Turkmenistan is characterized by one of the most energy-intensive economies with its vast pool of oil and gas fields. Turkmenistan followed a ‘national way of development’ which was based on the Soviet model of development. At the time of its independence in 1991, Turkmenistan was heavily dependent on Russia for selling its gas for a long time despite the long-lasting neutrality strategy. It was dependent on the soviet pipeline network, which connected the country only to European Russia, through the Central Asia-Center (CAC) pipeline. Russia maintained the monopoly in Turkmenistan’s market through the State-owned company Gazprom and bought Turkmen gas at low prices to cover domestic needs while exporting Russian gas to the European States, obtaining huge revenues from the richer European market. The budget and economy of Turkmenistan became dependent on money coming from Russia due to its gas sales. The energy policy of Turkmenistan has seen a shift towards diversification of its energy resources while coming out of the Russian monopoly over the hydrocarbon resources of Turkmenistan with its pipeline system.
Turkmenistan has become one of the most important Central Asian countries for Chinese investment. China has become Turkmenistan’s primary trade and economic partner as a result of the expansion of energy connections and the timely delivery of Turkmen gas in huge quantities to China. The signing of a General Agreement strengthened Turkmenistan’s commercial connections with China in the post-Niyazov era. The signing of a General Agreement on Gas Cooperation between China and Turkmenistan in 2006 solidified Turkmenistan’s commercial connections with China in the post-Niyazov period. This gas transaction paved the way for China National Petroleum Company (CNPC) to develop reserves in eastern Turkmenistan and laid the groundwork for the Central Asia-China pipeline. China has emerged as a crucial ally in Turkmenistan’s diversification policy, which aims to lessen the country’s reliance on Russia. Turkmenistan was able to break Russia’s monopoly on Turkmen exports when the Central Asia-China Gas Pipeline was completed in 2009.
The 1,833-kilometer pipeline that runs from Turkmenistan’s Gedaim to China’s Xinjiang area’s energy-rich Xinjiang region passes via Uzbekistan and Kazakhstan. The Chinese National Petroleum Company (CNPC) initially committed $4 billion to the construction of the Bagtyarlyk gas field (with estimated reserves of 1,3 trillion cubic metres), which served as the pipeline’s primary source of supply. Gradually China’s investment in Turkmenistan’s massive Galkynysh (Renaissance) gas field development, with an unknown value for the first phase and an undisclosed number for the second. Turkmen gas output has grown as a result of Chinese funding for the extraction of the Bagtyyarlyk and Galkynysh large gas resources, which have been successfully supplied via Central Asia. -Gas Pipeline through China
The construction of the Central Asia-China Gas Pipeline has proven to be a significant step forward in Turkmenistan’s diversification plan. Because of its extensive coverage, the Central Asia-China pipeline might be considered the most successful example of regional cooperation in the energy sector. It will expand out through Uzbekistan and Kazakhstan (both suppliers) before reaching Chinese markets, with Tajikistan and Kyrgyzstan acting as transit nations The construction of the gas export route was finished in 2009 and hailed as the “pipeline of the century” by President Gurbanguly. This pipeline proved to be a milestone in the gas trade for Central Asia to bypass Russia. It was a great respite during the tough times when the country suffered the loss from a gas export restriction after the April 2009 explosion in the Central Asia-Center-4 pipeline carrying gas from Turkmenistan to Russia. It led to a nine-month dispute over gas prices between Ashgabat and Moscow, disrupting of flow between the two countries. Although this pipeline opened up a new export channel, Turkmenistan’s energy security remains fragile owing to the lack of shared borders with China, and the passage of Turkmen gas exports is dependent on the agreement of other Central Asian countries.
source: Petroleum Economist; Kazakhstan Railways, UN Carec; FT research
Turkmen administrations prefer to gradually expand or limit exports to China due to its small population and limited export revenue requirements. Turkmenistan’s strategic hydrocarbon policy appears to be based on the government’s intention to curb the activities of foreign corporations’ engagement upstream (except Chinese state-owned firms). The lack of managerial experience and skilled labour in China, as well as field development and a lack of information, make it difficult to assess the evolution of the country’s gas market, which is rapidly expanding and moving away from fixed and regulated prices toward market mechanisms, as per government policy.
