Russia Cements Gas Position in Central Asia with Uzbekistan Pipeline Deal

Another Win for Russia

Europe's efforts to attract Caspian and Central Asian gas supplies and thus reduce the continent's growing reliance on Russian imports have suffered two major blows in the course of the past month. The first, clearly, was the outbreak of the war in Georgia, with Russia routing Georgia's military, continuing to occupy the country, and effectively asserting "veto power" over Georgia's oil and gas pipelines, thus heightening the risks of relying on Georgia as a transit state for Caspian gas (see "Related Articles" below). Yesterday, Russian Prime Minister Vladimir Putin dealt another setback to Europe's gas supplier diversification efforts, clinching a deal with the leadership of Uzbekistan to build a new pipeline linking Central Asia to Russia, thereby solidifying Russia's control over the direction of Central Asian gas exports.

Following talks with Uzbek President Islam Karimov in Tashkent, Putin, accompanied by Gazprom CEO Alexei Miller, announced an agreement that envisions construction of a new gas pipeline crossing Uzbekistan that will tie in to the Russian pipeline system, bolstering the growing export potential of both Turkmenistan and Uzbekistan. The planned pipeline, which Karimov said would be built in parallel to the existing Central Asia-Centre (CAC) trunk gas pipeline and the Bukhara-Urals pipeline, is slated to have capacity to transport between 26 and 30 bcm of gas per year. Karimov said that the existing capacity of these pipelines via Uzbekistan is approximately 54 bcm per year, so the new pipeline—which will actually originate in Turkmenistan before transiting Uzbekistan and Kazakhstan en route to Russia—will add important new export capacity for Central Asia's producers.

The agreement apparently also entails further repair work on the existing CAC pipeline, which is still the main export pipeline from Central Asia but has seen its transport capacity diminish with age. The CAC pipeline, which carried up to 100 bcm per year to Russia in its heyday in the Soviet period, has two branches, a larger eastern branch from Turkmenistan via Uzbekistan and Kazakhstan to Russia (adjacent to which Uzbekistan and Russia yesterday agreed to build the new pipeline), and a smaller western branch along the Caspian shore connecting Turkmenistan to Russia via Kazakhstan. Turkmenistan, Kazakhstan, and Russia agreed in May 2007 to upgrade the western branch of CAC as well as build a new pipeline with a capacity of 20 bcm per year.

Trans-Caspian Hopes Fading?

The Uzbek pipeline agreement, which also includes another commitment by Russia to move toward a "European pricing formula" in Gazprom's purchases of gas from Central Asia, will shore up Russia's dominant position in the region, as well as provide Turkmenistan and Uzbekistan with the ability to deliver anticipated gas supply volumes under previously-agreed deals with Gazprom. Russia and Turkmenistan agreed on a mammoth 25-year, 1.8 trillion cm gas supply agreement in April 2003, but the deterioration of the CAC pipeline has thus far limited the volumes Turkmenistan is delivering to Russia to between 40 and 50 bcm per year, well below the 80 to 90 bcm of gas annually that was envisioned in the deal. A series of gas price disputes between Turkmenistan and Gazprom over the past few years has also been a problem preventing the full realisation of that deal.

In the intervening years, both China and Europe have made strong plays for buying Central Asian gas directly, seeking to loosen Gazprom's grip on the region's gas exports and secure supplies for their growing import needs. While Europe has engaged in rounds and rounds of energy diplomacy, attempting to convince Central Asian gas producers (chiefly Turkmenistan) of the merits of diversifying their export markets and reducing dependence on Russia, China has less vocally made greater inroads, inking a long-term gas supply deal with Turkmenistan in 2006. Europe has offered to buy Central Asian gas exports, supporting the construction of the Baku-Tbilisi-Erzurum (BTE) gas pipeline and preparing the ground for a trans-Caspian gas pipeline (TCP) by supporting the development of an "East-West" supply corridor, but China has gone a step further, actually proceeding to launch construction of a Turkmenistan-China gas pipeline, with work now under way in Turkmenistan, Uzbekistan, and Kazakhstan simultaneously.

In response to these challenges to Russia's control over Central Asia's gas supplies from both East and West, Gazprom has refused to waver, focusing on putting the pieces in place to implement the April 2003 gas supply deal with Turkmenistan, as well as a smaller gas purchase deal with Uzbekistan (Russia also has an agreement to buy gas from Kazakhstan's Karachaganak field). The agreements to repair the CAC pipeline branches, as well as build new pipelines in parallel, will boost gas export capacity from both Turkmenistan and Uzbekistan, giving them a ready market for their growing output while also tying both countries closer to Russia. At the same time, Gazprom's willingness now to pay—or at least intention to move to—market prices for its Central Asian gas imports will help lure Turkmenistan and Uzbekistan to supply their gas to Russia, thereby taking away some of the appeal of Europe's TCP proposal.

Outlook and Implications

Although China is weakening Russia's dominant position with regard to Central Asian gas by boldly building (and financing) construction of a pipeline connecting Turkmenistan to China that is estimated to stretch 7,000 km when it is completed, Russian officials appear relatively unconcerned. This is perhaps due to the belief that the China pipeline, together with Gazprom's acceptance of substantially higher gas prices for supplies from the region, will appease Central Asian leaders' desire to diversify their export markets, thus further eroding any nominal support in Turkmenistan, in particular, for the TCP.

If Turkmenistan and Uzbekistan can monetise their gas potential, diversify their export markets, and secure higher gas prices, who needs the West? Russian companies, including Gazprom and LUKoil, have expanded their presence in Uzbekistan, and the natural market for their gas output is Russia, which appears to be conceding its overall control over gas production from eastern Turkmenistan to China in an effort to shore up its still-dominant role in Central Asia. In effect, Gazprom would rather see Central Asian gas supplied eastwards to China (although this is likely to compete with Russia's own gas export goals to China) than westwards to Europe. Russia's pipeline deals in Central Asia reflect the reality that Central Asian gas exporters have become empowered vis-à-vis Gazprom, yet the Russian gas giant still holds the cards—and is keeping Europe at the door. Gazprom is showing that it is keen to cement its position in the Central Asia in order to ensure that any gas exports from the region to Europe are necessarily routed via Russia rather than a trans-Caspian route bypassing Russia.

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