Russia Agrees to Two-Step Price Hike for Turkmen Gas

nCa News and Commentary

Ashgabat, 27 November 2007 (nCa) --- Russia agreed Tuesday to start paying higher price for Turkmen gas. Under the new terms, Gazprom will pay US $ 130 per 1000 cubic meters for the first half of 2008 and $ 150 for the second half.

This is marked improvement over the existing price of US $ 100 per thousand cubic meters

The contract – actually a supplement to the existing sale-purchase agreement – was signed Tuesday in Ashgabat when Gazprom CEO Alexi Miller met President Berdymuhamedov.

This is only an interim deal, covering the supplies for 2008.

A Gazprom press release says that starting 1 January 2009, the prices would be determined under a new formula according to the market conditions.

The new pricing formula – not the actual prices – would remain in force up to 2028.

The cooperation between Turkmenistan and Russia in the gas sphere is based on a 25-year agreement that was signed in Moscow in May 2003.

Sources in the Turkmen government told that in addition to gas prices, Berdymuhamedov and Miller discussed plans for giving an early start to the CCP (Caspian Coastal Pipeline) project that would increase the present transportation capacity in the northern direction by 20-30 bcm (billion cubic meters).

There are no hurdles in the way of this project and the implementation phase could begin as early as the start of next year, said the sources.

The CCP is a joint project of Turkmenistan, Kazakhstan and Russia. Final documents are likely to be signed within the next couple of weeks. Gazprom is expected to be the lead partner but each country would build the segment of pipe passing through its territory from its own sources.

In addition, the sides discussed the plans for reconstruction of the Central Asia-Centre pipeline, the network that carries Central Asian gas supplies to Russia and Europe. The project, worth above US $ one billion, would entail close cooperation among Turkmenistan, Uzbekistan, Kazakhstan and Russia. Gazprom, the monopoly gas transportation-rights holder in Central Asia, is the logical lead partner for this project. Project document could possibly be signed simultaneously with CCP agreement.

nCa Commentary:

The Silk Road method – neither yours, nor mine – has led to satisfactory conclusion of five months of rocky negotiations between Turkmenistan and Russia. The prices are within the range we predicted yesterday in our commentary. Some of our other predictions have also come true.

The increase in the price of Turkmen gas would serve as engine for different sets of possibilities, mostly positive for Turkmenistan and Russia and negative for Ukraine.

A cursory look at the new prices – US $ 130 per thousand cubic meters for the first half of 2008 and US $ 150 for the second half – gives the impression that Turkmenistan would get an average of US $ 140 per thousand cubic meters for its gas in 2008.

The actual mean price would be somewhat less than that.

The volume of Turkmen gas supplies in the northern direction fluctuates with the season. There is massive flow from December to March; in other months it slows down considerably. It means that nearly 60% of the volumes would be shipped from January to March when the price is $ 130. Very roughly speaking, the average price Turkmenistan may receive could be around US $ 138 per thousand cubic meters.

There are indications that Russia would buy more than 50 bcm from Turkmenistan in 2008. However, if we assume that supplies remain locked at present level of 50 bcm, Turkmenistan would get nearly US $ 7 billion of revenues from sale of its gas to Gazprom alone next year.

Add to this the exports to Iran. It is still unclear as to how much would Iran buy and at what price. Nevertheless, the price would be no less than what Russia is paying and the volumes could be 8-10 bcm.

The sudden jump in the income gives Turkmenistan a free hand to bolster its social services sector and expand infrastructure facilities. The ambitious plans for injecting US $ 4 billion into the education sector over the next several years, and creation of two whole new districts would not be lacking for funds.

The price agreement is just in time. It leaves a whole month for tricky, trilateral negotiations between Gazprom, NaftoGazUkrainy and RusUkrEnergo.

Russia would use this period to gain maximum political advantage with Ukraine.

The increase in price is such that it leaves great flexibility for Gazprom to dictate its own terms to Ukraine. The political situation in Ukraine is quite fluid at present and Russia would aim at two things: 1. Force the political orientation of the Ukrainian government in the Russian direction as much as possible; and 2. Try to gain some control over the gas transportation and storage facilities of Ukraine.

If things go according to Russian desires, the price could be around US $ 160 and Gazprom would still make some profit though not much. If Kiev invokes Kremlin wrath, the price could be in the vicinity of US $ 220.