Turkmenistan’s Prospective Emergence in the European Oil & Gas Market

Publisher: Institute of Energy For South-East Europe
Publisher: Institute of Energy For South-East Europe https://www.iene.eu/transcaspian-gas-pipeline-is-there-a-future-after-all-p3694.html

Turkmenistan’s new leader Serdar Berdimuhamedow has recently expressed an interest in expanding Turkmenistan’s global economic policy in Europe through the oil and gas industry.[1]Turkmenistan is a reclusive, authoritarian nation, and the government exercises complete control over the media.[2] Berdimuhamedow’s true foreign policy goals are therefore opaque, and little is known about his motives besides what his regime represents to the world. However, Turkmenistan took explicit international action towards a more global economy by signing the CISG in 2022[3], and Turkmen representatives began talks with WTO member states regarding Turkmenistan’s accession into the WTO in 2023.[4] These actions are a marked change from previous president Gurbanguly Berdimuhamedow’s lack of involvement in western foreign policy.[5] Are these recent steps and statements a true and feasible step towards a more global Turkmen economy or are they simply a mechanism for Turkmen officials to make billions of dollars through exportation and foreign investment? To answer this question, we must analyze the current hydrocarbon market in Turkmenistan, whether Turkmenistan has the technical ability to enter the European market, and how Turkmenistan will likely use these oil and gas profits.

The Turkmen economy relies heavily on liquid natural gas, and the country is estimated to have the 4th largest natural gas reserve in the world.[6] Turkmenistan has experienced a severe economic downturn since 2015, and the government is likely looking for a solution through oil and gas exports.[7] The country has a rich history of producing domestic oil and gas, and their largest international markets are Russia and China through direct natural gas pipelines.[8] Six companies of various nationalities, such as Chinese, British, Malaysian, and German, have production sharing agreements with Turkmenistan.[9] Most of these agreements are longstanding from the late 1990’s or early 2000’s,[10] and many American companies are currently courting Turkmenistan to share in production.[11] There are two traditional refineries in Turkmenistan, and a brand new gas-to-gasoline refinery opened in 2019.[12] Turkmenistan, therefore, has the capability to produce and refine oil and gas at the upstream stage to compete in the European market. However, Turkmenistan’s most formidable barrier of entry into the European market lies in the midstream sector.

Turkmenistan cannot currently enter the European market because there are no existing pipelines between Turkmenistan and Europe.[13] However, it is likely they will have the ability to enter the market soon. Berdimuhamedow announced a plan to build a pipeline between Turkmenistan and Turkey in April of 2023.[14] This pipeline, known as the Trans-Caspian Pipeline (TCP), would run beneath the Caspian Sea and connect Turkmen pipelines to existing European pipelines in Turkey. [15] The TCP has been discussed since the 1990’s[16] but has not been built due to infrastructure issues and opposition from fellow Caspian nations Russia and Iran.[17] Azerbaijan and Turkmenistan, who recently agreed to jointly develop a long contested offshore oil reserve,[18] would have to agree with Berdimuhamedow once more to build the TCP. Given their recent dispute resolution, a TCP agreement seems more likely. This would be in direct opposition of their Caspian rivals’ wishes and may inspire tension in the region. However, Russia is busy fighting another war, and the war in Ukraine has led major EU nations to consider banning Russian hydrocarbons.[19] Turkmenistan’s recent involvement in more western treaties, in addition to Berdimuhamedow’s recent meetings with the Turkmen Mejlis about expanding and modernizing natural gas production,[20] implies Turkmenistan’s foreign policy goal is to take advantage of an eventual, Russian driven hydrocarbon shortage in Europe. Although not a sure thing, the TCP would grant Turkmenistan access to the European market and garner huge profits for the Central-Asian nation.

The question then becomes: what will Turkmenistan do with these profits? The Turkmenistan constitution gives total control of land and minerals within the country to the government. [21] Therefore, all profits from expanded exportation of Turkmen hydrocarbons would go directly to Berdimuhamedow’s government and foreign companies with a production sharing agreement. In a Turkmenistan’s model production sharing agreement, local goods and services are required only if they are “are offered on terms equal to or better than imported goods and services with regard to quality, price and availability.”[22] Besides that specific language, there is no onus on foreign companies or the government to share profits with the local people contained within the agreement.[23] This cheap labor rate will surely lead foreign oil and gas companies to employ Turkmen citizens and grossly underpay them. Turkmenistan’s minimum wage of 1,160 Manet/month[24] is less than $4000 U.S.D. per year given the 1 U.S.D. to 3.5 manet[25]  legal exchange rate and lower than $500 per year on the 1 to 32 black market exchange rate.[26] The post-Soviet regime is also well documented for human rights violations including repression of political dissenters, food scarcity, low wages and gender discrimination.[27] It is unlikely that hydrocarbon export profits would motivate the current regime to address economic and human rights issues given the regime’s propensity for building gold statues and marble buildings in Ashgabat in the face of previous pressure to remedy their issues.[28]

Turkmenistan’s new president seems more western facing, but the apparent step into the western economy should be approached cautiously. Hopefully these changes signal a lifting of the Soviet-era veil in the authoritarian nation, but for now we have to speculate as to what Berdimuhamedow’s motives are. If the TCP is completed, Turkmenistan’s midstream barrier will disappear, and the nation will reap large profits from Europe. If Russian gas is banned, Turkmenistan could become the largest European gas supplier due to this artificial shortage, and European nations will have little choice but to provide Turkmen gas to consumers in the downstream market. However, European countries should consider ongoing human rights issues in Turkmenistan[29] as part of their foreign policy considerations when deciding if Turkmenistan gas is an ethical substitute for Russian natural gas.

