Saturday, October 18, 2008

Another resource hotspot in the grand chessboard

Energy superpower emerges in the Caspian

By M K Bhadrakumar

Turkmenistan knows better than any other country that predators will go to any extent to take away its valuable possessions. Five successive empires - Scythian, Parthian, Ywati, Hun and Turkmen - invaded the area to locate the "Akhal" oasis nestled in the foothills of the Kopet Dag mountains in southern Turkmenistan, and laid waste everything that came across their way until they could take away the treasured Akhal-Teke horses as spoils of war.

The ancient race of Akhal-Teke horses, dating to 2,400 BC, were much fancied for their elegance, strength, stamina and beauty. Alexander the Great apparently took away with him hundreds of these horses as prized trophies during his campaign in Central Asia.

So Turkmenistan's collective memory will be stirred by the announcement on Monday that the country may have in the Yoloten-Osman deposits one of the world's four or five largest gas fields.

British consultancy firm Gaffney, Cline & Associates (GCA), making the announcement in Ashgabat regarding the first results of its audit of Turkmen gas reserves, said its low estimate under the established international and classification system is that the fields may have a minimum 4 trillion cubic meters of gas and as much as a staggering 14 trillion cubic meters.

This catapults Yoloten-Osman, in the southeast of the country, to the status of Turkmenistan's No 1 gas field, overtaking even the fabulous Dowalatabad, whose reserves it will exceed by at least five times. It should be kept in mind that many other of Turkmenistan's many gas fields have yet to be fully explored, and the GCA has just made its initial findings known.

Without doubt, Turkmenistan is closing its gap with Russia and Iran, hitherto listed as having the world's largest and second-largest gas reserves at 48 trillion cubic meters and 26 billion cubic meters, respectively. If the GCA results are confirmed, Turkmenistan will have reserves just 20% lower than that of Russia and outstrip Iran by far.

It seems the late Turkmenistan president Saparmurat Niyazov stands vindicated. Just before he died in December 2006, Niyazov remarked that Turkmenistan held reserves that were adequate to export 150 billion cubic meters (BCM) of gas for the next 250 years. The world, including the then visiting German foreign minister Frank-Walter Steinmeier, didn't take Niyazov's statement seriously.

In March, Niayov's successor, Gurbanguly Berdimukhamedov, ordered the GCA audit to clear doubts about Turkmenbashi's controversial claim. In a British understatement, GCA manager Jim Gillet said in Ashgabat, "Given the huge gas reserves, it is now clear that whatever the results of any final clarification, I can confirm that there is more than sufficient gas to fulfill Turkmenistan's existing contract commitments." Turkmenistan has contracts to supply Russia with around 50 bcm annually, China with 40 bcm and with Iran 8 bcm.

Without doubt, the maths of energy security is being reset. October 13 will stand out as a watershed in the race for Caspian energy. Like the shy Akhal-Teke, Turkmenistan comes from behind and surges ahead on the race tracks, captivating the world audience, especially the main wagerers - Russian, European, Chinese and the ubiquitous Americans. For these seasoned hands betting on the race track, this will also be pari-mutuel wagering, as the French would say, meaning "among ourselves", with betting against each other and not against the race track.

Turkmenistan is undoubtedly a vital partner for Russia in gas supplies. The two countries have an agreement regarding gas prices and the volume of gas supplies for 2007-2009. Ashgabat has been extracting higher and higher prices from Russia for its gas supplies. The price was raised to $100 per 1,000 cubic meters last year from the level of $65. Then it was further raised to $130 for January-June 2008 and to $150 in the second half of 2008.

Ashgabat has been playing on the nerves of Russian energy giant Gazprom and its desperate need for Turkmen gas to meet its export obligations in the European market, which accounts for 70% of the Russian company's total revenue at the moment. Gazprom sells close to two-thirds of Russia's 550 bcm annual gas production in the rapidly growing domestic market, which compels it to secure Turkmen supplies to meet the contracted European commitments.

