Tweet

China Secures Gas Supply From Turkmenistan: Who’s the True Winner?

Guest post by: James Stafford

Article Overview: A look at the Central Asia–China gas pipeline that links Turkmenistan’s natural gas fields on the Caspian Sea to the Western Chinese border in the Xinjiang province. It also analyses the impact this has on Russia, China, Turkmenistan and what this means for Gazprom.

China Secures Gas Supply From Turkmenistan: Who’s the True Winner?

On December 14, 2009, an inauguration took place that deserves more attention than it received because it marks an economic power shift to the benefit of three Central Asian countries and China and to the detriment of Russia. The presidents of China - Hu Jintao, Turkmenistan - Gurlanguly Berdymukhamedov, Kazakhstan - Nursultan Nazarbayev, and Uzbekistan -Islam Karimov, inaugurated the Central Asia-China gas pipeline that links Turkmenistan's natural gas fields on the Caspian Sea to the Western Chinese border in the Xinjiang province.

This pipeline then connects with the West-East Gas Pipeline that crosses China and supplies cities as far as Shanghai and Hong Kong. 13 billion cubic meters (bcm) are supposed to transit through this pipeline in 2010, 30bcm by the end of 2011 and over 40bcm by 2013. Ultimately that pipeline could supply China with more than half of China's present day natural gas consumption.

Diversification of gas export routes seen as a regional security factor

Most commentators and officials have stirred clear from saying openly that Russia is losing ground in Central Asia because of political sensitivities. Despite years of recurrent official declarations that there are no spheres of influence - with the word "influence" being astutely replaced by the word "interest" - there is a delicate balance of powers in the region with historic, cultural and economic ties that cannot be ignored. There is also the need to accommodate the growing interest in the region of new players such China, the United States and the European Union. Russia sees the region as its natural backyard but many countries no longer consider Russia as the most rewarding partner or one that should always have the upper hand.

Turkmenistan is the big winner with this new pipeline as this new export route for its gas production frees it from the diktats of Gazprom: about 70% of its natural gas production used to exit the country through the Gazprom network. Turkmen President Berdymukhamedov stated, "The successful implementation of this project could become a prototype for all international energy partnerships," adding that "this pipeline will have a positive impact across the entire region and beyond, and it will become a major contributing factor to security in Asia." Other winners are Uzbekistan and Kazakhstan that will also be able to supply the pipeline with their own gas production, notably from the Karachaganak, Kashagan and Tengiz fields in Kazakhstan.

The Central Asia-China gas pipeline is a US$7.3bn project, 1,833 km long with 188 km going through Turkmenistan, 530 from Uzbekistan to Kazakhstan, and 1,115 km from Kazakhstan to China. The West-East Gas Pipeline crossing China is over 4,500 km long, making of the joint pipelines the longest in the world.

A new natural gas player: Turkmenistan

In 2008 the independent British auditing company Gaffney, Cline & Associates Ltd was tasked with assessing the volumes of Turkmen gas reserves in the Yoloton-Osman fields. Despite allegations that Turkmen officials - which included the heads of Turkmengas, Turkmenneft and Turkmenneftegazstroy - misled the auditors by providing inaccurate inflated data, it remains reasonable to believe that Turkmenistan holds the 4th or 5th largest natural gas reserves in the world in light of regularly announced gas discoveries in regions with already proven reserves. President Berdymukhamedov himself sacked the Turkmen officials entangled in this scandal in October 2009.

The problem for Turkmenistan until now was that its export routes were limited as over 70% of its gas exports transited through Gazprom's pipelines. An explosion at a key pipeline in April 2009 resulted in bitter battles: Turkmenistan and Russia blaming each other as to the causes of the accident; Turkmenistan supposedly losing over $1 billion per month in revenues; Gazprom refusing to pay European market prices for Turkmen gas per a deal concluded when prices were higher; Turkmenistan announcing it would provide gas to Nabucco, the nemesis of Russian-sponsored South Stream pipeline; etc.

The recent report by Vedomosti that Gazprom plans to purchase "not more than" 10.5 bcm from Turkmenistan during 2010-2012 compared to the usual 50 billion bcm is the confirmation that Turkmenistan absolutely must diversify its export routes. The bringing online of this new pipeline could not have been timelier.

