Russia resumes Turkmenistan gas imports

Russia has agreed to resume gas imports from Turkmenistan, starting in January, after a new contract was signed in the presence of Russian and Turkmen Presidents who are meeting in Ashgabat on Tuesday.

Russia stopped buying Turkmen gas last April causing Turkmenistan to lose an estimated one billion dollars a month. Gazprom said a pipeline explosion caused the halt, and Turkmenistan accused Moscow of suspending gas imports because of fall in demand in Europe

Now Russia will be importing 30 billion cubic metres a year – less than what it imported before the disruption – at a price based on European gas market price formula.  Aleskandr Nazarov, Senior Analyst at IFC Metropol believes Gapzrom is trying to retain some margin on resales to Ukraine and the EU.

“To keep it up at a level which is enough for Gazprom to earn at least a tiny margin on reselling the Turkmenistan gas to Ukraine or to the European union customers. And this could be a very good link for pricing for Turkmenistan, although I stioll reiterate my view any reselling of Turkmenistan gas under this formula is not profit making for Gazprom or for Russia.”

For years Turkmenistan has been relying on Gazprom’s network – A trade providing much of the country’s budget revenues. But the suspension encouraged Turkmenistan to open a new gas pipeline to China this month and develop contacts with Iran.

“Clearly, for central Asia the target market is China. The new gas pipeline coming on stream, they will be able to ramp up production and exports to China already next year. So for Gazprom it is also important to secure good stable relationships with central Asia."

Aleksandr Nazarov, Senior Analyst at IFC Metropol was negative about the news, also questioning the ability of Gazprom to make any profit from resale and adding that Turkmenistan has committed itself to China.

"In our opinion, this will have no effect on Russia’s budget and Gazprom. Basically, Russia does not make any profit by buying and re-selling Turkmen natural gas. There is no export tariff on the re-export of Turkmen gas, and there is no mark-up on it; therefore, there is no profit tax going into state coffers.

Gazprom executives said in the past that the operating profit from re-selling Central Asian gas was about 7-10%. Thus, we expect that, in terms of net profit, re-export may even prove unprofitable. This project does not generate any new cash flows for Gazprom; all it does is it requires a larger working capital.

On one hand, this decision may have been made because of political factors. However, we should not forget that Russia has already lost Turkmenistan in terms of international gas politics. Turkmenistan has made a deal with China to build a gas pipeline and start gas deliveries. Therefore, in several months we will no longer have the monopoly on Turkmen gas.

On the other hand, these agreements may have been signed because Gazprom still doubts it will be able to produce enough of its own gas in the next few years to meet Europe’s potentially great demand. However, we can see based on the results for 2009 that most probably Gazprom will have enough of its own gas.  Therefore, we don’t see any particular reason for Gazprom to buy so much Turkmen gas, and we interpret this news as negative for Gazprom."

By 2013 gas to China could reach full annual capacity of 40 billion cubic meters – almost as much as Turkmenistan used to ship to Russia. Now Turkmenistan faces a choice. If it resumes its traditional relationship with Russia that could leave the EU-backed Nabucco pipeline project out in the cold.