TURKMENISTAN-CHINA GAS AGREEMENT UNREALISTICALLY AMBITIOUS

Visiting China on April 2-7, President Saparmurat Niyazov of Turkmenistan signed with his Chinese counterpart Hu Jintao a “general agreement” on Turkmen gas deliveries to China and construction of a pipeline to link the two countries. Turkmen state media have published the agreement’s text, and Niyazov summarized it on television upon his return to the country. Some discrepancies between the text and Niyazov’s presentation notwithstanding, the agreement is unrealistically ambitious in its scope and the timetable of implementation.

The general agreement is a statement of intent. Under its terms, China would purchase 30 billion cubic meters of Turkmen gas annually during a 30-year period, starting in 2009. To provide the gas, the sides will jointly explore and develop “all deposits” on the right bank of the Amu-Darya River (eastern Turkmenistan) on the basis of a production sharing agreement to be negotiated. Should additional volumes of gas be required to meet that annual commitment, Turkmenistan “may [sic] guarantee” supplies from other gas deposits in the country. The wording suggests that the project is not based on proven or even probable reserves and that Niyazov is reluctant at this stage to guarantee volumes from its proven and operating fields, if development of the designated area does not yield sufficient volumes to meet the China project’s export targets.

The sides are setting up two joint working groups to conduct preliminary feasibility studies on field operations and construction of the export pipeline. The groups are to hold bi-monthly meetings with a view to signing a package of implementation agreements by December 31, 2006. That package would center on: 1) a production-sharing agreement on joint field exploration and development; 2) an agreement on the parameters of pipeline construction, setting the terms for the technical and economic feasibility study of the pipeline project; and 3) a sale-and-purchase agreement setting annual volumes and prices of gas supplies. The financial terms are to be based on the “comparable international market price,” and payments are to be made exclusively in U.S. dollars.

The general agreement shall not affect the parties’ rights and obligations arising from other agreements to which they are signatory. This stipulation implies that Turkmenistan’s existing commitments on gas deliveries to Russia and possibly other countries take precedence over the export project to China. In any case, Turkmenistan’s 25-year agreement with Russia (2004-2028) looks rather like an agreement of intent, not legally binding beyond 2008.

Further under the general agreement, China’s government shall hold consultations with the governments of transit countries regarding construction of the pipeline on their territories. Turkmenistan’s Oil, Gas, and Mineral Resources Ministry and China’s National Petroleum Corporation (CNPC) signed a preliminary agreement on the pipeline project during Niyazov’s visit.

In his presentation on Turkmen television following his return to Ashgabat, Niyazov twice named the target date for commissioning the pipeline as 2008, and anticipated Hu Jintao’s presence to switch on the valve for the first flow of gas to China. Moreover, Niyazov projected the annual volume of supplies to China at 50 billion cubic meters annually from 2010 on.

While the general agreement does not mention a route for the pipeline, Niyazov announced that it would traverse Uzbekistan and Kazakhstan to Urumchi in western China, there to link up with the Chinese pipeline network. No estimate of investments in field development or pipeline construction is found in the general agreement or Niyazov’s presentation. These omissions also suggest that the project is a very tentative one and the proposed timetable highly doubtful.

The announcement of the project is almost certainly designed to enhance the bargaining position of either side with other potential partners. Both Ashgabat and Beijing need to demonstrate that they have a range of options available as exporter and as importer, respectively. This has long been a familiar tactic of Niyazov’s in negotiating with possible customers for Turkmen gas. He continues discussing massive supply agreements with Russia, Ukraine, Afghanistan, and Pakistan concurrently, and seems open to reactivating negotiations with U.S. and European parties in the wake of the recent disruptions in Russian supplies.

Thus far, however, Niyazov has never been able to challenge Russia’s monopsony. Only a clear prospect of a westbound export route may persuade him to diversify Turkmenistan’s export destinations. Moscow aims to absorb nearly the full volume of Turkmen gas exports and resell that gas in Europe. Consequently, Russia will almost certainly react negatively to the Turkmen-Chinese agreement. However, the West collectively would be the strategic loser from any deal that would send Turkmen gas eastward, instead of Europe. Niyazov’s move in China is a consequence of the chronic lack of a Western policy in this regard.

(Neytralnyy Turkmenistan, April 4; Interfax, April 4; Turkmen Television Channel One, April 8)