A crack in Gazprom's Hegemony

Gazprom has for many years monopolized gas supplies from Central Asia. With growing interest from China and Europe to diversify their gas supplies, Gazprom engaged in a risky pre-empting game consisting of securing supply agreements, notably with Central Asian countries, to cut the grass under the feet of European countries that have been looking at alternative supply routes bypassing Russia. This has proven to be a costly and risky game, notably with Turkmenistan, as world market prices and demand dropped and the contracted prices were higher than the prices Russia could reasonably resell the gas for. The game played also includes undermining the Nabucco pipeline.

Nabucco, a natural gas pipeline bypassing Russia and endorsed by European countries and the United States, is the perfect example of the power struggle at play: by securing large gas volumes from Turkmenistan and Azerbaijan, the financial viability of Nabucco comes into doubt as it is not clear that there would be enough gas available to supply both Nabucco and the South Stream pipeline supported by Gazprom. Turkmenistan, bitterly annoyed by Gazprom running away from its contractual obligations, announced in July 2009 its willingness to supply Nabucco. Azerbaijan had also conveyed its willingness to supply both pipelines, though is recently playing harder to get in light of the recent Turkey-Armenia rapprochement.

China's steady approach to diversifying its suppliers for everything

China is very well aware that its economic growth and even domestic stability is conditioned upon securing supply chains through long-term agreements. One step at a time China is securing its supply of staple commodities, minerals and energy supplies. To further secure its position in the supply country, China offers loans and technical expertise in addition to gaining the management authority to run the local operations. China has become one of Africa's top three trading partners and several countries, no matter how unsavoury and corrupt they may be, became important trading partners like Sudan, which exports a majority of its oil to China, while others guarantee China's food supply. In November 2009, the China Metallurgical Group bought for US$3 billion a 30-year lease to exploit copper deposits in Afghanistan further demonstrating that no country, no matter how troubled it is, is off-limit.

Money helps shift the balance of power

As Cicero's saying goes "nervi bellorum pecuniae" (money is the sinews of war) and in the commercial wars that are being fought, China has huge financial reserves that it can put in the balance, notably through its state-run financial institutions such as the China Development Bank (CDB). The CDB played a critical role in financing the construction of the US$6.7bn Kazakh section, the largest and most expensive chunk of the pipeline. The China National Petroleum Corporation (CNPC) acquired 50% of MangistauMunaiGas in April 2009 for US$2.6bn and the China Investment Corporation acquired about 11% of KazMunaiGas Exploration & Production in September 2009 for about US$939 million.

China has a financial advantage at a time of liquidity shortages: its ability to instruct it state-owned companies to work on specific projects and to coordinate the involvement of all possible Chinese players (finance providers, construction and management companies, etc.) enables China to strategically position itself at every level of the food chain. For instance in Central Asia, China acquired shares in companies that exploit gas fields (MangistauMunaiGas and KazMunaiGas E & P); China got the rights to exploit fields in Turkmenistan when other countries are still struggling to obtain such rights; China financed and helped in the construction of the pipelines running from the fields (CNPC, China Petroleum Pipeline Bureau and China Petroleum Engineering and Construction Corporation); and China purchases the gas production.

China is at an advantage compared to its American or European competitors as the US has no state companies while Europe's few state companies are held to the same standards as private sector companies and cannot as easily be told what to do. Also, China's financial support has no string attached beyond a long-term commitment for guaranteed supply. The United States or members of the European Union often condition the granting of financing to the improvement of democracy and human rights which is seen by Central Asian countries as an intolerable mingling with domestic issues. Furthermore, China has a lot of state companies that the government can "instruct" to work on a project such as a pipeline. CNPC was the leading operator of the Central Asia-China pipeline project, working closely with each country towards its completion.

This conjunction of companies "ready-to-go" with guaranteed financing and full government endorsement and support gives China a competitive edge. However, moving away from Russia's arms into China's is not a love story but more a marriage of convenience. Concerns exist over China's growing influence and its lower environmental standards. Central Asian countries remain interested in American and European commercial involvement to see it have a balancing role. In addition US and European companies implement good business practices such as transparency, accountability, sanctity of contracts, rule of law, etc. that would greatly benefit Central Asia that is plagued by corruption.

One successful example of mutually beneficial regional collaboration

The fact that Turkmenistan, Uzbekistan and Kazakhstan managed to coordinate their efforts towards the common goal of building a pipeline that will serve them all is an achievement. China played an instrumental role as conductor in making it happen. President Hu Jintao himself underlined the benefits of mutual collaboration through a win-win situation, stating "in line with the principle of mutual complementarity, mutual benefit, equality and win-win cooperation, the four countries have actively carried out energy cooperation and achieved fruitful results."

