); Turkmengaz (produces gas); Turkmenneftegazstroi (construction company for hydrocarbon industry); and Turkmengeologia (conducts hydrocarbon exploration).

Seeking to attract more foreign investment and diversify export routes, the Turkmen government began reforming the country's energy sector and regulatory environment. In March 2007, the government established a hydrocarbon regulatory authority, State Agency on Management and Use of Hydrocarbon Resources, to issue licenses and contracts for oil and gas field development and provide greater revenue transparency. In 2008, Turkmenistan also passed a Hydrocarbon Law to provide greater legal transparency in ownership of oil and gas projects. According to the World Bank, foreign direct investment in Turkmenistan was $1.4 billion in 2009, up 65 percent from 2008, and country officials anticipate higher investment in the future.

International companies can participate in joint ventures (JVs) or production sharing agreements (PSAs) with Turkmenneft for offshore oil and gas blocks in the Caspian Sea. Turkmenistan currently limits investment opportunities for international companies to offshore oil and gas developments, with exception for the PSA with China vis-à-vis the Bagtyiarlyk onshore natural gas project in the country's southeastern region. In 2009, the Turkmen government signed several PSAs with foreign companies, including Russia's Itera and Germany's RWE, for offshore field development in the Caspian Sea.

Turkmenistan is a small net exporter of crude and refined oil. Oil export options for Turkmenistan are limited. Turkmenistan has almost no international oil pipelines apart from a cross-border pipeline in the east running from Kazakhstan and Uzbekistan where Turkmenistan can import Uzbek crude oil to feed the Chardhzou refinery. A small amount of crude oil is exported from Turkmenistan across the Caspian Sea to Azerbaijan and the Russian port of Makhachkala. Securing pipeline access in Russia has been a problem due to the poor quality of some Turkmen crude. A portion of Turkmenistan's total petroleum exports is in the form of refined products. EIA reports exports of crude and total refined products were 48 bbl/d and 74 bbl/d, respectively, in 2008.

Turkmenistan currently ranks in the top six countries for natural gas reserves and the top 20 in terms of gas production. According to OGJ, Turkmenistan has proven natural gas reserves of approximately 265 Trillion cubic feet (Tcf) in 2012, a significant increase from 94 Tcf estimated in 2009. Turkmenistan has several of the world's largest gas fields, including 10 with over 3.5 Tcf of reserves located primarily in the Amu Darya basin in the southeast, the Murgab Basin, and the South Caspian basin in the west. Recent major discoveries at South Yolotan in the prolific eastern part of the country are expected to offset most declines in other large, mature gas fields and will likely add to the current proven reserve amounts.

Turkmenistan has become a leading gas exporter in the Caspian and Central Asian region. The country exports a majority of its gas because production rates are more than double domestic demand estimated at 720 Bcf/y in 2010. The International Energy Agency forecasts exports will rebound and rise to about 3,180 Bcf/y by 2035.

Turkmenistan signed several agreements between 2007 and 2009 with international parties interested in tapping its gas reserves and developing pipeline infrastructure. Turkmenistan has historically relied on Russia as the primary export market and transit country for its gas, though recently constructed pipeline routes to China and Iran have opened new opportunities. In 2009, Turkmenistan exported 636 Bcf/y, dropping from over 1,700 Bcf/y in 2007 and 2008, as a result of the supply disruption to Russia discussed in the Exploration and Production section.

At the beginning of 2008, Turkmenistan ceased sending supplies to Iran due to a gas dispute; however, the countries signed a new agreement in February 2009. Iran agreed to import 350 Bcf/y, though imported only 177 Bcf/y that year. This amount is expected to increase as Turkmenistan tries to offset the fall in exports to Russia and fill capacity on a second pipeline to Iran commissioned in 2010. Total capacity for both pipelines is 700 Bcf/y.

China began importing Turkmen gas at the end of 2009 and expects to increase supplies as the pipeline capacity and production levels increase. In July 2007, China signed a 30-year gas purchase agreement with Turkmenistan to take 1,100 Bcf/y. CNPC's fields in the Amu Darya/Bagtyiarlyk contract area should supply about 460 Bcf/y of the gas with the remaining 600 Bcf/y of contract exports to come from existing fields and the South Yolotan. China and Turkmenistan signed another agreement in late 2011 that could add another 1,200 Bcf/y, bringing the total potential volume of gas exports to China to nearly 2,300 Bcf/y.

A proposal to build the Trans-Caspian Pipeline would bypass both Russia and Iran to carry Turkmen gas across the Caspian Sea to Azerbaijan and connect with pipelines en route to Europe. This proposed 1,060-Bcf pipeline could connect to the South Caucasus pipeline flowing gas to Turkey and then to the planned Nabucco pipeline to southeastern Europe. Disputes over Caspian seabed jurisdiction between Turkmenistan and Azerbaijan could complicate the project's viability.

An additional way for Caspian region exporters to supply Asian demand would be to pipe oil and natural gas through Iran to the Persian Gulf, or southwest to Afghanistan. The Afghanistan option, which Turkmenistan has been promoting, would entail building pipelines across Afghan territory to reach markets in Pakistan and possibly India. The Trans-Afghan pipeline, also called the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, would span over 1,000 miles from a point in Turkmenistan to Fazilka (India) on the Pakistan-India border and have a proposed capacity of over 1,200 Bcf/y. Majors issues holding up construction are supply security concerns, uncertainty of pricing and fees, and lack of financial commitments. India and Pakistan suggested paying below market prices, and finalization of the sales and purchase agreements presents a challenge to the negotiations.