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. Last Updated: 07/27/2016

Putin Lands a Deal for Turkmen Gas

ria-novostiPresidents Vladimir Putin and Gurbanguly Berdymukhammedov laying the cornerstone for a new Russian school in the Turkmen capital, Ashgabat, on Friday.
President Vladimir Putin scored a victory for access to Turkmen gas on Saturday, winning approval for a direct pipeline around the Caspian in a major setback to U.S.-backed plans for an alternative route that would bypass Russia.

The new pipeline is due to run from western Turkmenistan along the Caspian shore, pumping billions of cubic meters of gas through Kazakhstan before entering Russia, from where it will likely be exported at great profit.

A triumphant Putin announced the deal after a meeting with Turkmen President Gurbanguly Berdymukhammedov and Kazakh President Nursultan Nazarbayev in the Caspian port of Turkmenbashi.

The deal serves a big blow to U.S. and European Union interests. Washington and Brussels have been lobbying hard for a pipeline that would send Turkmen gas to Europe under the Caspian Sea, cutting Moscow out of the picture.

The new pipeline will come as a relief for Gazprom, which relies on Turkmen gas to fulfill its supply contracts as production at home stagnates and energy demand across Europe grows.

Competition for Turkmen gas reserves, estimated by BP's Statistical Review to stand at 2.9 trillion cubic meters, has intensified since the death of President Saparmurat Niyazov in December.

An official agreement would be signed by July, and construction could begin within one year of its signing, Putin said in remarks posted on the Kremlin web site.

Under an agreement signed with Niyazov in 2003, Turkmenistan was committed to ship 50 billion cubic meters of gas to Russia next year, a number due to rise to 80 bcm by the time the agreement runs out in 2028.

Putin said the new pipeline would pump at least 20 bcm of gas annually by 2012, and Industry and Energy Minister Viktor Khristenko said in Turkmenbashi that the number could eventually reach 30 bcm, Itar-Tass reported.

Officials failed to indicate how much it would cost to build the pipeline, but Itar-Tass cited 2003 estimates placing construction costs at $1 billion. The true cost of the pipeline would likely run much higher, as the prices of materials such as steel have risen drastically in recent years.

Russia, through state-run Gazprom, already imports about 42 bcm of gas per year from Turkmenistan at a price of $100 per 1,000 cubic meters.

Mikhail Klimentyev / Itar-Tass
Nazarbayev, left, Putin and Berdymukhammedov celebrating the pipeline agreement on Saturday in Turkmenbashi.
It then exports the gas to Europe for an average price of $250 per 1,000 cubic meters, reaping tremendous profit while using domestic reserves to fulfill cheaper supply contracts at home.

Gazprom CEO Alexei Miller, who was accompanying Putin on his trip, said the $100 price for Turkmen gas would last through 2009 and that a new price would be negotiated by July of that year.

The three presidents said they would also expand the capacity of an existing pipeline that currently pumps Turkmen gas to Russia through Kazakhstan and Uzbekistan to 90 bcm. Uzbek President Islam Karimov signed off on the deal from Tashkent before the Turkmenbashi summit, Putin said.

Nazarbayev won key concessions from Putin on oil transit during talks in the Kazakh capital, Astana, on Thursday, prompting some analysts to speculate on a possible trade-off for Kazakhstan's approval of the Caspian pipeline project.

Putin said he would drop longstanding objections to expansion of the Caspian Pipeline Consortium, which carries oil from Kazakhstan's Tengiz field to the Russian Black Sea port of Novorossiisk. He also agreed to Kazakhstan's participation in the Russian-controlled pipeline from the Bulgarian Black Sea port of Burgas to Alexandroupolis on the Greek Adriatic.

"We will transport [oil and gas] by whichever route is profitable," Nazarbayev said in Turkmenbashi, news agencies reported.

Putin said the Turkmen leadership had initiated plans for the new Russia-backed Caspian pipeline. "We are opening the Caspian route at the request of Turkmenistan," Putin said, The Associated Press reported.

No other countries would be invited to participate in the pipeline's construction, he added. "It's enough to have three countries," he said.

The deal will likely further put off discussion of a trans-Caspian pipeline that would ship Turkmen gas under the Caspian Sea to Baku. Azerbaijan and then on to Europe, Russian officials and analysts said.

"Existing technical, legal, environmental and other risks relating to the trans-Caspian project are so great that it would be impossible to find an investor," Khristenko said, remarks posted on the Kremlin web site showed.

"Unless this is a political project, and then it does not matter what would be inside the pipeline as long as it exists," he said.

Berdymukhammedov said consideration of the alternative route was still "on the table," Russian news agencies reported.

The Turkmen leadership has promised to build a gas pipeline to China, and Berdymukhammedov said the country was also considering routes to Afghanistan and India.

"Don't worry, there is enough [gas]," he said, Reuters reported.

Turkmenistan, largely closed to the outside world during Niyazov's rule, has refused to allow any independent assessment of its gas reserves and claims closer to 10 times the figure put forward by BP.

"If these claims are substantiated and if the Turkmens find investors to produce this gas, the possibility of the trans-Caspian pipeline remains on the table," said Valery Nesterov, an analyst at Troika Dialog.

Both the Odessa-Brody pipeline in Ukraine and the Nabucco pipeline, planned to carry gas from the Caspian to Austria, were approved despite Russian objections, he noted.

The EU, supported by the United States, has been pushing to reduce its reliance on Russian gas amid concerns over Moscow's ability to wield its energy power for political ends.

Nesterov said politics would win out. "If politicians really have a strong desire to get more gas that would bypass Russia, they could offer to incur some financial losses and risks," he said.

Putin moved to reassure critics on Saturday, saying: "We take our responsibility in the world energy supply very seriously."

Putin wrapped up his three-day visit to Turkmenistan on Sunday, flying to the Caspian port of Aktau, the center of Kazakhstan's booming oil industry. He was due to hold further talks with Nazarbayev before flying back to Moscow on Tuesday.