AN EYE ON THE OIL & GAS SECTOR IN TURKMENISTAN

 

by Irina Begjanova

 

Turkmenistan=s abundant oil and gas resources make it a country to watch in the next millennium. A country of only some 4.9 million people, Turkmenistan borders on Afghanistan, Iran, Kazakhstan, Uzbekistan, and the Caspian Sea. Its hopes for rapid and lucrative development of its energy resources in the post-Soviet era were dashed by the dearth of export outlets to hard currency markets. In March 1997, Turkmenistan=s only paying export route, through Russia=s pipeline system, was shut down due to nonpayment problems with Ukraine, causing a sharp drop in export earnings. The Government of Turkmenistan is now looking to implement several proposed export pipeline projects and to develop its production and refining capabilities.

 

Natural Gas

Turkmenistan has the world=s fourth largest known natural gas reservesCafter Russia, the United States, and IranCwith estimated reserves totaling 13-21 trillion cubic meters of gas. In 1992, Turkmenistan produced 84 billion cubic meters (bcm) of gas, but only half of that amount was produced in 1996. Faced with limited export pipeline options and nonpaying customers, gas production fell even further in 1998 to just over 13 bcm. A new but small (8 bcm capacity) gas pipeline to Iran, built in 1997, currently enables Turkmenistan to export about 3 bcm of gas per year. To increase exports, Turkmenistan is actively pursuing a project to construct a pipeline to Turkey via the Caspian Sea, Azerbaijan, and Georgia, and it is also exploring options for exporting gas to China and through Afghanistan to Pakistan.

 

Oil

Turkmenistan has significant oil reserves amounting to 6-8 billion tons. Turkmenistan produced 6.3 million tons of oil in 1998 and around 4 million tons of oil during the first eight months of 1999. The country=s two oil refineriesCin the Caspian port city of Turkmenbashi and in the town of SeidiCare both in need of modernization. The Turkmenbashi refinery, where most Turkmen oil is refined to meet domestic needs, is currently being upgraded. The Seidi refinery, which is currently running at 6-8 percent of capacity, will also be reconstructed.

 

Government Energy Policy

The Turkmenistani Government is looking for foreign investment to develop its oil and gas industry and export routes to hard currency markets. Eight oil and gas resource areas have been made available for joint venture projects and production sharing. The government is also interested in developing offshore oil fields in the Caspian Sea. An international tender for bidding on Caspian Sea offshore oil field development was held in 1997. However, an unresolved dispute with Azerbaijan on the Serdar oil field has discouraged the winners of the tender from developing their concessions. Currently, Western Atlas (U.S.) is conducting a geological study of the shallow water area and the Karabogazgol Gulf of the Caspian Sea. An international tender for the right to explore and produce oil in the Caspian Sea is expected to be announced by year-end.

 

The Law on Hydrocarbon Resources adopted in March 1997 provides a detailed legal framework for conducting oil and gas activities in Turkmenistan. Under this law, three types of licenses can be issued on the basis of tender results or direct negotiations: an exploration license, an extraction license, and a single exploration and extraction license. Two types of agreements can be signed for oil production: a production-sharing agreement (PSA) and a joint venture agreement. A few foreign companies have already begun operations by signing PSAs in the oil sector. The government expects more foreign oil and gas companies to come to Turkmenistan in the near future.

 

Foreign Investment Projects

Thus far, U.S. direct investment in Turkmenistan has not been significant. In 1998, Mobil Oil, in alliance with Monument Oil (Great Britain), signed a production-sharing agreement with the state Turkmenoil company and invested more than $40 million in the development of the Burun oil field in western Turkmenistan. In summer 1999, Mobil received a license to explore the Garashsyzlyk oil field, and planned to increase its investment in Turkmenistan.

 

Several other foreign companies have invested in Turkmenistan. Since 1996, the Malaysian oil company Petronas has invested around $60 million to explore and develop three offshore oil fields in the Caspian Sea (block 1Cthe Gubkina, Barinova, and Vostochny Livanova fields). The Chinese Oil Corporation invested $14 million to restore and overhaul 30 oil wells. Monument made some investment in 1997-1998, and planned to invest $55 million in 1999 in the development of the Burun and Garashsyzlyk oil fields. Since 1993, Dragon Oil, an Irish-registered company whose major shareholder is Dubai-based Emirates National Oil Company, has invested around $125 million in the Larmag Cheleken joint venture with Turkmenoil to develop two offshore oil fields in the Caspian Sea (block IICLam and Zhdanova fields).

 

On February 19, 1999, the Government of Turkmenistan chose Pipeline Solution Group International (PSG), a joint venture between U.S. companies Bechtel and GE Capital, to lead the Trans-Caspian Pipeline Consortium (TCP). An agreement concerning the sale/purchase of Turkmen natural gas has been signed between Turkmenistan and Turkey. The TCP will transport natural gas 1,800 kilometers from Turkmenistan westward under the Caspian Sea across Azerbaijan and Georgia to Turkey. PSG and its 50/50 consortium partner, Royal Dutch/Shell Exploration, are expected to arrange financing and manage construction of the estimated $2.5 billion project.

 

Caspian Finance Center Support

In 1999, the U.S. Caspian Finance Center was opened in Ankara, Turkey, to assist American companies in entering the energy rich markets of the Caspian region. The center is run by three U.S. agencies: the Trade and Development Agency, the U.S. Export-Import Bank, and the Overseas Private Investment Corporation. Working with the commercial and economic officers of the Departments of Commerce and State, the multiagency trade finance team offers services designed to maintain U.S. commercial interests in the region and better position U.S. firms over foreign competition.

 

To contact the Caspian Finance Center, call Deborah Forhan, Director of Business Development for TDA in the Caspian Region, at tel: +90(312)468-6110; fax: +90(312)466-6082; or email: dforhan@tda.gov.

For more information on doing business in Turkmenistan, see the 2000 Country Commercial Guide, prepared by the U.S. Embassy in Ashgabat, at BISNIS Online www.bisnis.doc.gov/bisnis/country/cntasia.htm#Turkmenistan.

 

BOX

SELECTED PRIORITY INVESTMENT PROJECTS IN TURKMENISTAN

 

1.            Construction of  a Trans-Caspian gas pipeline (1,800 km) to transport natural gas from eastern Turkmenistan via the Caspian Sea, Azerbaijan, and Georgia to Turkey (Erzurum). The projected capacity of the pipeline is 16-30 billion cubic meters (bcm) of gas per year. Estimated cost: $2-3 billion.

 

2.            Upgrading the Seidi oil refinery (commissioned in 1991) to an overall annual capacity of 6 million tons of oil. Estimated cost: $300 million.

 

3.            Construction of a gas and chemical production complex in Seidi with an annual capacity of 200,000 tons of polyethylene. Estimated cost: $800 million.

 

4.            Installation of gas collector at the 94 km Beshkyzyl-Yelkui-Uchadji route. Estimated cost: $50 million.

 

5.            Development of oil fields at Eastern Cheleken, Northern Erdekli, and Southern Kamyshldja. Estimated cost: $30 million for each oil field.

 

6.   Rehabilitation of the Shatut, Ekerem, and Nebitlidje oil fields. Estimated cost: $50-60 million.