Crossroads Asia

Turkmenistan’s Ongoing Gas Quandary

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Crossroads Asia

Turkmenistan’s Ongoing Gas Quandary

Reports of a late resolution of a dispute with a Chinese supplier show further problems in Turkmenistan’s gas industry.

Turkmenistan’s Ongoing Gas Quandary
Credit: Pixabay

Turkmenistan’s gas industry has struggled to adjust to the new regional market configuration, with Russia dropping it as a supplier, China becoming its sole reliable customer, and the TAPI pipeline construction lagging behind. Structural problems, such as the drop in oil prices – which affected some of the contract prices for gas – and the loans-for-gas pay scheme with China, have also put the state budget under pressure.

Against this backdrop, on April 5 President Gurbanguly Berdymukhamedov fired Yashigeldy Kakayev, the chief energy figure in the government ranks, for being unable to keep the industry under control. Maksat Babayev, ex-chief of the state-owned energy company Turkmengaz, replaced Kakayev as the new deputy prime minister in charge of the energy industry. Although it may look like the usual veteran-to-veteran substitution, the government is showing anxiety for its ability to keep the country’s flagship industry afloat.

In April, Russia’s Gazprom confirmed that it will no longer seek to import Turkmen gas, after a price dispute abruptly tarnished relations between the two countries in the past three years. Effectively, Gazprom will substitute Turkmen volumes for Uzbek ones, as highlighted in the recent five-year agreement to buy 4 bcm of Uzbek gas annually, for a total of $2.5 billion.

Earlier this year, Turkmenistan also stopped pumping gas to Iran, saying that Iran had failed to pay its debt. Iranian state energy managers, who had traveled to Ashgabat just days before Turkmenistan turned off the tap, said they were surprised by the decision and accused the Turkmen counterpart of breaching the supply contract.

The combination of disputes with its neighbors has progressively isolated Turkmenistan. Now, its only hope is to maintain, or even increase, exports to China, Turkmenistan’s last significant customer.

The Chinese avenue, in turn, has become more of a bumpy road for Turkmenistan, after Uzbekistan announced the indefinite suspension of construction work for Line D of the gas pipeline through which Turkmenistan sends gas to China. Without additional capacity, an increase in export volumes seems unlikely.

In addition, a recent legal dispute with a Chinese company risked tarnishing public relations between the two trade partners.

After failing to reach the government through official channels, a law firm representing the Chinese company CSR Ziyang Co. Ltd told the press that it considered initiating an arbitration procedure to settle a debt that Turkmengaz had accumulated.

CSR Ziyang had supplied two shunting locomotives to Turkmengaz’s extractive operations in the Mary region in 2015. The Turkmen company, however, had repeatedly failed to pay back the debt of $2.5 million, or even provide a reliable timeline, saying in September 2016 that the debt would be settled “in the near future.”

Just days after the opposition news outlet Alternative Turkmenistan News reported on Turkmengaz’s insolvency, the company reportedly paid back the debt.

Such minor disputes being exposed in the public domain are signs of the cracks in Turkmenistan’s energy industry. Until a few years ago, Turkmengaz was regarded as a reliable customer. Now, it struggles to pay a rather minor debt.

Importantly, an ailing Turkmengaz is the reflection of the dire situation in Turkmenistan more broadly. In March, the IMF concluded a visit to Ashgabat, presenting a rather gloomy outlook.

“The Turkmen economy continues to adjust to a challenging external environment, including persistently low natural gas prices,” Martin Sommer, the IMF’s mission leader, said in a statement. “However, the external current account deficit remains.”

The report concluded by highlighting the need to curtail state spending and to improve the business and regulatory environment. However, amid the current economic malaise, such a neoliberal turn seems, just like any progress in export diversification, as unlikely as ever.