Gazprom to replace Turkmen gas with Uzbek supplies

Gazprom to replace Turkmen gas with Uzbek supplies
By bne IntelliNews January 6, 2016

Gazprom, Russia’s state-owned gas export monopolist, has officially suspended gas purchases from Turkmenistan starting from January 2016, according to a statement by the Turkmen state gas company Turkmengaz. At the same time, Gazprom said that it would increase purchases of Uzbek gas.

The announcements show how Central Asia’s gas producers are exploiting their improved bargaining positions. In the past they could only export their natural gas via pipeline networks run by Gazprom, which used to buy it at discount prices. Now Russia has found itself in fierce competition with China for Central Asian gas after Beijing funded the construction of the Central Asia-China gas pipeline,  with a total capacity of 55 bcm a year from Turkmenistan via Uzbekistan and Kazakhstan. The completion of the construction in 2009 has eased Turkmenistan’s and Uzbekistan’s dependence on Russia for export routes and emboldened their positions in gas dealings with Gazprom.

Although the gas prices offered by both countries are shrouded in mystery, gas from Uzbekistan is believed to be cheaper because, according to Kazakh customs figures, in the first half of 2015 Astana bought Uzbek gas at $89.6 per 1,000 cm and Turkmen gas at $170.1 per 1,000 cm.

As a result, Gazprom reduced the annual purchases of Turkmen gas from 45 bcm in 2008 to 11 bcm in 2010, as Europe started paying less for Russian gas exports and increasingly more gas started to be shipped eastwards to China. The decision to stop Turkmen gas purchases went against a 25-year contract signed between the two countries in 2003, which envisaged an increase in Turkmen gas exports to Russia to 80 bcm per year. Russia decreased Turkmen gas exports further to 4 bcm in 2015 as European demand for Russian gas fell by 6.5% y/y to 80.4 bcm in the first half of 2015 (it picked up in the third quarter because of low prices).

In July, Turkmenistan accused Gazprom of not paying for gas the Central Asian country supplied to Russia, according to a statement by the Turkmen Oil and Gas Ministry. Without specifying the size of Gazprom’s debt to Turkmengaz or the amount of gas supplied, the ministry explained that the Russian gas monopolist failed to make payments for gas because of the economic downturn and Western sanctions against Russia.

Turkmengaz attributed Gazprom’s decision to halt Turkmen gas exports to “the changing situation on the international gas market, and also certain economic and financial issues that have arisen for Gazprom Export”. At the same time, the company promised to remain open for negotiations with Gazprom on a “wide array of issues”.

Turkmenistan’s independence from Russia will be further bolstered by the launch of the construction of a Turkmenistan-Afghanistan-Pakistan-India pipeline with a capacity of 33 bcm a year. Despite the launch, the fate of the pipeline remains murky as concerns are mounting over security in war-torn Afghanistan.

While completely halting purchases of Turkmen gas, Gazprom’s CEO Alexei Miller has confirmed that his company will increase purchases of Uzbek gas in 2016. Uzbekistan supplied only 1 bcm of natural gas to Russia in 2015. “Uzbekistan is our reliable partner in the gas sphere and we will continue to develop our mutually-profitable cooperation in the future,” Interfax quoted Miller as saying. Miller didn’t specify the volumes of Uzbek gas Gazprom intends to buy, but RFE/RL,   citing sources at the company, reported that the gas monopoly would increase the figure to 3.1 bcm in 2016, slightly short of 4 bcm supplied in 2014.

Uzbekistan’s plans to increase gas supplies to Russia has been greeted by surprise in the country where the population and industrial consumers habitually face gas shortages in the autumn and winter as the government prefers to sell the stuff abroad for hard currency instead of supplying it to domestic consumers. The government regulates domestic gas prices which are set at $30-63 per 1,000 cubic metres (cm) for the population and at $36.5 per 1,000 cm for industrial enterprises (at the black-market exchange rate). Meanwhile, Kyrgyzstan is reported to buy gas at $160 per 1,000 cm on the border with Uzbekistan.