Russia gambles on Central Asia energy reserves

religion | Mar 17, 2008 | By Joanna Lillis

Kazakhstan, along with its Central Asian neighbors Turkmenistan and Uzbekistan, will receive a huge increase in energy-related revenue following a flurry of regional diplomatic activity. Ukraine, meanwhile, stands to lose the most under the new pricing framework for Central Asian natural gas.

The most important development over the past week or so was a March 11 announcement by the Russian state-controlled conglomerate Gazprom that, starting in 2009, it would pay European market prices for Central Asian natural gas.

Gazprom did not specify a price, but given the current market conditions, Kazakhstan, Turkmenistan and Uzbekistan can expect to receive somewhere in the range of $200-$300 per 1,000 cubic meters (tcm) of gas next year. At present, Gazprom is paying up to 180/tcm for Central Asian gas.

A statement issued by Gazprom said the deal was is "based upon the interests of the national economies and considering the international commitments with regard to the energy supply reliability and continuity."

The deal is certain to hit Gazprom’s bottom line. It could also potentially cause supply disruptions down the road by sparking pricing disputes, likely involving Ukraine, which is the key transit nation for European energy exports. But the Russian conglomerate’s action helps solidify Moscow’s position as the gatekeeper for Central Asian energy exports to Western European markets. Over the past year, the competition over Caspian Basin energy has intensified, with the United States, European Union and China all seeking to break Russia’s current stranglehold over regional export routes.

Gazprom officials have indicated they do not intend to absorb all of the shock of the higher costs, but will pass along some of the added expense to its own consumers. On March 14, Gazprom CEO Alexei Miller announced that the gas price for European customers could reach $400/tcm by the end of 2008. Earlier estimates for late 2008 had pegged the price at $310/tcm.

In addition to the price hike, Turkmen and Russian officials on March 12 signed a deal on the transfer of Soviet-era geological and geophysical data covering Turkmen deposits that had heretofore been kept under tight control in Moscow. The information could prove useful to Ashgabat’s efforts to hasten the development of the country’s energy resources. [For background see the Eurasia Insight archive].

The pact grew out of a joint declaration issued in 2007 in connection with the unveiling of a grand Russian-backed energy export scheme, centering on the expansion of the Prikaspiisky pipeline network. [For background see the Eurasia Insight archive]. The Russian decision to hand over the data at this time is seen by many regional energy observers as an incentive for Berdymukhamedov to remain loyal to the notion of Russia’s export primacy in Central Asia.

Russian leaders may now be feeling more confident about their ability to stay on top of the regional energy game, but there are plenty of indicators that their position still cannot be considered secure. The Gazprom agreement signals that Central Asian energy producers are developing a sense of unity that could enhance their collective clout in energy dealings with outside players.

For most of the post-Soviet era, Central Asia’s cohesion has have been hampered by the inability of regional leaders to work together on a wide variety of economic and social issues, in particular the development of natural resources and the distribution of scarce water resources.

Regional leaders, however, are clearly working to set aside differences. Kazakhstan, which will chair the Organization for Security and Cooperation in Europe in 2010, has been exerting diplomatic pressure on its neighbors to promote regional stability and cooperation. [For background see the Eurasia Insight a



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