The Oil Drum

There has been the occasional story popping up in Drumbeat over this past week or so about the severe winter and gas shortages in Iran, and their resulting cut in supplies to Turkey. The Iranian domestic shortage was supposed to be made up from Turkmenistan. Unfortunately the shortfall from Iran to Turkey was supposed to be made up by increased supplies from Russia, but those also are falling short. About a year ago we saw some of the same discussion about supplies from Turkmenistan, through Russia, to Europe, with shortfalls and price increases – particularly relating to the gas supplies to Ukraine, through which the pipelines flow. At the end of that discussion the Turkmen got an increase in the price of their gas. It is therefore not surprising to see that Turkmenistan is seeking to double the price it gets from Iran.

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As the production from Saudi Arabia continues to lag, even if transiently, Russian production and exports become more critical to world supply. And so we exchange the problems of getting oil from the sandy wastes of the Empty Quarter, with those of production from the icy wastes of Siberia. There are a couple of small issues, that I thought could be discussed, relative to this.

The first of these relates to gas supplies from that part of the world. It was interesting to note, in light of a number of comments made on this site about Gazprom’s acquisition of Western European pipeline company shares, that they now appear to be similarly interested in those of Portugal, as their strategy to control gas flows throughout Europe continues to succeed. The benefits, to them, of this policy are clear, for example in the negotiations over Kovykta, a field with 2 tcf of natural gas and over half a billion barrels of condensate. The plans were to sell some 2 bcf, largely locally, and then to expand deliveries through pipeline networks.

Unfortunately BP has noted:

TNK-BP cannot sell gas from its vast east Siberian Kovykta field or its smaller Rospan unit in western Siberia without Gazprom because of the Russian gas giant's monopoly control over Russia's pipeline network.

And here it has a problem, since the local market is not large enough to absorb the gas that the field can produce...

As the year draws to an end, so Leanan has quickly caught the news that is only now being picked up elsewhere that the ruler of Turkmenistan, Turkmenbashi has died of an apparent heart attack with the immediate heir being announced as

Deputy Prime Minister Gurbanguly Berdymukhammedov as interim president -- in apparent violation of the country's constitution, which stipulates that the parliament speaker should take over until elections are held.

His nominal successor was the speaker Alezov, but, in the immediate consequence of the death, he has apparently been put under arrest (something that was prominent about 4 hours ago but which seems to have vanished from the Internet).

The reason for this little post is that Turkmenistan holds the fourth largest gas reserves around, and the future of these may now be in some doubt. We have written about some of the interplay between Turkmenistan, Russia and potential customers over the past year and it might be appropriate to repeat some of that information to remind you of the situation.

UPDATE: Thanks to Greko there is a Stratfor piece that gives more information on the current situation here .

Were we living a couple or three thousand years ago or so, perhaps now might have been the time to go purchase an animal and then get some learned scientist of the time to peer at its entrails. The thought struck me, after reading a comment by Jerome a Paris following my recent post on natural gas supplies, and how Turkmenistan might start favoring gas shipments east rather than west . His credentials in this are much better than mine. However, as you will see, I am not totally convinced.

Jerome pointed out that, with 25% or so of the world's natural gas under it's control, Gazprom is now pretty much calling the shots, and that a lot of the stories hitting the news should be read with that understanding in mind. That if they don't want a pipeline to be built, then it won't be.

With a couple of stories in the news this week, one's first inclination might be to think that we should stop worrying so much about immediate fuel supply problems.  Consider the report that natural gas supplies are at the highest level since 1984.  At a level of some 197 tcf, set against an annual production of around 18.3 tcf, this would appear to give us a reasonably good supply for over ten years.  Unfortunately life is not that simple.  As Dave pointed out our reserves are increasingly coming from unconventional sources.  And as the OGJ article points out

Production growth hasn't followed the increase in reserves, noted Chris McGill, AGA's managing director of policy analysis.

 "In 2005, over 27,000 gas wells were completed in the United States, which is the highest level of completions on record," he said. "However, most of these wells were drilled onshore in shale, tight sands, and coal seams, which are low-yield and slow-yield resources."

Sigh! It appears that the appearance of agreement between Russia and Ukraine is still just that, with final details of exactly for how long, and at what gas price remaining to be finally defined.  The Moscow Times carries a quote from the Ukrainian Foreign Minister

"Everything is extremely unpredictable," former Ukrainian First Deputy Foreign Minister Olexander Chaliy said by telephone from Kiev. "This is leading to huge uncertainty. This is all very bad for Ukraine." Chaliy coordinated talks with Russia on gas issues from 1998 to 2004.

It appears that this may note bode well for the current government.

"This is a big problem for Yushchenko," said Peter Bobrinsky, head of equity sales at Kiev-based investment bank Concorde Capital. "When you swim with the sharks and you start bleeding, you're in trouble."

Part of the problem appears to be that the initial agreement was achievable because Ukraine gets some gas from Russia and some from Turkmenistan.  At the time the Ukrainians agreed to pay a higher price for the Russian gas, but, by blending this with gas from Turkmenistan, which retained a cheaper price, the overall increase could be kept to an acceptable level.  Unfortunately the Turkmenistan government would now like to be paid at the going rate also. The fact that Ukraine has also increased its take by 70 million cubic meters to cope with the cold, which the Russians must allow since otherwise their customers in Western Europe would feel the pinch again,  does not make the negotiations any more friendly.

Grin! Given the nature of much of the discussion here, dare I mention that I was up in Indianapolis at an event that has a relation to NASCAR vehicles (duck!) Thought not!

More seriously as I traveled, I noted that the USA Today is reporting that the bad weather in Central Europe is continuing. As a result for the sixth day Gazprom was unable to meet its international market commitments.  And, with sabotage to the pipelines, supplies to Georgia and Armenia remain cut-off. The Turkmenistan President is in Moscow possibly to talk about Gazprom taking over Turkmen gas. The BBC reports that:

some experts doubt that Turkmenistan has the gas, or the pumping capacity, to cope with what is expected to be a 30% increase in demand for its gas from Ukraine.

In fact some think that Turkmen gas may be at peak levels.

For the short term Gazprom is sending some gas to Georgia via Azerbaijan but if the cold weather persists, as is anticipated, it may get more complicated.  Iran, for example, is also willing to supply Georgia.  This may be needed since the Russian supply is providing only 35% of that which is needed.

The continuing gas situation between Russia and Ukraine is receiving more attention in Europe perhaps than here. The problem is not just with Ukraine, Poland and Hungary as the Washington Post report shows.

The former Soviet republic of Moldova, which neighbors Ukraine, has not received Russian gas supplies for two days, Russia's RIA-Novosti news agency reported. It said Moldova had not signed a 2006 contract with Gazprom, and that Moldovan President Vladimir Voronin had complained that the Russian price was too high.
Like Ukraine, Moldova has sought to orient itself away from Russia and toward the West.

But an agreement to resolve that particular issue appears imminent.  At present the Russians claim that Ukraine stole 100 million metric meters of gas yesterday.  There is also a question as to whether Ukraine is continuing to get gas from Turkmenistan, a normal supplier of around 120 million cubic meters a day to Ukraine.  Russia has bought almost all the export supplies from Turkmenistan for the first quarter of this year. (Thanks William).

UPDATE: Interestingly the Turkmen press reports that there have been no discussions with Ukraine, and

The press release says that, meanwhile, gas supplies through Central-Asia-Centre (CAC), the only gas conduit that facilitates shipment of Turkmen volumes to Russia and Ukraine, would remain closed from 00:01, 1 January 2005 to 7 January 2005 for repair and maintenance of the system.