Article published on Chronicle of Turkmenistan on December 10th, 2018
Mid-November, CNPC (China National Petroleum Corp.) announced that the Turkmenistan-China gas pipeline was nearly used at its full capacity at the moment. That’s certainly good news for Turkmens. The press communiqué underlined that if the pipe was about to reach 160 million cubic meters a day, it was because of the winter coming. Nevertheless, the trends seems good: Turkmenistan started to sell its natural gas to the People’s Republic of China (PRC) in 2010, exports rose to 28-29 bcm/year in 2014-16, 31.7 bcm in 2017 and for the first half of 2018 the volumes are 18.75% higher than for the same period of the previous year, according to Chinese custom statistics.
That makes Turkmenistan the first gas provider to the PRC, with 34% of all its imports (natural + liquefied) coming from the Turkmen land. Gas represents so far only around 7% of the PRC’s energy mix, but taking account of the size of its economy, it’s enough to make it from next year the world n°1 gas importer. And the perspectives seem encouraging for Ashgabat. According to BP Statistical review China’s gas consumption increased by 15% in 2017, accounting for 32.6% of global gas consumption net growth. But, unfortunately for Turkmenistan, the future of its “blue gold” exports to the Red Empire is not all bright.
The first reason for that is that in the last decade, Turkmenistan has gained China as an export destination, but lost Russia and Iran. Today, China is its only client. Then, the price paid by Beijing decreased year after year. “The estimated price at the Turkmen border for gas exported to China fell from just over $300/mmc in 2013-14 to $215 in 2015, $165 in 2016, and $185 in 2017. Moreover, some revenues are being used to repay loans from Chinese banks for the development of the Galkynysh gas field”, wrote the expert Simon Pirani in a report dedicated to the Southern Gas Corridor prospects, published last July by the Oxford Institute for Energy Studies. The consequence was the immediate fall in revenues on the Turkmen budget, which was filled around 70% by the gas sales.
With the current prices it pays, China certainly wants to continue to purchase Central Asian gas. But that can’t satisfy Turkmenistan. A fourth line is under construction, going through Kyrgyzstan and Tajikistan, in order to bring the overall export capacity from 55 to 85 bcm/year (the project has been delayed and should be achieved within four years). Various estimations are showing that by 2020 Chinese gas consumption will be around 340 bcm (220 production, 120, imported), compared to 240 bcm in 2017, 520 bcm in 2030 and 800 bcm in 2050. Gas is truly the “transition energy” for China, which aims to decrease the share of coal in its energy mix (60%), in order to reduce its CO2 gas emissions, and to bring the gas one from 7 to 10% by 2020. According the IEA (International Energy Agency), the total Chinese gas imports should raise from 92 bcm in 2017 to 171 in 2023 for example.
Costs push China to rely more on pipeline gas than on LNG (Liquefied Natural Gas). The latter is twice more expensive than the natural gas currently. But because of the lack available pipelines, Chinese LNG purchases are growing. Plus 46.4% between 2016 and 2017 (from 35.6 to 52.6 bcm). A similar jump is observed this year as well. In 2019, China will become the n°1 LNG importer, overtaking Japan. These figures shouldn’t frighten Turkmenistan, as its geographical location and its export means (pipelines) are playing in its favor. But in our troubled world and economy (with unpredictable oil prices, on which gas ones are partly indexed), nobody knows what will be in the future the compared costs of the natural gas and the LNG. But still, it seems reasonable to believe that Turkmenistan is in a good position to remain an important gas exporter for China. Then, the problem is more the competition with other natural (or pipeline) gas exporters… starting with Russia.
For years, Moscow did not voice objection against the Turkmen projects to export its gas volumes to China. On the contrary even, as Gazprom was mostly thinking to prevent any competition on the EU market. Indeed, as Beijing and Ashgabat were making real their projects, Europe (+ Turkey) represented about 1/3 of the Gazprom’s volume exports and 2/3 of its revenues. With such a profitability, we can understand why Russia was doing everything possible to push Turkmen gas Eastward (China), or Southward (TAPI project, Turkmenistan-Afghanistan, Pakistan-India). But everything changed in this regard with the Ukrainian crisis.
From 2014, when Moscow entered into a deep confrontation with the West, it turned to China to show Europeans that it could divert its gas export to the East. Thus, Moscow and Beijing signed in May 2014 a 30 years contract for the sale of 30 bcm/year of Russian gas. At the beginning, it looked like a bluff. But in the following years, it started to make more sense for China, even if we never totally understood how rational the deal was for the Russian side. This is how was born the “Power of Siberia 1” gas pipeline project, which is due to start working at the end of 2019 with a final capacity of 38 bcm/year. The situation is more complicated with the second line of “Power of Siberia”, the one going through Altay region, as Beijing is negotiating for a gas price indexed on oil one.
Despite these difficulties, Russia pivot toward Asia becomes more real… and Moscow’s pressure on Turkmenistan stronger, to take its expected shares of the Chinese gas market. Experts close to the Russian power are more often writing articles compiling all the good reasons for China to not buy anymore Turkmen gas. After repeating that Turkmenistan is facing problems with its new fields, they usually focus on the supposed high risk of destabilization in the country because of radical Islam, ISIL re-deployment in the neighboring Afghanistan, or some internal separatism.
The Kremlin desire to divert Turkmen gas from Chinese market explains why Gazprom proposed to President Berdymuhamedov to resume its purchase from next January. “As raw material, Turkmen gas is totally un-useful for Russia. (…) But it is possible that Gazprom tries to push China to conclude a contract with us by limiting the possibilities of Turkmen gas supplying to China”, speculated recently the Moscow based energy expert Igor Yushkov. As Ashgabat didn’t manage to open new export routes these last years, whether through the Caspian Sea (West) or to the South (TAPI), it had no choice but to agree with the Russian offer (especially with the very hard budgetary situation that the country faces).
The solution could be not as bad as it looks finally. One of our sources familiar with the Caspian hydrocarbons projects says that “Moscow is considering the idea to sale Turkmen gas directly to some European customers, like Germany, via Ukraine. It would be a way for Mr. Putin to say to Berlin that Russia continues to use Ukraine as a transit route, something that Chancellor Merkel is insisting on very much. But for Putin it would acceptable as it wouldn’t be Russian gas as such. It could be also a way to not increase the share of Russian gas the European imports, which is about 34% today. This point is important because Europeans are very sensitive to the idea to depend too much on Russian gas… but still, these new flows of gas would be exported to Europe under Russian control. It’s not sure that it works, but the idea is there. It’s probably why the Turkmen minister of Foreign Affairs travelled recently to Berlin for example.” That’s not mean that the chief of the Turkmen diplomacy, Mr Meredov, won’t continue to travel a lot to Beijing in the coming years. But he might bump into Mrs Lavrov, Miller or Putin.