Russian newspaper Kommersant made an innocuous-sounding reference on Wednesday, quoting a source in Gazprom to the effect that the Russian monopoly's famous July 25 agreement with Turkmengaz does not involve Yoloten-Osman. It seems, in other words, that Russia held in its hands a chimera when it fancied that the July 25 agreement put Gazprom in complete charge of all of Turkmenistan's exports. Surely, that is proving to be a misconception of Himalayan proportions.

For Russia, arguably, the game now starts all over again. First and foremost, it is no longer the superpower in the world of natural gas as was widely regarded until last weekend. Turkmenistan is, unquestionably, also a gas superpower of comparable muscle power to Russia.

Again, Russia will need to come terms with a "multipolar" world of gas-producing countries. It needs to revisit its entire strategy toward consolidating a world gas market. The prospect of a gas cartel - a gas OPEC - materializing any time soon now recedes into the far background. There will be disappointment in Tehran that the idea will have to be thrown out of the window, but a collective sigh of relief can be heard in European capitals.

More important, Russia will have to rework its bonding with its Central Asian partners. Turkmenistan was a vital link in the Moscow-led energy chain of Central Asia's leading gas-producing countries - the others being Uzbekistan and Kazakhstan. Last year, Russia worked out plans - involving Kazakhstan and Turkmenistan - for a gas pipeline along the Caspian Sea's eastern coast for handling Turkmenistan's anticipated exports. In September, during Russian Prime Minister Vladimir Putin's visit to Tashkent, Uzbekistan agreed to the Russian plan for an expansion of the Central Asian gas pipeline system for handling anticipated Turkmen gas exports.

These initiatives were predicated on the assumption that Russia must gear up to handle all of Turkmen gas exports. During last year, Russia gained rights over the gas exports of Turkmenistan, Kazakhstan and Uzbekistan on the basis of its offer to make purchases at "European prices". The entire economics and logistics behind these complicated webs of Russian gas diplomacy in Central Asia now require updating - and rapid updating since, unlike previously, Russia's competitors by now know its tactics and work ethics and there is consequently now no more surprise element.

The immediate Russian concern will be regarding the Nabucco gas pipeline proposal mooted by the European Union and backed by the United States as an energy project that would somewhat reduce Europe's dependence on Russian gas supplies. Nabucco envisages the dispatch of Caspian gas to the European market via an energy hub in Turkey bypassing Russian territory. Nabucco's viability depends on access to Turkmen (or Iranian) gas supplies.

With GCA's announcement on Monday, the doubts have been dispelled at least in one direction - Turkmenistan indeed does have the capacity to feed Nabucco with all the gas it needs. This comes at an awkward time for Moscow when its rival project, South Stream, which aims at further tying up the European market with Russian gas supplies, is struggling to take off.

Nabucco will give South Stream a run for its money. If it materializes, it could also be a setback for the broader thrust of Russian diplomacy, which in the past two years has aimed at cultivating the countries in the southern tier of the European market - Austria, Italy, Greece and the Balkan and Central European countries. There is already immense pressure from the US on the South Stream's transit countries to back off from far-reaching energy collaboration with Russia.

Geopolitics is just one step behind. Russia hoped to temper the eastward expansion of the North Atlantic Treaty Organization's expansion and the US designs to roll back the Russian presence in the Black Sea region by working out a system of energy dependence with the US's allies in the region. Moscow recently offered a $4 billion loan to Ukraine for establishing two nuclear power plants in its western region. This is despite the pro-US stance of Ukrainian President Viktor Yushchenko.

Moscow's strategy was working well. In a telling remark on Tuesday, at a joint press conference with Georgian President Mikheil Saakashvili, president of the European Commission Jose Manuel Barroso virtually acknowledged the effectiveness of the Russian diplomacy in Europe. He said that if the EU is moving toward resuming negotiations with Russia on a new partnership deal even in the aftermath of the Caucasus conflict, that was not a "gift" for Russia but because it was in the interests of Europe. He said EU had economic, financial and investment interests to safeguard and needed to work out cooperation with Moscow in maintaining energy security.

