TURKMENISTAN: GAZPROM REFUSING TO BUY TURKMEN GAS

C O N F I D E N T I A L SECTION 01 OF 02 ASHGABAT 001262 SIPDIS STATE FOR SCA/CEN; EEB; NEA/IR ENERGY FOR EKIMOFF/BURPOE/COHEN COMMERCE FOR EHOUSE E.O. 12958: DECL: 10/02/2019 TAGS: EPET ECON PGOV EINV BTIO RU TX SUBJECT: TURKMENISTAN: GAZPROM REFUSING TO BUY TURKMEN GAS IN 2009? REF: ASHGABAT 1169 Classified By: Charge Sylvia Reed Curran for reasons 1.4 (b) and (d). ¶1. (SBU) SUMMARY: Recent Russian media reports indicated that Russia's state-owned Gazprom will not resume purchases of Turkmen gas for the remainder of 2009. The reports come as the demand for gas remains in decline, and Russia continues to push for a much lower gas price with the Turkmen. Some energy experts suggest that Russia might be counting on buying cheaper gas from Kazakhstan and Uzbekistan, but it is unclear what kind of volumes Russia could get from these countries. Post continues to hear that the GOTX is digging deep into its foreign currency reserves in order to make up for the loss of gas revenues from Russia since April. Given that European gas prices could remain low in the near term, it appears that Russia has a compelling economic reason to play hardball with the Turkmen over gas. END SUMMARY. ¶2. (SBU) The world demand for natural gas continues to fall due to warmer weather and the effects of the global economic crisis. Traditionally, Russia purchases large volumes of gas from Central Asia (mostly from Turkmenistan) and then re-exports it to Europe for a large profit. In the past, Russia could buy Turkmen gas on the cheap, pocketing large profits from Europe, especially when demand was high. When Russia and Ukraine's squabbling over gas lead to a month-long shut off in early 2009, some European counties like Bulgaria were literally left in the cold. Europeans vowed to reduce consumption and look for alternate gas routes like Nabucco in order to lessen the effects of any future gas shutoffs. As another winter approaches, it remains unclear how much gas Europe will actually need for 2010. ¶3. (C) EU TACIS Advisor Michael Wilson, a longtime and well plugged-in Embassy contact, told us that Turkmenistan would be willing to accept $180 per thousand cubic meters (tcm) from the Russians as opposed to the reported $320 per tcm Russia was paying in 2009. Wilson added that Russia was hoping to get a price between $140-$160 per tcm, while reducing purchase volumes dramatically. In addition, Russian media reports indicate that Russia might propose a more flexible payment contract that would not include a "take or pay" provision that would guarantee an agreed upon level of revenue for the Turkmen. GOTX officials have told us that with supplies to Iran ranging from 8-14 billion cubic meters (bcm),and with China expected to import 4-5 bcm in 2010 when the China-Central Asia Pipeline is completed, they do not need Russia as much as before. (NOTE: The current gas pipeline from Turkmenistan to Iran has a maximum capacity of 12 bcm and has never been used at full capacity, according to Turkmen sources. A new pipeline is due to come on-line in December. END NOTE.) In the past, however, the bulk of Turkmen gas revenue has come from selling gas to Russia, and that situation is not likely to change in the near-to-medium term. Energy experts in Turkmenistan maintain that the Turkmen must reach agreement with Russia or be forced to completely deplete their currency reserves. ¶4. (C) Russian media statements, asserting that Russia could buy gas from Kazakhstan and Uzbekistan in lieu of resuming supplies from Turkmenistan, seem to be the typical "stick" approach (minus any "carrots") that Russia often uses in negotiating with former Soviet Republics. Moreover, energy experts estimate that Russia would do well to get 18 bcm from Kazakhstan and Uzbekistan for 2010, while in comparison, Russia generally purchases between 45-48 bcm of Turkmen gas per year. It was also reported that Uzbekistan recently cut off gas supplies to Tajikistan until the Tajiks come up with ASHGABAT 00001262 002 OF 002 $18 million to cover an accrued gas debt, making the concept of Russian purchases of Uzbek gas attractive to the Uzbeks, at least. Nevertheless, it seems likely that the recent Russian rhetoric is more tough talk aimed at pushing the Turkmen to accept a lower gas sales price. Russia will need more than 18 bcm of gas for 2010, given that Ukraine plans to purchase at least 25 bcm from Russia next year. ¶5. (C) COMMENT: When Russian President Medvedev visited Turkmenistan in September, he accepted an invitation by the Turkmen president to return to Ashgabat in December for the opening of a Russian school (reftel). Many in the Turkmen capital expect the two heads of state to sign a new gas deal at that time, noting that the GOTX has been without gas revenues from Russia for 6 months. Our contacts believe that Berdimuhamedov realizes the economic importance of resuming gas sales to Russia. At the same time, a way for the Turkmen to save face when squeezed by lower prices for gas and lower export volumes is something they will most likely require from the Russians. END COMMENT. CURRAN