RUSSIAN ENERGY: THE RUSSIA-CENTRAL ASIA GAS DEAL

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002332 SIPDIS SIPDIS DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR KLECHESKI E.O. 12958: DECL: 05/18/2017 TAGS: EPET ENRG ECON PREL RS SUBJECT: RUSSIAN ENERGY: THE RUSSIA-CENTRAL ASIA GAS DEAL REF: A. SOFIA 611 ¶B. ASHGABAT 489 ¶C. MOSCOW 2166 ¶D. MOSCOW 2226 Classified By: Amb. William J. Burns. Reasons 1.4 (b/d). ¶1. (C) Summary: During the course of DAS Paul Simons's May 16-17 Moscow visit we spoke with several people about the gas agreements reached between Turkmenistan and Russia during President Putin's recent trip to Russia's southern neighbor. Most of those we spoke to said that they were not surprised that Turkmenistan cut a deal to upgrade the deteriorating pipeline infrastructure in Central Asia. However, they pointed out that Turkmenistan did not make a specific commitment to deliver gas volumes to fill the upgraded pipelines. Gazprom and the Russian Energy Ministry maintained that the cheapest route for sending Central Asian gas to Europe is through Russia and that this agreement was driven by economics rather than geopolitical considerations. In the end, the wild card here is the level of Turkmenistan's gas reserves. If Turkmenistan has what they say they have (many here are doubtful),then they will have enough to fulfill their 25-year agreement to Russia and still have gas left over to send east and/or west. End Summary. ¶2. (C) State's DAS for Energy, Sanctions, and Commodities Paul Simons visited Moscow May 16-17 for energy-related meetings. Russia's recent gas agreement with Turkmenistan was a constant theme in the meetings. Among others, he met with Alexander Medvedev, Deputy CEO of Gazprom; Ian MacDonald, Chevron's Russia chief; Kris Sliger, Executive VP at TNK-BP; Ivan Materov, Deputy Minister of Energy; Vladimir Milov, President of the Institute of Energy Policy; and Ron Smith, Chief of Research at Alfa Bank. ¶3. (C) Most observers we talked with view the Central Asian gas pipeline deal as nothing more than a general statement of intentions and appears to be a far less concrete result than the news on CPC expansion coming out of the trip (Ref D). The gas deal contains three parts: the upgrade of the existing Caspian littoral and Central Asia-Center pipelines and the construction of a new pipeline parallel to the littoral pipeline. Beyond that, about as concrete as the agreement gets, according to the text, is that the four presidents (Putin, Nazarbayev, Karimov, and Berdymukhammedov) agreed to "...sign not later than September 1, 2007 an agreement on cooperation between the states on the reconstruction of the existing gas-transporting system and the building of new capacities for gas transportation from the region of Central Asia, which should include the preparation of a feasibility study...as well as joint commitments to create favorable conditions of economically efficient implementation of the project, including exchanging supplies of gas..." Gazprom head Alexey Miller said that the agreement would, "eventually allow Russia to buy 80 bcm of Turkmen gas a year." ¶4. (C) Medvedev and Materov said that the agreement was driven by economic realities rather than geopolitical concerns and Medvedev harshly criticized the USG for publicly castigating the deal "without sufficient analysis." Medvedev maintained that alternate routes such as across the Caspian and into the Nabucco pipeline are much more expensive than sending the gas through Russia. He said that Nabucco lacks the two things a project must have to be viable: gas commitments and a market, and as such any promotion of Nabucco is a fundamentally "political" project. Materov said that "economic considerations were paramount" in cutting this deal. Medvedev said that Russia is committed to "diversifying" its sources of supply and that upgrading the infrastructure in Central Asia was part of this drive and a necessity if Turkmenistan was to fulfill its agreement to deliver to Russia up to 80 billion cubic meters (bcm) of gas in 2009. Medvedev said that Turkmenistan is free to send its gas in other directions, "if they have enough gas," after supplying Russia. ¶5. (C) Chevron's MacDonald said that the Russian/Turkmen deal, "will happen," because Russia needs the gas, while MOSCOW 00002332 002 OF 002 TNK-BP's Sliger was less sure. Sliger described it as a typical Russian deal -- "an agreement to agree to nothing at some point in the future." He noted that the Turkmen did not commit to any gas volumes but seemed more than happy to have Russia ultimately spend the money to upgrade the pipelines. Milov also pointed out that Turkmenistan has not committed any gas and that the deal was really driven by Putin's worry over Turkmenistan's efforts to diversify. In particular, Milov said that Turkmenistan's commitment of 30 bcm per annum (bcm/a) year to China and the extension of the pipeline to Iran (15 bcm/a) really got the Kremlin's attention. Separately, Chinese sources the IEA had been in touch with suggested that China is following the news closely but inevitably comes to the conclusion that reserves are at the core of any future Turkmen commitments beyond its obligations to Russia. ¶6. (C) Alfa Bank's Smith added that this deal is more about price negotiations than anything and is certain the Turkmen are using TCP and a possible pipeline to China as leverage. He expects Turkmenistan to soon get a higher price for their gas (currently they receive $100/tcm) but that they will continue sending the bulk of their gas to Russia. He said that the, "wild card is whether they (Turkmenistan) have more gas," than currently believed. Echoing Smith, MacDonald said that the Turkmen, "believe they have a lot more gas than they actually do," and because of that a trans-Caspian pipeline (TCP) would not work unless there is a large new gas find. COMMENT ¶7. (C) Russia needs gas from various sources to help address its looming supply-demand imbalance and geography makes Central Asia a logical supply source. Whether Putin was trying to lock down Central Asian resources because he perceived Nabucco as a threat may be doubtful (Ref A). More likely, he is concerned by China's aggressive energy overtures in the region. As well, Uzbekistan's recent announcement that it would ship 13 bcm to China must have played into these Russian anxieties. Berdymukhammedov's statement that he is preserving his right to examine alternatives but will fulfill his commitment to Russia (Ref B) would suggest that he and Putin agreed to little more than to do the infrastructure work necessary to ensure the physical flows that Turkmenistan promised Russia in their 2003 25-year deal (Ref C). ¶8. (C) Whatever the reasons, the salient facts appear to be that a decaying Soviet-era pipeline will be upgraded (something good for global energy security),some incremental new capacity may be built that appears aimed at fulfilling existing Turkmen commitments to Russia, and that Turkmenistan's ability to support any other pipeline routes in other directions is not out of the question, but depends on a more detailed understanding of Turkmenistan's reserves. BURNS