"I think it is in the interest of the EU to keep the dialogue with Russia to promote stability in Europe," Barroso underlined in a virtual snub to the US doctrine of isolating Russia over the Caucasus crisis.

It is not only with the European countries but also with its partners in the Commonwealth of Independent States (CIS) that Russian diplomacy has effectively used energy as a calculus for generating political and strategic influence. At the very least, with the emergence of Turkmenistan as an energy superpower, the "co-relation of forces" within the CIS undergoes a change. This is not only for Russia but also for the other countries which consider themselves as leading players in Central Asia and the Caspian - Kazakhstan, Uzbekistan and Azerbaijan (all of them have uneasy "partnerships" historically with post-Soviet Turkmenistan).

But Russia also has factors of advantage. It has a surplus of hard cash at a time when the Western banking system is collapsing. Gazprom can use this clout of financial liquidity as a bargaining chip to outsmart Western oil companies cultivating favor in Ashgabat. A Russian business daily reported on Tuesday that Putin is forthwith providing $9 billion to Russia's four largest oil and gas companies to "refinance" their foreign debt in the context of the meltdown of the Western banking system.

The government had earlier announced $5.5 billion in tax breaks for the Russian energy companies. The four Russian oil majors had addressed a letter to Putin last month asking for a total of $80 billion to pay off their foreign debts and finance strategic projects. Putin responded on Friday by saying the government would disburse up to $50 billion.

Now, how many Western governments can match Russia providing such backing out of sovereign wealth funds to its oil majors at the present time of global credit crunch? The decision-makers in Ashgabat are bound to factor in these hard realities when they weigh the relative merits of competing offers from Gazprom and Western oil and gas companies.

There is also a huge psychological factor. In the idiom of wagering, it is always the case that when you are essentially betting against all else, your chances of winning depend on making a more informed decision. Simply put, Moscow has multiple lines open to Ashgabat dating to the Soviet era.

All the same, the latest development provides the US with a window of opportunity to play itself back into the race for Caspian energy after Russia repeatedly outsmarted it in recent years. Clearly, there is now no dearth of a resource base if Washington is to push trans-Caspian gas pipeline projects.

The Turkmen government announced last week that it intended to increase its gas exports to 125 bcm annually by 2015. From the US perspective, that target seems reasonable enough to make a robust pitch for Nabucco in the short term even though Yoloten's gas will take time to be extracted for exports.

The US will make a pitch on behalf of Western companies as regards providing expertise. The deck has already been cleared. Washington no more harps on Turkmenistan's human-rights record, nor is it appealing to Western governments to pressure Ashgabat into making fundamental democratic reforms. As an American commentator put it, "It has become clear this year that the need for energy supplies has pushed rights concerns to the background in discussions with the Turkmen government".

Such pragmatism is nothing new to US diplomacy and Ashgabat can be expected to take note. Surely, the graph of US expectations is curving upward sharply. Washington would have had prior knowledge of the GCA's audit. A US expert on the Caspian wrote, "The implications of the GCA audit results are momentous for European and trans-Atlantic energy security ... Brussels and Washington can encourage Western companies to become involved in developing South Yoloten-Osman, Yaslar and other Turkmen gas fields with westbound pipeline outlets via Azerbaijan to Europe. This could significantly counterbalance Russian Gazprom's dominance in European markets."

Even so, he also acknowledged, "Conversely, the Kremlin will undoubtedly seek privileged access for Gazprom to the newly ascertained Turkmen resources, acting preemptively against the West. By combining those new resources (on top of the already committed Turkmen inputs) with its own volumes, Gazprom would boost its dominance in Europe to impregnable levels for a long time to come."

There is also much hyperbole in these expectations. The heart of the matter is that the US experts do not spot a dark horse. It is far too presumptuous to choreograph the battle scene in such straightforward terms of Russia versus the West. There is yet another serious player watching the fabulous Turkmen gas fields from the east - China.

