'Russia's Eurasian gas designs and the Trans-Afghan pipeline

Michael Denison

The contract due to be signed on December 27 2002 in Ashgabat for the construction of the Trans-Afghan gas pipeline (TAP) connecting Turkmenistan with Pakistan comes at the end of a year in which significant plans for the reconfiguration of the Eurasian gas sector's architecture have been designed, carrying implications both within and beyond the regional market. The Afghan War effectively opened the gateway for Turkmenistan to lessen its dependence on Russia for the export of its natural gas. Yet recently refined proposals advanced by President Putin for a Eurasian gas alliance may prove more decisive.

BACKGROUND: On 26-27 December 2002, Presidents Musharraf and Niyazov of Pakistan and Turkmenistan, and the leader of Afghanistan's interim administration, Hamid Karzai, are scheduled to meet in Ashgabat to sign a contract to construct a $2 billion, 1500 km gas pipeline, with an annual capacity of 30 billion cubic metres (bcm), which will connect the massive Dauletebad fields in south western Turkmenistan with the Pakistani port of Gwadar in the Gulf of Oman. The projected route will traverse Afghanistan, running alongside arterial roads via Kandahar.
The contract builds on an accord signed by the three leaders on 30 May 2002 in Islamabad to undertake a feasibility study for TAP. The study is to be financed by the Asian Development Bank and is also supported by the US and the UN Development Program.
TAP appears to be an attractive project for all concerned. Notwithstanding the construction of a small capacity line to Iran in the mid-1990s, Turkmenistan remains dependent for its gas exports on the Soviet era Central Asia - Center trunkline which connects the entire Central Asian gas network to the Russian distribution system and, by extension, the European infrastructure. This has given Russia a stranglehold over Turkmen gas exports since the dissolution of the Soviet Union. The only markets effectively open to Turkmenistan have been ex-Soviet states such as Ukraine and Armenia who tend to pay erratically, by barter or not at all. For his part, Karzai is hoping that pipeline investment will stabilize outlying regions in Afghanistan and generate transit revenues, whilst Musharraf is keen to maintain strategic linkages to Afghanistan in the post-Taliban era at the same time as servicing the expanding domestic gas market. Despite the clear political will driving the project, there are, however, serious reservations about the practicality of TAP which suggest that Russian attempts to unite the region's producers in to an OPEC style gas alliance might ultimately prove to be the more significant indicator of sectoral trends.

IMPLICATIONS: The imminent signing ceremony masks a variety of substantial obstacles in turning TAP in to reality. Firstly, the security situation in Afghanistan is still far from settled. In the past few weeks, US planes have resumed the bombing of feuding warlords, and there is precious little evidence of the demilitarization of Afghan society as yet. Any investment of the magnitude of TAP will be contingent upon reliable, if rudimentary, guarantees of security to contractors and operators. Secondly, no major financial backer of the project has yet been identified. Given the infamous difficulties encountered by Unocal in the mid-1990s, investors have hardly been queuing round the block. President Niyazov has even attempted to engender interest amongst the Russian gas giants with little apparent interest. Thirdly, it is unclear at present how the Turkmen government actually intends to fill the line. Production targets have been missed repeatedly over the past decade and there is evidence of widespread corruption amongst senior officials and serious infrastructural decay within the internal Turkmen network itself. Fourthly, Niyazov's unpredictability may act as a disincentive to potential backers. Three years ago, the projected Trans-Caspian line foundered when Niyazov proved to be an unreliable negotiating partner. The Russians were then adroitly positioned to step in to supply the Turkish market through the Blue Stream project. Finally, if the feasibility study were to conclude that TAP were only viable if the line extended to India, then the project would be a hostage to Indo-Pak relations which would clearly be an unsound basis for large-scale investment at this point, especially as news of a substantial gas find on the Indian East coast, offshore Andhra Pradesh, reach the headlines.
In this context, detailed proposals for the so-called Eurasian gas alliance announced at the CIS energy summit in late October 2002 represent an interesting counterpoint to TAP. Gazprom has apparently calculated that the importation of Turkmen gas is likely to be more cost-effective than development of remote Arctic and Siberian fields in the short to medium term. According to Russian energy minister Igor Yusufov, Gazprom will agree to take as much as 50 bcm per annum from Turkmenneftgaz, contingent upon the Turkmen government signing up to what will clearly be a Russian-led Alliance. This leaves Niyazov facing the tricky dilemma of whether to surrender de facto and de jure control over gas exports and effectively reintegrate into a common, neo-Soviet energy space, albeit with the prospect of receiving more regular and reliable payments, or prioritize diversification beyond Russia's reach by reactivating projects to export through Iran to Turkey and by vigorously pursuing TAP.

CONCLUSION: The parameters of gas development in Central Asia have been defined much more clearly over the past year. The TAP summit in Ashgabat in late December illustrates that Niyazov does now have some cards to play in the gas sector, even if they are still somewhat theoretical at this stage. Clearly, they are likely to remain so if major Western companies remain wary sinking funds, and reputations, into three contiguous, chronically unstable states vulnerable to regime collapse and wide scale lawlessness. Oil and gas companies are used to operating in complex environments but TAP might be a risk too far. If that is the case, then Moscow is, in contrast to its declining security influence and presence in Central Asia, likely to remain in the energy box seat for several years to come.

AUTHOR BIO: Michael Denison is a PhD. candidate at the University of Leeds, United Kingdom.

http://www.cacianalyst.org/2002-12-18/20021218_Eurasian_Gas_Russia_TAP.htm