Clare Nuttall in Almaty -

Of all the resource-rich Central Asian nations, Turkmenistan has been the most secretive and isolated from the outside world. Its gas reserves are known to be some of the world's largest, but with little concrete data to go on, their size has been the subject of wildly varying estimates.

Energy consultancy Gaffney, Cline & Associates is now working on the first official audit of Turkmenistan's reserves since the Soviet era. Appointed by the Turkmen government to carry out the research in March, the UK firm's report is eagerly anticipated within the next few weeks. Hard data on Turkmenistan's reserves could, a report from the Moscow-based investment bank Troika Dialog says, "electrify the story" of the country's commodity market.

"Turkmenistan has the capacity to become the Kuwait of the region, with projected oil and gas production per capita in 2015 at the same level as the small Gulf states," forecasts Troika's report, entitled "The CIS ex-Russia: Commodities, Reform and Convergence."

The Turkmen state under the autocratic rule of the weird late president Saparmurat Niyazov long claimed that the country had gas reserves of over 22.4 trillion cubic metres (cm), whereas the estimate in BP's 2007 statistical yearbook is barely one-tenth of that, at just 2.9 trillion cm. Even taking this more conservative estimate, Turkmenistan's reserves per capita are extremely high, given the country's population of just over 5m. "Taking the BP numbers on a per capita basis, Kazakhstan and Turkmenistan already have more hydrocarbons than Russia," says Troika. "However, if our estimates for reserves are correct, then Turkmenistan starts to look like the super-rich Gulf states such as the UAE."

Troika's estimate for the Central Asian region's reserves are 83bn barrels of oil and 19 trillion cm of gas, considerably higher than the 47bn barrels of oil and 7 trillion cm of gas listed by BP.

Commodities are the main investment theme in the oil and gas rich countries of the former Soviet Union. Their reserves were underexploited in the Soviet era, but new infrastructure is now being put in place. "The next few years will bear the fruit of these changes, and we will see dramatic increases in the production of commodities, led by oil and gas output, which we expect to more than double by 2015," Troika says. In each of the main hydrocarbon producers of Central Asia and the Caucasus - Azerbaijan, Kazakhstan and Turkmenistan - production is expected to double between 2006 and 2015. Nowhere is this truer than in Turkmenistan.

Unexploited

If the Turkmen government's ambitions come to fruition, the country will see the largest increase of gas production of any of the CIS countries - from 50bn cm in 2006, to 150bn cm by 2015. This will bring per capita gas production to higher than that in Saudi Arabia and almost level with the UAE. That is not to say that the same level of wealth will flow into Turkmenistan as to the UAE. Firstly, it is mainly an exporter of gas, which currently sells at around half the price of oil.

Like the other Central Asian nations, Turkmenistan's location means it has to pay high transit fees for its exports, though China's emergence as an insatiable market for raw materials puts this in a different perspective. A number of new pipelines under construction should help Turkmenistan and its neighbours to increase the prices for their raw materials.

Indeed, Ashgabat is being courted as never before. In April, Turkmenistan agreed to supply the EU with 10bn cm a year from 2008. It is also negotiating an increase in the price paid by Gazprom for its exports, having already forced Iran into paying more after cutting off supplies for several months. And the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline project could collapse unless India is prepared to considerably raise the prices they are offering for Turkmen gas.

In the last year, the Turkmen market has also benefited from its isolation, which has made it virtually invulnerable to external shocks, Troika points out. Thanks to its large current account surplus and very limited foreign debt, it has emerged unscathed from the global credit crunch.

The main risk that Turkmenistan faces is fluctuations in commodity prices, due to its economy's dependence on the oil and gas sector. Political risk is also a factor; Turkmenistan regularly sits at the bottom of any development or democracy index. Despite the reforms initiated since the death of Niyazov, the regime remains an authoritarian one.

Troika recommends buying the commodity story in the CIS. "We anticipate dramatic increases in the volume of production of commodities both for countries and for stocks over the next few years." As yet, there are few ways to get exposure to the Turkmen market. As Troika says, "Dragon [Oil] is the only liquid way to play it."

LSE-listed Dragon Oil, whose main activity is the development of the offshore Cheleken Contract Area, is ranked fourth in Troika's comparison of the performance so far this year of 15 major traded stocks in the region. Its close relationship with the Turkmen government should, Troika points out, enable it to gain additional resources in a high-growth environment.

The results from Gaffney Cline's study will be eagerly awaited. More information on the country's reserves, as well as the slight opening of the economy to external investors, could mean there will be more ways to play the Turkmen story in future.

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