Luca Anceschi

Is Turkmenistan slowly entering an unprecedented export crisis? Recently, the regime’s key diversification failure—namely that affecting the country’s production structure, which remained unchanged throughout the post-Soviet years—has been compounded by an unexpected yet not unpredictable reduction of Turkmenistan’s export options. Exporting gas—Turkmenistan’s main source of revenue—might soon become a more challenging undertaking. This short piece in-tends to contextualize Turkmenistan’s export conundrum by questioning whether the TAPI pipeline can ultimately be seen as an adequate answer to the medium term export crisis faced by the regime headed by Gurbanguly Berdymuhamedov.

In early October 2014, Gazprom announced its decision to suspend purchases of natural gas from Central Asian providers, opting not to engage in any future negotiation to renew existing contracts with key regional exporters, including Uzbekistan and, most notably, Turkmenistan. While capturing on the one hand the impact that decreasing oil prices and Western sanctions are exerting on the economy ofthe Russian Federation, this announcement raised on the other a

With the launching of the Central Asia-China natural gas pipe-line in December 2009, Turkmenistan had finally accomplished a critically important goal, namely the establishment of a diversified network of routes to export its gas. To this end, it endeavoured to successfully commercialize three major energy partnerships, namely those with Russia, the Islamic Republic of Iran, and China. After 2009, however, the Turkmen regime began to progressively articulate its gas trade in increasingly China-centric terms.
This policy decision, in quantitative terms, left a virtually indelible imprint on Turkmenistan’spost-2009 gas trade. Between 2009 and 2013, Turkmenistan’s gas trade with China grew by approximately 800percent, reaching 24.3 billion cubic meters (bcm) per annum in 2013. Data for 2014—whentotal gas exchanged between Ashgabat and Beijing rose to 25.9 bcm—suggested that such positive trend is persisting, although volumes traded are yet to reach the amount of 30 bcm per annum agreed upon by Turkmengaz and CNPC. A revised deal regulating the commercialization of Sino-Turkmen gas ties has been finalized in 2014, stipulating that, from 2015onwards, China’s imports of Turkmen gas would rise to 40 bcm per year. Preliminary datafor 2015 seem to indicate that the parties are on track to reach this quota.

Gas trade with Russia, on the other hand, remained steady throughout 2009-2013. At the end of the period in question, Gazprom’s purchases had reached 10.97 bcm—a very marginal increase from the 10.7 bcm it bought in 2009. Pre-2009 gas trade, however, was much more substantive: in 2008, for instance, Gazprom’s purchases from Turkmenistan amounted to42.3 bcm. Two distinct sets of circumstances contributed to the four-fold contraction. Tobegin with, the parties engaged in a major gas dispute in 2009, when trade along the Central Asia-Centre gas pipeline was interrupted for a protracted timeframe, leading Turkmenistan to experience a 25 percent GDP loss. By the time the pipeline had re-entered into line (early2010), Turkmenistan’s export outlook had been revolutionised by the opening of the Central Asia-China gas pipeline, which contributed to relegate Russia at the very margins of Turkmenistan’s gas strategy. In late 2014, Russia’s gas giant announced a cap of 4 bcm for 2014purchases, claiming that recent progress in field exploration elsewhere had made the pur-chase of gas from Turkmenistan—and Central Asia more in general—an unprofitable enter-prise.

Is this scenario tolerable for the Turkmen regime, which has traditionally perceived its own stability as a function of the country’s hydrocarbon clout? A closer look at the Turkmen economy seems to suggest that energy dependency is to become, in the medium-term, a significant source of instability for Berdymuhamedov and his associates. Notwithstanding the unrealistic GDP data issued by the government since the mid-2000s,the Turkmen economy may have now entered a period of crisis.

The snap-devaluation of January 1, 2015, when the manat lost approximately 20 percent of its value, led to rampant inflation, which hit food prices across the country particularly hard. The economic hardship experienced by the wider population was exacerbated by the government’s associated decision to end the system of subsidies that traditionally regulated domestic energy use in boththe residential and the transport sectors.

Since the mid-1990s, a very protracted series of brusquely interrupted negotiations, inconse-quential quadripartite agreements, and opaque commercial deals characterised the development of the TAPI pipeline project. At the time of writing, construction works have yet to begin and, while total costs are soaring, the parties involved are yet to identify a commercial champion to execute the operationalization of the 1,814 km-long pipeline. Speculations about Turkmenistan’s interest in TAPI dated back from 1994-1995, when the late Saparmurat Niyazov established a negotiating table with Pakistan and Argentinian energy company Bridas to carry out a feasibility study for a Trans-Afghan natural gas pipeline, the route of which was to be eventually extended to the Indo-Pakistani border.
This is not the place to re-analyze the intricate circumstances that saw Unocal and Bridas presenting competing visions for TAPI: nevertheless, a closer look at the factors that led to the project’s progressive loss of relevance in the mid- and late-1990s does ultimately facilitate a more focused understanding of the pipeline’s current operationalisation prospects. Beyond the security concerns that crystallised while the Taliban were extending their control over increasingly larger portions of the Afghan territory, two critical questions, which were related respectively to supply and demand, did ultimately compromise the feasibility of TAPI in the 1990s.

On the other hand, the recent economic development experienced by India and, to a lesser extent, Pakistan, strengthened the structural demand component of the TAPI project: the most recent estimates established that over 95 percent of the 33 bcm of natural gas currently projected to flow through TAPI will be purchased by India and Pakistan. Afghanistan, in this sense, is expected to represent a marginal buyer within the TAPI consortium: its involvement in the project is mostly connected to the transit stage, for which the government in Kabul is expected to reap some significant fees.And it is precisely the issue of transit that has obfuscated the current implementation pro-spects for the TAPI pipeline project.
Some recent developments, at the same time, opened new scenarios for the wider Turkmenistan-Afghanistan security relationship, and TAPI implementation more in particular. Since late 2014, Taliban militia gained partial control over two Afghan provinces that border Turkmenistan, namely Faryab and Jowzjan. Potentially, proximity with the Taliban could present Turkmenistan with the opportunity to re-open those lines of communication that, in the late 1990s, allowed the Niyazov regime to establish a good relationship with the Islamic Emirate of Afghanistan.
remarks
Turkmenistan has entered an energy cul-de-sac. The crystallisation of medium-term de-pendency on CNPC purchases has put the Berdymuhamedov regime in a very uncomfortable position. Banking on China’s protracted gas ‘thirst’ and on long-term stabilization of gas prices might lead to a further contraction in Turkmenistan’s total gas revenues. In an economic system where the hydrocarbon sector continues to account for 35 percent of GDP, 90percent of exports, and 80 percent of fiscal revenues, long-term decline in revenues is a very risky option. As diversification of the country’s economic structures is simply not an option for a regime that thrives on monopolistic control of gas revenues, the only remedy to total gas dependency on China is represented by a further diversification of Turkmenistan’s export routes. Thee xpansion of gas linkages with South Asia, to be accomplished through the operationalization of the TAPI natural gas pipeline, does however represent a very challenging undertaking. Huge financial costs are not the only hurdle to the project’s full implementation, as major security concerns and failure to identify a commercial champion appear to prevent TAPI development. A hypothetical relaxation of Turkmenistan’s very rigid procedure in regulation of exploration and development of on-shore gas fields might somehow facilitate the appointment of a consortium leader. TAPI’s (in)security problems, on the other hand, appear largely intractable. Turkmenistan’s security of gas export, in this sense, is not to be achieved by looking at TAPI.