This said, regional cooperation is far from being a reality in Central Asia despite the well-recognized benefits of cross-border commercial activities. In the end, though Turkmenistan is definitely an important winner with this new pipeline, China can be seen as the ultimate winner by having not only secured a very valuable route for its gas supply, but also by having reinforced its image as a regional player that managed to get three Central Asian countries work towards a mutual beneficial goal, namely a new export route for their gas.

The additional bargaining power Turkmenistan, Uzbekistan and Kazakhstan gained from diversifying their energy export routes, thanks to the Chinese assistance, strengthens their political and economic independence and reinforces regional stability and security and that achievement deserves recognition.

This article was written by Philip H. de Leon

Related Articles
  V. D. The Future of China-Africa Economic Relations: FACTORS INFLUENCING THE GROWING TIES
  Soros: It's Up To China
  The Great Geopolitical Battle Over Energy Transit Routes
  The China Bubble Thing
  II.D. Foreign Direct Investment: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA
  SME's - WIll China be the next colonial power in Africa
  II.a Merchandise Trade: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA
  II.C. Other Debt-Creating Financial Flows: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA
  What are the 3 biggest challenges faced by supply chain/purchasing professionals today? (Survey Result 15)
  Is it Time for You to Start Selling in China?
  Financial Fact and Fiction
  Are Multiple Supply Chains Important (Survey Response 4)
  IV. A. Private Traders: THE ROLE OF THE PRIVATE SECTOR
  V. A. Markets for Exports: AID VS. COMMERCE: FACTORS INFLUENCING THE GROWING TIES
  Selling to China Is An Uphill Battle But You Can Succeed
  III. C. Commercial Policies: THE ROLE OF CHINA’S PUBLIC SECTOR
  China is No Longer an Emerging Economy!
  Scary!
  Dollar Falls As China Buys Up Commodities! Euro & Aussie to Benefit!
  CONCLUSION: What Drives China’s Growing Role in Africa?

Article Tags: China, Natutal Gas, Russia



Related Forum Posts
business in CHINA - Has anybody dealt with manufacturing companies in China? I need to find reputable company in China, which manufactures small electric appliances.
Diamonds vs. squares - True True - I put on 10 pounds after eating sliced cheese that was endorsed by a wrestler when I was a kid... A diamond shreddie is a lot cheaper than LeBron James - LOL!
Any Ex-Bankers and Stock Brokers here? - We are looking for partners and collaborators especially ex-bankers and stock brokers to set up an operation in Indo China, where we believe the mid to long term growth prospects are tremendous. We are a business consultancy based in Singapore and have established a good network in Indo China over the last few years. Please PM me for more details.
Re: How do we market to 2 Billion people in China? - [quote="ideasuniversity":3l3e911r]Internet had made the world a global village. How can we market our product to the 2 billion people in China? Imagine 1% of the population buying your product online. That is 20,000,000 multiply your product. If you sell your ebook for $5. This is $100,000,000. Please let us brainstorm on how we can market to this country. Your suggestion are welcome.[/quote:3l3e911r] I'd begin by first visiting China and living there for a while to determine if there are any niche markets that aren't being served. You can only do so much research online. At the end of the day, there's nothing that beats first hand experience and talking directly to some of your future customers.
Re: Web Idea - Hi Som, Welcome aboard. Almost everything that I can add is already mentioned by the ever-active, respected members of the Forum. But I would like to bring it to your attention that whenever we have our idea and nurture it for long, it becomes something like our baby and we are all possessive about that. True. Now the question is that as we are mostly possessive of our idea how far can we go about it? I mean, you say your idea is fresh as morning coffee. True to you but have you researched and actually tried to find out the feasibility part of it? I have also been a programmer and as such I feel that many of the ideas that we have generally look seemingly better in book but when it comes to reality, there is a difference. So I would recommend you to re-consider the idea. Not as Som but as someone who is a client of the idea. Please step into the shoes and find out whether you would go for the product as a client! If yes, then lets start with doing a market research and the follow up with the other formalities. Reason being that its getting late and the Coffee may lose its freshness! Good Luck,


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

What is Discretionary Cash Flow

10 Golden rules to survive the Global Crisis

The Biggest Domain Name Myth

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.