By Régis Genté
As the Russo-Chinese gas pipeline “Power of Siberia” was launched on December 2nd, Turkmenistan, that amounted to 27 percent of China’s imported gas in 2018, might lose its privileged position.
A bad news for sure, but the first ever Russian-Chinese pipeline should not affect Turkmenistan that significantly.The worst might be yet to come.
On December 2nd, the “Power of Siberia 1” (POS-1) gas pipeline has been officially inaugurated.Five years after Moscow and Beijing signed a 400 billion dollars contract for the delivery during three decades of 38 billion cubic meters (bcm) of gas per year.
Russian and Chinese leaders followed the event via a video conference.Vladimir Putin declared it was “a genuinely historical event” (for the first time, Russian gas is delivered to the Chinese market), while Xi Jinping stressed that “China-Russia relations are entering a new era”.
An era that will be new for the Turkmen gas as well!
Until 2009 and the completion of the Central Asia-China gas pipeline (also known as TurkmenistanChina gas pipeline), Turkmenistan had been enjoying a quite comfortable place in the Chinese gas imports.
In 2018, Ashgabat loaded 33 bcm in the Central Asia-China pipeline, e.g. 27% of Beijing gas imports (47.9 bcm of Natural gas via pipelines, and 73.5 bcm as LNG Liquefied Natural Gas according to BP Statistical Review).
These 33 bcm amount to 11 percent of the total gas consumed by China in 2018 (283 bcm).That share might go down, after the 3,371 km.
POS-1 reaches its full capacity, in 2024 (when China has built its own part of the pipe).But maybe not that down!
As “Power of Siberia” comes into the game, the Turkmen ability to bargain might be weakened.Now able to resort more on Russian gas, Beijing is in a more comfortable position to negotiate both volume and price it is ready to pay for Turkmen gas.
It has already been the case since three four years. “China is in a strong negotiating position with Turkmenistan with regard to prices.That is because it has limited its dependence on Turkmenistan, as it has on all other gas sources”, stresses Simon Pirani, an energy expert who follows Turkmen gas industry since long.
The last years, after Russia stopped purchasing Turkmen gas and Ashgabat put an end to its deliveries to Iran, Beijing became the only client of the Central Asian republic.
Beijing started to bargain hard to scale down the prices.The other bad news is that Russia sales its gas at a low price, with a formula reportedly based on the crude oil or on a basket of competing fuels.
However, China has a huge environment problem, especially in the Northeast provinces (where the Russian gas is to be delivered at first).These provinces have the oldest power plants and coal-powered heat of the People’s Republic of China (PRC).
Beijing will try hard to continue to lower the share of coal in its energy mix.That gives hope to Ashgabat that there will be enough room for both Russian and Turkmen gas on the Chinese market.
As a matter fact the “Middle Kingdom” is expected to need 510 bcm per year by 2030. Plus 45 percent within a decade! A trend that depends on many factors, such as growth slowdown of the PRC economy, increase of the domestic gas production (including shale gas), the LNG purchase on spot markets…
“The Power of Siberia 1 pipeline will not affect Turkmenistan project that significantly, even if the full 38 bcm is delivered to Shanghai areas.POS1’s protected gas market is Heilongjiang, Jilin, Liaoning and Hebei provinces.
This protected market can absorb 25 bcm/y gas from Chayandinskoye Siberian deposit without any difficulty.But the extra 13 bcm/y from Kovykta gas deposit that has to go down to Shandong, Jiangsu and Shanghai areas will not be very competitively priced gas.
It will be quite vulnerable gas against LNG supply from Qatar, Australia and US”, says Keun-Wook Paik, an Eurasian energy expert from the Oxford Institute for Energy Studies.
The Central Asia-China gas pipeline corridor is being used close to its capacity limit (55 bcm/year), especially in the winter time.Few expect that Beijing will underuse its three lines.
“The big question that is under consideration in Chinese government is whether, and when, to go ahead with the long-standing decision to expand it to 85 bcm/year.
The pipeline is planned to go through Uzbekistan, Tajikistan and Kyrgyzstan, instead of going through Uzbekistan and Kazakhstan as the other Lines A, B and C do.Senior politicians in Tajikistan and Kyrgyzstan have repeatedly spoken about the project, but the 2017 decision to postpone it, still stands.
Eventually, China will probably build Line D and raise its imports from Turkmenistan to 65 bcm/year.But this “eventually” could well be in the mid or late 2020’s”, says Pirani.
This is where the worst might come, for Turkmenistan.
Ashgabat bears some responsibilities in that. First, Beijing lost its confidence in the country’s reliability as a gas provider when in January 2018 Turkmenistan was unable to deliver the agreed amounts of gas. And shipments dropped by 14 percent from a year earlier.
Second, by refusing the construct the line D of the Central Asia-China gas pipeline, Ashgabat lost an opportunity to engage more with China as a business partner. “Turkmenistan’s decision to prioritize non-China gas market was a very bad decision.
If D line had been constructed earlier, the chance of Altai gas pipeline to be built, and to give Russia another entry to China gas market, would have been very low during the 2020’s, as Gazprom is very unlikely to open its upstream to CNPC”, observes Keun-Wook Paik.
“The construction of an Altai pipeline would be a more direct source of competition for Turkmen gas than POS, because geographically it would enter China in the same western region that Central Asian gas does.
To the extent that Central Asian supply is consumed in that part of the country, it could then easily be substituted by Russian gas, if an Altai pipeline was built”, adds Pirani.
There is worse to come for Ashgabat.Last September, President Putin forced Gazprom to rethink its original Altai route and to explore the possibility of Mongolian route. “If the Mongolian route is accepted by Beijing authority, it will be a nightmare for both Turkmenistan gas and original Altai gas, passing through Xinjiang province.
Mongolian route is technically easy to construct and economically the most competitively priced gas will be delivered to Bohai Bay-Shandong, Jiangsu and Shanghai gas market”, added Mr.Paik.
Last August, Igor Makarov, a Russian businessman born in Ashgabat who was at the very center of the Turkmen gas exports to Russia in the 1990’s, was hired by the President Gurbanguly Berdymuhamedov as an adviser for energy issues.
In the coming days or weeks, the former Itera CEO (now ARETI CEO) should hand his report to the Turkmen President.Will he suggest to forget about his pipe dreams (TAPI Turkmenistan-Afghanistan-Pakistan-India- and Trans-Caspian ones) and to work with Beijing on the line D of the Central Asia-China gas pipeline?
No one knows so far.