Turkmenistan: The Achilles' Heel Of European Energy Security

A Turkmen gas compressor at the Korpeje oil and gas field (file photo) (ITAR-TASS) WASHINGTON, June 30, 2006 (RFE/RL) -- In the wake of the "gas war" between Russia and Ukraine in early 2006, and the brief interruption it caused in supplies to Europe, the world awoke to the increasing importance of Central Asian natural gas for European energy security. After all, the bulk of the natural gas that Ukraine imports through Russia comes from Turkmenistan.

Now, with international ratings agency Fitch warning that the elements are in place for a "perfect storm" of an energy crisis, news comes on July 30 that talks between Turkmenistan and Ukraine over an independent agreement for gas supplies in the fourth quarter of 2006 have bumped up against the issue of transit through Russia. The previous day, Turkmenistan and Russia's state-controlled Gazprom broke off talks on late-2006 shipments to Russia amid Turkmen threats to cut off supplies in September. Is the storm fast approaching?

Ukrainian Fuel and Energy Minister Ivan Plachkov arrived in Ashgabat on June 29, as Turkmenistan and Gazprom both reported that negotiations between Gazprom Chairman Aleksei Miller and Turkmen President Saparmurat Niyazov were "broken off." Gazprom's press release stated that the breakdown occurred after the sides "failed to reach an agreement" over Turkmenistan's insistence that Gazprom pay $100 per 1,000 cubic meters for 2007 shipments and additional 2006 shipments. Until now, Gazprom has paid $65 per 1,000 cubic meters of Turkmen gas. Turkmenistan's official TDH news agency reported that Turkmenistan will finish deliveries of a previously contracted 30 billion cubic meters (bcm) at $65 per 1,000 cubic meters by September. After that, Turkmenistan threatened, it will halt shipments to Russia.

Feeling The Effects In Kyiv

The Gazprom-Turkmenistan price tiff had direct implications for Ukraine, which consumes 76 bcm of gas a year but produces only 20 bcm. It imports the remainder, with 41 bcm in Turkmen imports planned for 2006. The January compromise that ended the Russian-Ukrainian gas showdown set up a complex scheme for Ukrainian imports. Ukraine buys gas at $95 per 1,000 cubic meters from Rosukrenergo, a Swiss-registered trading company owned half by Gazprom and half by two Ukrainian businessmen. Rosukrenergo buys gas from Gazprom, which sells the trader a mixture of Russian gas at over $200 per 1,000 cubic meters and much cheaper Central Asian gas (primarily Turkmen, with lesser quantities from Kazakhstan and Uzbekistan).

For Ukraine, the upside of the January compromise was the final price of $95 per 1,000 cubic meters, lower than prices elsewhere in the former Soviet Union (outside Russia and Belarus) and far lower than the EU average price of $240 per 1,000 cubic meters. And price matters -- analysts forecast a grim fate for Ukraine's energy-intensive chemical industry if the price of gas edges above $100, and tough times for the metal industry if it goes higher. Which brings us to two significant downsides of the January compromise: 1) its reliance on cheap Central Asian gas, and 2) its susceptibility to renegotiation after six months.

Both downsides were soon evident. In May, Kazakhstan, which is slated to ship 8 bcm to Russia in 2006, garnered a price hike from $50 to $140 per 1,000 cubic meters, "Vedomosti" reported on June 22. On May 22, Gazprom Deputy Chairman Aleksandr Ryazanov announced that the rising price of Central Asian gas could increase Ukraine's purchase price to $130, according to the Economist Intelligence Unit. On June 20, Turkmenistan's Foreign Ministry announced that it planned to raise the price of gas for Gazprom in the second half of 2006 from $65 to $100 per 1,000 cubic meters. Ryazanov told a press conference the same day that he envisaged Ukraine paying $150-$160 per 1,000 cubic meters by the end of the year.

Tricky Spot

In the Ukrainian-Turkmen talks on June 30, the Turkmen side noted that it will complete deliveries of the 30 bcm it has contracted to Russia by September. Then it offered Ukraine an independent deal for the fourth quarter of 2006 at $100 per 1,000 cubic meters, turkmenistan.ru reported. But the offer came with a catch beyond the expected price hike: Ukraine must arrange transit for the gas -- presumably in the quantity of approximately 10 bcm -- through Russia on its own. The Ukrainian side will now return to Kyiv for consultations, and negotiations with Ashgabat will be continued later, turkmenistan.ru reported.

The failed talks between Gazprom and Turkmenistan on June 29, inconclusive negotiations between Ashgabat and Kyiv on June 30, current lack of an agreement to ensure Ukraine's supplies through the end of the year, and the Turkmen threat to cut off shipments in September if its rising price demands are not met are, in the best light, tough bargaining in the extreme; in the worst, they represent a step toward a new gas crisis. For now, the episode lays bare the shifting sands on which Ukraine's gas supply rests.

Those shifting sands led Jeffrey Woodruff, director of the energy group at ratings agency Fitch, to warn on June 27 that the problems besetting the Turkmenistan-Ukraine gas nexus had "the makings of a perfect storm," Reuters reported. The specific elements Woodruff had in mind were Turkmenistan's threat to raise prices and the knock-on effect for Ukraine, Russian allegations that Ukraine was failing to refill underground storage tanks at sufficient rates, and rumblings in Ukraine of the need to renegotiate the knotted deal with Rusukrenergo. Woodruff stressed that "any of the events in isolation could be enough to spark new supply interruptions in Europe, but all of them colluding near the beginning of the G8 summit on energy security seems unbelievable."

