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Emerging Markets

Gas slump fuels Russo-Turkmen tensions

“We can’t compete with large countries on the front of mass production and our convergence can be successful only in case we switch on more knowledge-based production and use the opportunities offered by the regional market,” Lipstok told Emerging Markets.

Natural gas production figures released this week showed that output from Gazprom, the Russian near-monopoly, was down 35% year-on-year in the first week in May, as Russia and Turkmenistan haggle over how to share the gigantic losses caused by the recession.

The figures, published by Interfax citing Russia’s gas dispatching service, are even grimmer than those for the first quarter (year-on-year cuts of 14.8% for the Russian industry as a whole, and 18% for Gazprom) and April (23% and 28% respectively).

A steep decline in gas demand – in European and CIS export markets as well as from Russian industry – is the main cause of production cuts. In the first quarter, Russian gas exports were just 56.4% of their level in the first quarter of 2008.

The most drastic reduction was in exports to Ukraine, which ran at less than one fifth of their normal level, because of the January gas dispute and Kiev’s subsequent efforts to substitute gas from storage for expensive imported volumes.

The unprecedented decline in demand has exacerbated tensions between Russia and Turkmenistan, the second largest former Soviet gas producer. Russia buys most of Turkmenistan’s output to supplement its own gas balance, while the central Asian republic relies on the revenues for most of its national income.

Russian imports from Turkmenistan were briefly halted last month after an explosion on the main pipeline linking the countries. Although no information on import volumes is published, researchers believe that even after the damage was repaired, imports have been restored at greatly reduced levels.

Tatiana Mitrova, head of the Centre for International Energy Market Studies at the Russian Academy of Sciences’ Energy Research Institute, said: “The balance of interests between Russia, Turkmenistan and the consuming countries has always been based on the assumption that demand would increase continuously.

“This is the first time in the post-Soviet era that there has been such a reduction in demand, particularly in Europe. Now Turkmenistan and Russia are trying to reach a consensus on how to share the losses.” Both prices and volumes of imports are under discussion, she expects.

Turkmenistan’s single major gas export route is the one to Russia, and its principal bargaining chip is to establish new routes. The furthest advanced scheme is the construction of a new pipeline to China, expected to be completed next year.

This year’s clash with Russia has also resulted in renewed Turkmen overtures to possible European customers, despite long-mooted plans to take gas to Europe via the so-called “southern corridor” being notoriously expensive and politically difficult.

In April Turkmenistan signed a production agreement with RWE, the Germany energy company, put a domestic pipeline project out to international tender, and invited energy ministers, UN officials and oil company executives to Ashgabat for a conference on energy security.

European visitors spoke enthusiastically of the “southern corridor” pipeline projects, while Igor Sechin, Russia’s deputy prime minister with responsibility for energy, urged “economically soundly-based tariffs” for gas imports and long-term supply and transport contracts rather than the annually renewable agreements used at present.

Some European commentators interpreted these changes as potential steps towards a Turkmen-European energy relationship. But Mitrova argued: “Ashgabat’s main point is to show Moscow it is displeased. This is how the negotiations on prices and volumes are being conducted.”

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