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MarketScreener Homepage  >  Equities  >  MOSCOW INTERBANK CURRENCY EXCHANGE  >  Gazprom PAO    GAZP   RU0007661625

GAZPROM PAO

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Gazprom : China, Russia May Vie For Turkmenistan's Gas – Analysis

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05/10/2019 | 01:27pm EDT

By Michael Lelyveld

After years of inaction, Russia has resumed natural gas imports from Turkmenistan, raising the prospect of competitive pressure for one of China’s main sources of supply.

On April 15, monopoly Gazprom and the Turkmengaz state company confirmed the restart of flows from the isolated Central Asian nation for the first time since Russia stopped imports at the start of 2016.

Under a contract with Zurich-based Gazprom Schweiz, an affiliate of Gazprom Export, initial volumes appear to be short-term and relatively small.

“In accordance with the contract, in the period through June 30, 2019, there are plans to acquire up to 1.155 billion cubic meters (40 billion cubic feet) of Turkmen natural gas,” said a Gazprom statement quoted by the Interfax news agency.

Other terms have not been disclosed, and no reason was given for the involvement of Gazprom’s subsidiary in Switzerland, which Bloomberg identifies as a private company that “procures and sells Central Asian natural gas to customers in Europe.”

The timing of the deal during the low-demand period after the winter heating season is one of many curiosities that have yet to be explained.

“To (what) extent Gazprom would re-export Turkmen gas or use it in Russia … is not clear,” the Jamestown Foundation’s Eurasia Daily Monitor said. So far, Gazprom officials have offered no reasons for the deal.

Russia’s motives prompted head-scratching last October, when Gazprom CEO Alexei Miller visited Ashgabat and described the need for resuming gas imports on Jan. 1 as a “priority” issue.

Other topics including Turkmenistan President Gurbanguly Berdymukhammedov’s demands for cooperation on gas processing and chemicals could wait, Miller indicated. The supply issue needed to be resolved first, he said.

A real puzzler

Having missed the target date for the high-demand winter period by more than three months, Gazprom’s intentions may be even more of a puzzler now.

“I start with the assumption that, by all accounts, Gazprom has over 100 billion cubic meters (bcm) per year of surplus supply capacity for any flows going west. So, there is no need for Turkmen gas in the Gazprom system,” said Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington.

Last year, Gazprom exported 201.8 bcm of gas outside the CIS, capturing 36.7 percent of European gas imports, according to company figures reported by Russia’s PRIME Business News Agency.

While both Russia and Europe appear to be oversupplied with gas for the time being, analysts see the contract as providing a pretext for Gazprom to revive some version of the 2003 intergovernmental agreement with Turkmenistan, which called for Russia to buy 60-70 bcm annually in 2007-2008 and 70-80 bcm starting in 2009.

At the time, the 25-year agreement was seen as a sign that Russia would control Central Asian gas exports for decades.

But Gazprom never came close to importing such volumes.

When demand waned with the global slump in 2009, the company abruptly clamped down on inflows, causing an explosion on a section of the Soviet-era Central Asia-Center (CAC) pipeline system on Turkmen territory.

In 2015, Gazprom sued Turkmengaz for 4 billion euros (U.S.$4.5 billion, 30.2 billion yuan) and sought retroactive price cuts. In 2016, Gazprom declared a “pause” in imports under the inter-governmental agreement, citing changed market conditions.

In the meantime, Turkmenistan forged ties with China following the late President Saparmurat Niyazov’s breakthrough supply agreement in 2006.

China invested heavily to build the 2,000-kilometer (1,242-mile) Central Asia-China Gas Pipeline (CAGP) system through Uzbekistan and Kazakhstan, financing gas field development in Turkmenistan and effectively ending Russia’s dominance over access.

In 2017, Turkmen gas exports to China reached some 33 bcm, Trend News Agency reported, representing 35 percent of China’s total gas imports. The supplies have been vital to China’s effort to reduce reliance on high-polluting coal.

Last year, Turkmenistan targeted 38.7 bcm for China, or 31 percent of China’s imports, according to customs data.

