Reserves Auditor Confirms Turkmenistan's Giant Gas Production, Export Potential

Massive Growth Potential Confirmed

As Turkmenistan's importance in underwriting European energy security has increased over the past few years—witness the country's role as chief supplier to Ukraine to resolve the Russia-Ukraine "gas war" in January 2006, as well as the domino effect of gas supply cutoffs all the way through to Greece when Turkmenistan halted gas exports to Iran earlier this year—so has the unease over the uncertainty about the Central Asian state's ability to continue playing this major backstop role (see "Related Articles"). Although Turkmenistan has been a major gas supplier to Russia over the past 15 years, it has signed a number of gas supply deals over the past five years with alternative customers, arguing that if only the infrastructure were in place to transport the gas, Turkmenistan could deliver the goods. Long-term gas supply deals have been agreed with China, Turkey, and Iran, in addition to an existing 25-year deal with Russia's Gazprom, and Turkmenistan continues to pursue construction of a pipeline to supply gas to Pakistan and India as well.

Until the death of Saparmurad Niyazov in December 2006, importers and potential importers of Turkmen gas had no recourse but to trust the authoritarian Turkmen leader. Since Gurbanguly Berdymukhammedov took over following Niyazov's death, however, there has been a surge in interest among foreign companies, encouraged by Berdymukhammedov, to invest in Turkmenistan's oil and gas reserves. Growing investor interest, together with a (relatively) more open governing approach, has put the focus more squarely on the size of Turkmenistan's gas reserves, in particular, and thus, the country's ability to meet its various export commitments. As such, Berdymukhammedov commissioned an independent audit of the South Yolotan gas field, which Niyazov had touted as one of the world's largest when it was discovered just a month before his death.

Yesterday, at long last, an independent audit of the field, located in the Murgab Basin just north of Turkmenistan's giant Dauletabad gas field, confirmed Niyazov's claims. Jim Gillett of the British auditor Gaffney, Cline & Associates (GCA) told Berdymukhammedov and government ministers that the field holds at least 4 tcm of gas—making it bigger than Russia's Shtokman field (3.7 tcm)—and that was on the conservative side. GCA's audit showed a middle-case estimate of 6 tcm, and a high-case estimate of 14 tcm. The field is thus one of the top five in the world, and although Gillett said that further evaluation is necessary, he added: "It is now clear that whatever the results of further verifications, there is more than sufficient gas to fulfill Turkmenistan's current contract commitments".

Now, Time to Realise That Potential

Confirmation of the South Yolotan field's reserves will help ease concern over increased reliance on gas supplies from Turkmenistan, as well as answer lingering questions about the country's ability to supply enough gas for proposed pipeline projects such as the 30-bcm-capacity Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. The sheer size of South Yolotan, together with the GCA independent audit of the adjacent Yashlar gas field (putting reserves at between 250 bcm and 1.5 tcm), also supports the supply of planned volumes of 40 bcm/y to China (up from 30 bcm previously) through the Turkmenistan–China pipeline that is currently under construction, plus existing export commitments to Iran (10-14 bcm/y) and to Russia (up to 80 bcm/y from next year).

Although the GCA audit may support Turkmenistan's long-term gas production and export potential, it is with the short-term commitments that the country is almost certain to struggle. Turkmenistan extracted approximately 69 bcm of gas in 2007, exporting about 50 bcm— some 42 bcm to Russia's Gazprom (which in turn delivered this gas to Ukraine via an intermediary) and the remaining 8 bcm to Iran. The GCA audit makes clear that previous international estimates of the country's reserves, of around 2.83 tcm, are far too low—particularly as Turkmenistan estimates that the Dauletabad field alone, still the country's main source of gas production, contains 4.5 tcm (although impartial observers say this is too high, given the rate of depletion). Nonetheless, the issue now becomes how fast Turkmenistan can convert these reserves to actual production.

Gillett suggested that "international best practice" is to develop fields such as South Yolotan in phases of 10 bcm/y, and that output from the field could be expanded to 70 bcm/y eventually. Turkmenistan is aiming to increase gas output this year to 80 bcm, but few expect this ambitious target to be met, given the lack of investment: a final total of around 73–75 bcm for 2008 is perhaps more realistic. Although the China National Petroleum Corp. (CNPC) is working to launch output from the Bagtyarlyk field in the south-east in conjunction with the start of operations on the Turkmenistan-China pipeline by the end of next year, even immediate development of South Yolotan will not allow Turkmenistan to increase gas production fast enough to meet its planned export commitments in 2009.

Outlook and Implications

Perhaps an even greater obstacle is the dearth of sufficient pipeline infrastructure currently in place to deliver a potential increase in Turkmenistan's gas production to its export partners. Current production from the Dauletabad field and existing pipeline infrastructure enable Turkmenistan to meet export commitments to Iran, while development of the Bagtyarlyk field and a pipeline currently under construction will help guarantee export volumes to China. Exploitation of the reserves in place at South Yolotan can also ensure enough gas exports from Turkmenistan via the TAPI pipeline, if it is ever built, although security issues in Afghanistan pose an even greater risk to the realisation of that project.

However, it is the constraints on transport capacity via the eastern and western branches of the Central Asia-Centre (CAC) gas pipeline, rather than on gas production, that are likely to prevent Turkmenistan from boosting exports to Russia to 80 bcm next year, as envisioned in a 25-year gas supply deal signed in 2003. Renovation work on both branches has been agreed, as well as construction of new pipelines in parallel to the existing pipelines along the Caspian Sea shore and the eastern branch through Uzbekistan, but the planned increase in capacity will not be ready in time to meet next year's target. Moreover, the lack of any pipeline infrastructure linking Turkmenistan to Azerbaijan via the Caspian Sea will prevent the former from exporting up to 10 bcm of gas via this route to Europe as agreed earlier this year.

Nevertheless, the GCA audit confirms Turkmenistan's gas production potential, which will surely help the government attract even more interest from international investors in its energy sector. In addition, passage of a new hydrocarbon law in August could pave the way for the government to start signing gas development deals with foreign companies and begin to realise this potential. With affirmation of the gas reserves in place, Turkmenistan has the ability to substantially increase its gas production, so putting the infrastructure in place (and/or increasing capacity on existing pipelines) will ensure it can deliver on its export deals. In the meantime, the country's growing importance as a regional gas supplier, together with its current export capacity constraints, are likely to mean that it will choose to follow the best price and export its gas in that direction.

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