The root of Europe's vulnerability is that Ukraine remains the conduit for 80 percent of the gas shipments the continent receives from Russia. And as the events of January demonstrated, if Ukraine experiences a shortfall, Europe does, too.

Systemic Problem

The underlying problem is the fragility of the entire framework for keeping Ukraine supplied with Turkmen gas, the essential component shielding Ukraine's economy from a potentially lethal price hike. What's worse, the fragility has multiple causes. For starters, Ukraine's economy is ill suited to withstand higher gas prices even as those prices are rising. And Ukrainian oil and gas company Naftohaz Ukrayiny is financially strapped, with a $60 million debt to Turkmenistan for 2003-05 shipments and, according to Gazprom, arrears of $370 million for 2006 shipments as of June 15 (although Gazprom Deputy Chairman Ryazanov said that he expected Ukraine to pay that debt down to $100 million by July 1, and Ukraine has apparently promised to make good on its $64 million debt to Turkmenistan in September).

Moreover, with prices in Western Europe well over $200 per 1,000 cubic meters, Turkmenistan's desire to receive more than $65 per 1,000 cubic meters is natural. And Russia, which controls the only pipelines capable of delivering Turkmen gas to Ukraine, has made it clear that it plans to seek price increases across the board in the former Soviet Union, even from ally Belarus.

Against this challenging backdrop, political conflict in Ukraine -- where the formation of a coalition government has stalled amid parliamentary infighting -- has hampered the government's ability to fashion a unified negotiating position. Rocky relations between Russia and Ukraine are another impediment. Both elements have been on full display of late. Yuliya Tymoshenko, the expected prime minister in Ukraine's nascent ruling coalition, announced on June 22 that Ukraine must review existing gas deals and "build new agreements on a friendly basis with the Russian Federation, Turkmenistan, Uzbekistan, and Kazakhstan." Gazprom spokesman Sergei Kupriyanov warned the next day of a "new gas crisis" and charged that Tymoshenko's statements "once again confirm that Ukraine is the weak link in the system of gas suppliers to Europe," AP reported. Days later, amid continued wrangling in Ukraine's parliament, Ukrainian Fuel and Energy Minister Ivan Plachkov told Kyiv's Channel 5 that there was, in fact, no need to renegotiate the January 4 deal with Russia over Turkmen gas.

The Niyazov Factor

Yet another factor is Turkmen President Saparmurat Niyazov, who enjoys nearly unlimited power and has used it to indulge in such megalomaniacal whimsy as the construction of a huge golden statue of himself that rotates to face the sun at all times. In late December, Niyazov signed a deal with Ukraine to supply 40 bcm in 2006 at $50 per 1,000 cubic meters in the first half of the year and $60 in the second. Days later, he signed another contract with Gazprom at a higher price, and that deal eventually served as the basis for the arrangement with Rusukrenergo that has seen Ukraine pay $95 per 1,000 cubic meters thus far in 2006. The contract with Ukraine was never implemented.

The deal that was implemented -- involving Turkmenistan, Russia, the Swiss-registered Rosukrenergo, and Ukraine -- drew fire for its murk and middlemen. In an April 2006 report on the Turkmen-Ukraine gas trade, NGO Global Witness documented a history of business practices that can charitably be described as highly unorthodox culminating in the creating of Rosukrenergo. Global Witness also reported that 75 percent of Turkmenistan's hard-currency revenues from gas sales go into shadowy extra-budgetary funds controlled by Niyazov. The report concluded that the January 4 contract that resolved the Russia-Ukraine gas dispute, and ended the interruption of supplies to Europe, "does not guarantee any security for any substantial period of time." Global Witness stressed that "the tangled maze of companies described in this report is hardly a solid foundation for a trade of such commercial and geostrategic importance."

Gazprom On Its Guard

And then there is Kremlin-controlled Gazprom, which jealously guards the only pipelines that can ship Turkmen gas to Ukraine. Before he arrived in Turkmenistan, Ukrainian Fuel and Energy Minister Plachkov had said that he hoped to negotiate with Turkmenistan under the original, late-December contract that set a price of $50 per 1,000 cubic meters in the first half of 2006 and $60 in the second. But Turkmenistan's Foreign Ministry announced on June 30 that Gazprom, citing limited pipeline capacity, refused in December to provide a license for the transport of gas through Russia under the Turkmen-Ukraine contract.

It is precisely such a license that Turkmenistan has now proposed that Ukraine try to negotiate with Russia, turkmenistan.ru reported. What's more, Turkmenistan "is ready to review the issue of gas shipments to Ukraine in 2007 if the Ukrainian side receives a license for its transit."

The negotiating ploy here seems clear -- to put the ball in Gazprom's court, letting Russia decide whether or not it wants to imperil a possible Turkmen-Ukrainian gas deal. And the timing is dramatic, with Russia set to host a G8 summit on energy security in only two weeks' time.

Yet the waters of the Turkmen-Ukraine gas trade have never been muddier. For one, the 2007 shipments Turkmenistan is now "ready to review" were thought to have been promised to Russia under a 2003 "contract of the century." But as previous experience with Turkmenistan has shown, contracts are not the final word. That belongs to Niyazov -- who is only one factor among the many enumerated here, all of which are coming into play as Europe, which receives one-fifth of its gas through Ukraine, watches and wonders about the winter ahead.