Central Asia Teams up to Sell Gas at ‘European Prices’

nCa News and Commentary

Ashgabat, 12 March 2008 (nCa) --- Starting next year, Central Asian gas producers will sell their gas at European prices, says a press release of Gazprom.

The decision came after a meeting Tuesday in Moscow where senior officials of Kazakhstan, Uzbekistan and Turkmenistan consulted with Alexi Miller, CEO of Gazprom.

President of KazMunaiGaz, Uzakbay Karabalin, chairman of UzbekNeftGaz, Nurmuhammad Ahmedov and chairman of TurkmenGaz, Yagshygeldy Kakaev, were present in the meeting.

Gazprom says that the decision is based on “the national economic interests taking into account the international obligation to ensure reliable and uninterrupted energy supplies.”

While the Gazprom press release doesn’t explain as to what could be the ‘European prices’ in 2009, a look at the current prices could be helpful.

Under a complex formula, a mix of economic and political variables, Gazprom determines price after bilateral negotiations with each client. In 2008, the average price for the European clients would be around US $ 350-360 per 1000 cubic meters.

nCa Commentary

One may get the impression that Russia has herded the Central Asian producers into this arrangement. At best, this is only partly true.

Ukraine would obviously be the hardest hit by the deal. However, before feeling sorry for Ukraine one should remember that Ukraine’s own ill advised maneuvers have landed it into this spot. Moreover, by 2011, Ukraine was going to switch to full European prices anyway; all that has been done in the Tuesday meeting in Moscow is to shift the timetable back by a couple of years.

The pricing policy, however, was not agreed to with Ukraine in mind.

On one hand it shows the growing strength of the Central Asian producers and on the other hand it reveals something resembling panic in Kremlin as Putin’s presidency comes to an end.

There may have been external factors such as alternate pipelines to China and the systematic move for Trans-Caspian pipeline that may have put some fear of God in the Russian hearts.

This is a far cry from the days of Rem Vyakhrev when Gazprom used to act mightier than almighty in its absolutely unfair dealings with Central Asian producers.

That was then and this is now.

The thing to remember is that there is a limit to how far one can go in raising the price of the natural gas.

Europe buys gas mainly for power generation – more than 80% of the gas consumed in Europe goes for production of electricity.

Alternate technologies are developing fast and with real giants like bp jumping into the game, chances are that within the next five years, probably earlier, some technology should be available to produce electricity at reasonable costs without burning oil or gas.

Actually, such technologies exist already but they are quite expensive compared to natural gas. With the price of natural gas rising at one end, and the decreasing cost of alternate technologies at the other, a tipping point may come when it would be feasible to ditch natural gas and switch to alternate methods.

Russia and Central Asian producers would be well advised to concentrate more on developing their downstream sectors instead of relying on the sale of natural gas.