[1] See Vladimir AfanasievTurkmenistan shuffles energy executives as challenges mount, Upstream (May 15, 2023, 4:33 PM), https://www.upstreamonline.com/production/turkmenistan-shuffles-energy-executives-as-challenges-mount/2-1-1451469.

[2] See United States Agency for International Development (USAID), Turkmenistan: Democracy, Human Rights, and Governance, https://www.usaid.gov/turkmenistan/democracy-human-rights-and-governance (last visited Nov. 3, 2023).

[3] United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 1489 U.N.T.S. 3.

[4] See Turkmenistan begins preparations for engaging in accession talks with WTO members, World Trade Organization (May 30, 2023), https://www.wto.org/english/news_e/news23_e/acc_30may23_e.htm.

[5] See Sebastien Peyrouse, Could a New President in Turkmenistan Provide an Opportunity for the US to Promote Reform?, The Diplomat (Feb. 19, 2022), https://thediplomat.com/2022/02/could-a-new-president-in-turkmenistan-provide-an-opportunity-for-the-us-to-promote-reform/.

[6] See The World Bank in Turkmenistan, The World Bank, https://www.worldbank.org/en/country/turkmenistan/overview (last visited Nov. 3, 2023).

[7] See Turkmenistan Country Report 2022, BTI, https://bti-project.org/en/reports/country-report/TKM (last visited Nov. 3, 2023).

[8] Id.

[9] Crude Accountability, Turkmenistan’s Crude Awakening Oil, Gas and Environment in the South Caspian 12-13 (2009).

[10] Id.

[11] Who’s Who in Turkmenistan: Petroleum Company Dossiers (Update 2022), Crude Accountability,https://crudeaccountability.org/turkmenistan/whos-who-in-turkmenistan-petroleum-company-dossiers/ (last visited Nov. 3, 2023).

[12] Turkmenistan – Country Commercial Guide, Oil and Natural Gas Refining,International Trade Administration (Aug. 8, 2022), https://www.trade.gov/country-commercial-guides/turkmenistan-oil-and-natural-gas-refining.

[13] The Main Gas Pipelines of Turkmenistan, Ministry of Foreign Affairs of Turkmenistan (Jan. 29, 2017),https://www.mfa.gov.tm/en/articles/84

[14] See Claudia Carpenter, Turkmenistan to develop pipeline to export gas to Europe: president, S&P Global (Apr. 26, 2023), https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/042623-turkmenistan-to-develop-pipeline-to-export-gas-to-europe-president.

[15] Isabel Stagg, Turkmenistan revives call for gas pipeline to Europe, World Pipelines (Nov. 23, 2023, 2:12 P.M.),https://www.worldpipelines.com/business-news/03112023/turkmenistan-revives-call-for-gas-pipeline-to-europe/.

[16] Id.

[17] Pravesh Kumar Gupta, Geopolitics of Trans-Caspian Gas Pipeline, Vivekananda International Foundation (Jan. 20, 2020), https://www.vifindia.org/article/2020/january/20/geopolitics-of-trans-caspian-gas-pipeline.

[18] David O’Byrne, Azerbaijan and Turkmenistan agreement advances Caspian gas cooperation, EurasiaNet (Jan. 22, 2021),https://eurasianet.org/azerbaijan-and-turkmenistan-agreement-advances-caspian-gas-cooperation

[19] See Gabriel Gavin & Victor Jack, EU balks at adding Russian gas pipeline ban to sanctions package, Politico (May 16, 2023, 8:27 PM), https://www.politico.eu/article/eu-balks-add-russia-natural-gas-pipeline-ban-sanctions-package-g7/.

[20] See Modernization of the oil and gas industry is the most important vector for the growth of the economic power of Turkmenistan, Turkmenistan: Golden Age (Apr. 1, 2022),https://turkmenistan.gov.tm/en/post/62006/modernization-oil-and-gas-industry-most-important-vector-growth-economic-power-turkmenistan.

[21] Turkmenistan 2008 (rev. 2016)[Constitution], May 19, 1992 §1, art. 14.

[22] Model Production Sharing Agreement for Petroleum Exploration and Production in Turkmenistan, Art. 20.1 (Turkm.), https://faolex.fao.org/docs/pdf/tuk81989E.pdf.

[23] See Id.

[24] Minimum Wage – Turkmenistan, WageIndicator Foundation,https://wageindicator.org/salary/minimum-wage/turkmenistan last visited Nov. 7, 2023).

[25] Jason Fernando, Turkmenistan Manat (TMT): What It Is, How It Works, Example, Investopedia (Oct. 31, 2022), https://www.investopedia.com/terms/t/turkmenistan-manat-tmt.asp.

[26] Id.

[27] See Turkmenistan 2022, Amnesty International, https://www.amnesty.org/en/location/europe-and-central-asia/turkmenistan/report-turkmenistan/.

[28] See Nellie Huang, An unexpected city of extremes, BBC Travel (Mar. 11, 2015), https://www.bbc.com/travel/article/20150213-where-las-vegas-meets-pyongyang.

[29] Turkmenistan 2022, supra note 27.