US experts and cold warriors are obsessed with battling resurgent Russia on the beaches of the Caspian Sea, the mountains of the Caucasus and the steppes of Central Asia. But they are underestimating China's potential as a market for Turkmen gas and as a competitor to European countries.

Ashgabat is already committed to delivering up to 40 bcm gas annually to China through a $2.6 billion Central Asia-China gas pipeline that Beijing is financing. PetroChina (a subsidiary of China National Petroleum Corporation) and China National Oil and Gas Exploration and Development Company (CNOGEDC) have a 50-50 sharing of the project's costs and have formed the Trans-Asia Gas Pipeline Company Ltd as a wholly owned subsidiary for this purpose.

Interestingly, China is collaborating with local companies in Kazakhstan and Uzbekistan for the construction, which is an altogether new and interesting experience for the Central Asian countries.

China is a latecomer in Turkmenistan but it has already overtaken the West and is second only to Russia in that country. At the time of the signing of the July 2007 Sino-Turkmen agreement on supply of Turkmen gas, US analysts pooh-poohed the agreement as a typical ploy by Ashgabat to drive a hard bargain vis-a-vis Russian and Western companies bidding for contracts. They overlooked that China was dead serious.

CNOGEDC is far from a novice; its expertise in oil and gas exploration work is well known in diverse markets, not only in the Caspian (Kazakhstan and Azerbaijan) but also in Indonesia, Algeria, Oman, Niger, Chad, Ecuador, Peru, Venezuela and Canada.

China holds many trump cards. First, it is a "virgin" market with a strong urge to expand. Beijing plans to raise its ratio of natural gas consumption to total energy use by 2.5 percentage points to 5.3% by 2010. This is still far below the global average of 25% and is indicative of China's potential as a market. Two, China carries no imperial baggage - unlike the US or Russia. It is not prescriptive. It is not peddling "color revolution". China doesn't hector on free market or human rights. The Central Asian countries find such an attitude extremely comfortable.

Three, China has a game plan. It will not appear avaricious, like Western companies. Energy cooperation will invariably form part a broad Chinese thrust in the direction of mutually beneficial economic cooperation. Thus, China will not hesitate to offer substantive assistance to Turkmenistan. Four, China will not overtly compete. Instead, China will most likely work with Russia on development packages to increase Turkmen gas production.

In contrast, the cold warriors in the US visualize the Western companies as lone rangers on the Central Asian steppe. In fact, the entire European energy diplomacy in the Caspian suffers almost fatally from the spirit of rivalry with Russia that Washington injects into it. Wherever German, Italian and French oil companies have shaken off the US tutelage and begun working with Russia, they have done far better. China's energy diplomacy in Central Asia and the Caspian offers a model for the European oil majors.

Of course, it will be fascinating to see how China learns from its own history. In 101 BC, Han emperor Wu-Ti was absolutely captivated by Akhal-Teke, which he called "heavenly blood-sweating horses". He wanted to buy a stallion as a model for making a horse statue made of gold in his palace. But the Turkmen for some obscure reason, rejected the Han request. Wu-Ti retaliated by dispatching an army of 80,000 to the inhospitable Turkmen deserts where the Akhal-Teke roams in abandon. The Chinese simply got hold of 30 purebred horses and some 3,000 partbreds and made their way back to Wu-Ti.

True, China has been absolutely mesmerized by the Akhal-Teke. Tu Fu, an 8th century Chinese poet wrote
The Ferghana horse is famed among nomad breeds.
Lean in build, like the point of a lance;
Two ears sharp as bamboo spikes;
Four hoofs light as though born of the wind.
Heading away across the endless spaces,
Truly, you may entrust him with your life.
All the same, today's China is unlikely to do what came naturally to Wu-Ti. Even if Ashgabat were to tell China that it cannot have the entire output of the Yoloten-Osman gas fields, Beijing will unlikely remonstrate. It will gladly settle for sharing the output with its friends in Russia or the West if that's indeed what Ashgabat wants.

Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.

Original article posted here.

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