China’s combined imports of pipeline and liquefied natural gas (LNG) soared 31.9 percent in 2018 as the government promoted fuel-switching to fight smog in northern cities.

Imports covered 44.5 percent of China’s gas consumption last year.

The top spot

But Russia is now poised to challenge Turkmenistan for the top spot among China’s suppliers with the opening of its mammoth 4,000-kilometer Power of Siberia gas pipeline in December, which would eventually deliver 38 bcm annually over a 30-year period.

The juxtaposition alone should be enough to raise Beijing’s suspicions that Russia is seeking to increase its leverage over China’s growing market by suddenly finding a need for Turkmen gas.

“The Russians always saw Turkmenistan as their main competitor for the Chinese gas market,” Chow said.

China’s gas flows from Turkmenistan have been disrupted for brief periods during the past two winters due to technical problems.

Although the Russian restart of Turkmen imports only covers small volumes so far, it could be extended and increased on the basis of the intergovernmental agreement, putting an added strain on China’s supplies.

The condition of the extensive CAC system may be a factor limiting the volumes of the initial contract with Russia.

Sections of the pipeline network have been sitting unused since 2015, and the extent of investments in maintenance and repair is unclear.

Last week in a press release, Kazakhstan’s pipeline operator KazTransGaz cited “modern technologies and modernization” of the CAC for the ability to resume gas flows quickly, but the statement appeared to credit maintenance on lines through its territory alone.

Volumes transiting Kazakhstan were said to be 15 million cubic meters per day. As of May 3, more than 220 million cubic meters of gas had been transported to Russia, the company said.

Motivated by greater prospects

If the condition of the CAC pipelines is a consideration, the contract to restart Turkmen exports to Russia could be seen as a trial run for larger volumes to come.

The forces at work among the three countries are both opaque and complex.

The Eurasia Daily Monitor noted that Turkmenistan’s larger gas volumes for China probably generate little in the way of earnings because of the cost of Chinese credits. The smaller volumes for Russia may be seen as a source of needed cash.

While the restart may create competition for the Chinese market, Chow sees a greater chance that Russia is motivated by prospects that Turkmen gas could flow west from the Caspian Sea.

Last August, the five shoreline states signed a landmark convention on the Caspian’s legal status, breaking a 25-year deadlock on the division issue and potentially clearing the way for Turkmen resources to reach Western markets without transiting Russia.

So far, trans-Caspian flows remain only potential, since the convention leaves room for Russia to raise environmental objections. But Chow suggested there may be greater potential for exports from disputed offshore fields on the Azerbaijan-Turkmenistan median line.

“The Russians are likely more concerned about the slowly warming relations between Turkmenistan and Azerbaijan,” said Chow. “There have been some real deals being negotiated between the two for over a year to bring some offshore Turkmen gas to Azerbaijan, which is short of gas for its domestic market.”

“Anytime they get close, senior Russians magically show up in Ashgabat,” said Chow. “The message is clear: We can help you or hurt you,” he said.

Whatever the reason for Gazprom’s reappearance in Turkmenistan, China should be watching developments closely between its two most important gas suppliers.

In the meantime, China has doubled down on Russian gas sources with agreements to invest in the Arctic LNG 2 project with independent developer Novatek.

China National Petroleum Corp. (CNPC) and China National Offshore Oil Corp. (CNOOC) will each acquire 10 percent shares in the U.S.$25.5-billion (171.7-billion yuan) project in the next two to three months, Novatek said, according to Interfax.

CNPC already holds a 20-percent share of Novatek’s Yamal LNG project in the Arctic region, while the China Silk Road Fund owns 9.9 percent.

(c) 2019 Buzz Future LLC Provided by SyndiGate Media Inc. (Syndigate.info)., source Middle East & North African Newspapers

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Financials ($)
Sales 2019 124 B
EBIT 2019 22 418 M
Net income 2019 22 109 M
Debt 2019 40 831 M
Yield 2019 5,70%
P/E ratio 2019 4,17
P/E ratio 2020 4,04
EV / Sales 2019 1,02x
EV / Sales 2020 1,00x
Capitalization 86 369 M
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Average target price 3,47 $
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GAZPROM PAO (EDR)62.75%85 352