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China Secures Gas Supply From Turkmenistan: Who's the True Winner?

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On December 14, 2009, an inauguration took place that deserves more attention than it received because it marks an economic power shift to the benefit of three Central Asian countries and China and to the detriment of Russia. The presidents of China - Hu Jintao, Turkmenistan - Gurlanguly Berdymukhamedov, Kazakhstan Nursultan Nazarbayev, and Uzbekistan -Islam Karimov, inaugurated the Central AsiaChina gas pipeline that links Turkmenistan's natural gas fields on the Caspian Sea to the Western Chinese border in the Xinjiang province.

This pipeline then connects with the West-East Gas Pipeline that crosses China and supplies cities as far as Shanghai and Hong Kong. 13 billion cubic meters (bcm) are supposed to transit through this pipeline in 2010, 30bcm by the end of 2011 and over 40bcm by 2013. Ultimately that pipeline could supply China with more than half of China's present day natural gas consumption.

Diversification of gas export routes seen as a regional security factor

Most commentators and officials have stirred clear from saying openly that Russia is losing ground in Central Asia because of political sensitivities. Despite years of recurrent official declarations that there are no spheres of influence with the word "influence" being astutely replaced by the word "interest" - there is a delicate balance of powers in the region with historic, cultural and economic ties that cannot be ignored. There is also the need to accommodate the growing interest in the region of new players such China, the United States and the European Union. Russia sees the region as its natural backyard but many countries no longer consider Russia as the most rewarding partner or one that should always have the upper hand.

Turkmenistan is the big winner with this new pipeline as this new export route for its gas production frees it from the diktats of Gazprom: about 70% of its natural gas production used to exit the country through the Gazprom network. Turkmen President Berdymukhamedov stated, "The successful implementation of this project could become a prototype for all international energy partnerships," adding that "this pipeline will have a positive impact across the entire region and beyond, and it will become a major contributing factor to security in Asia." Other winners are Uzbekistan and Kazakhstan that will also be able to supply the pipeline with their own gas production, notably from the Karachaganak, Kashagan and Tengiz fields in Kazakhstan.

The Central Asia-China gas pipeline is a US$7.3bn project, 1,833 km long with 188 km going through Turkmenistan, 530 from Uzbekistan to Kazakhstan, and 1,115 km from Kazakhstan to China. The West-East Gas Pipeline crossing China is over 4,500 km long, making of the joint pipelines the longest in the world.

A new natural gas player: Turkmenistan

In 2008 the independent British auditing company Gaffney, Cline & Associates Ltd was tasked with assessing the volumes of Turkmen gas reserves in the Yoloton-Osman fields. Despite allegations that Turkmen officials - which included the heads of Turkmengas, Turkmenneft and Turkmenneftegazstroy - misled the auditors by providing inaccurate inflated data, it remains reasonable to believe that Turkmenistan holds the 4th or 5th largest natural gas reserves in the world in light of regularly announced gas discoveries in regions with already proven reserves. President Berdymukhamedov himself sacked the Turkmen officials entangled in this scandal in October 2009.

The problem for Turkmenistan until now was that its export routes were limited as over 70% of its gas exports transited through Gazprom's pipelines. An explosion at a key pipeline in April 2009 resulted in bitter battles: Turkmenistan and Russia blaming each other as to the causes of the accident; Turkmenistan supposedly losing over $1 billion per month in revenues; Gazprom refusing to pay European market prices for Turkmen gas per a deal concluded when prices were higher; Turkmenistan announcing it would provide gas to Nabucco, the nemesis of Russian-sponsored South Stream pipeline; etc.

The recent report by Vedomosti that Gazprom plans to purchase "not more than" 10.5 bcm from Turkmenistan during 2010-2012 compared to the usual 50 billion bcm is the confirmation that Turkmenistan absolutely must diversify its export routes. The bringing online of this new pipeline could not have been timelier.

A crack in Gazprom's Hegemony

Gazprom has for many years monopolized gas supplies from Central Asia. With growing interest from China and Europe to diversify their gas supplies, Gazprom engaged in a risky pre-empting game consisting of securing supply agreements, notably with Central Asian countries, to cut the grass under the feet of European countries that have been looking at alternative supply routes bypassing Russia. This has proven to be a costly and risky game, notably with Turkmenistan, as world market prices and demand dropped and the contracted prices were higher than the prices Russia could reasonably resell the gas for. The game played also includes undermining the Nabucco pipeline.

Nabucco, a natural gas pipeline bypassing Russia and endorsed by European countries and the United States, is the perfect example of the power struggle at play: by securing large gas volumes from Turkmenistan and Azerbaijan, the financial viability of Nabucco comes into doubt as it is not clear that there would be enough gas available to supply both Nabucco and the South Stream pipeline supported by Gazprom. Turkmenistan, bitterly annoyed by Gazprom running away from its contractual obligations, announced in July 2009 its willingness to supply Nabucco. Azerbaijan had also conveyed its willingness to supply both pipelines, though is recently playing harder to get in light of the recent Turkey-Armenia rapprochement.

China's steady approach to diversifying its suppliers for everything

China is very well aware that its economic growth and even domestic stability is conditioned upon securing supply chains through long-term agreements. One step at a time China is securing its supply of staple commodities, minerals and energy supplies. To further secure its position in the supply country, China offers loans and technical expertise in addition to gaining the management authority to run the local operations. China has become one of Africa's top three trading partners and several countries, no matter how unsavoury and corrupt they may be, became important trading partners like Sudan, which exports a majority of its oil to China, while others guarantee China's food supply. In November 2009, the China Metallurgical Group bought for US$3 billion a 30-year lease to exploit copper deposits in Afghanistan further demonstrating that no country, no matter how troubled it is, is off-limit.

Money helps shift the balance of power

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