China’s decision to obtain gas from Turkmenistan was based on its industrial strategy, which included providing Turkmenistan with a large-scale credit programme. It made upstream investments and built pipelines with the help of CNPC, a state-owned business, and state banks. The Chinese government encourages the growth of the gas market. The National Development and Reform Commission (NDRC) has adopted a reform plan that is the first significant step toward shifting away from the conventional regulated cost-plus pricing system and toward an oil-linked netback pricing system, which has been tested since November 2011. The objective, according to the NDRC, is to replace a large number of regulated pricing systems in each province with a single city-gate price, and then to “liberalize well-head prices and allow the market to decide the prices”
Turkmenistan has made a significant contribution to the development of the Lapis Lazuli international transit corridor, which aims to reconnect Afghanistan with world trade by connecting it to the INSTC and BTK lines that run through Turkmenistan, Azerbaijan, Georgia, and Turkey. The Lapis Lazuli International Transit Corridor links Georgia, Turkey, Afghanistan, Turkmenistan, Azerbaijan, and Turkmenistan both by land and rail. It connects to the BTK railway, which travels from China to the Caucasus and then to the EU. Since the beginning of 2018, the corridor has been in use and has been a key factor in Afghanistan’s new economic boom.
Chinese State Councilor and Foreign Minister Wang Yi held a meeting with Turkmen Deputy Prime Minister and Foreign Minister Rashid Meredov on the sidelines of the third “China+Central Asia” (C+C5) Foreign Ministers’ Meeting in Kazakhstan in June 2022 and both sides agreed to intensify energy cooperation Both the countries decided to speed up coordination between the Turkmenistan development strategy and China’s Belt and Road initiative to strengthen global governance, revive the Great Silk Road, and further their cooperation in cyber and biosecurity.
Challenges to the energy partnership with China
Exports to China have increased at a fast pace: in the first half of 2019, China’s imports from Turkmenistan (nearly solely gas) totaled $4.4 billion. While Turkmenistan is China’s largest gas supplier, taking up more than 40% of the country’s totalgas imports, Beijing’s alliances are significantly more broad than Ashgabat’s. Turkmenistan has been using a large portion of its income to repay Chinese loans used to fund its energy infrastructure and is stuck in the debt trap. Turkmenistan owes China billions of dollars in loans for the construction of gas pipes to transport gas from Turkmen fields to China
While Turkmenistan is witnessing a deepening of its energy relations with China with a major boost in its export market, there also emerges a concern about its dependence on China as a gas export market.China has implemented a multi-vector energy policy that includes a well-diversified portfolio of regional gas suppliers, giving it a strong bargaining position when it comes to gas price and volume negotiation. Turkmenistan has become more exposed to Chinese price pressures as a result of China’s 2014 agreement with Russia, which has had a significant influence on the country’s economy. China’s insistence on paying substantially below European prices for Turkmen goods, with the possibility of even lower prices in the future, has Turkmen officials anxious about the country’s rising reliance on China. Ashgabat has become reliant on gas shipments to China, putting Turkmenistan in a weak bargaining position as seen in 2017 when Turkmenistan halted gas supply to Iran over a price dispute.
The trade pattern between the two countries shows an imbalance in the export and import of hydrocarbon resources. For example, Turkmenistan exports mainly raw materials in the form of hydrocarbons to China, and China on the other hand supplies finished goods, which has negatively affected the local businesses of Turkmenistan. Increasing engagements with China have resulted in the dependent structure of Turkmenistan on China where China is not only interested in achieving energy security but also in politically asserting itself in the region. Having a huge external debt to China, Turkmenistan is not in a position to cut its ties with China but can surely work on reducing its dependence by working on an export diversification strategy. The untapped export market of South Asia in the east and the highly profitable market of Europeans up the opportunity for Turkmenistan to diversify its export routes. The TAPI (Turkmenistan-Afghanistan-Pakistan-India) project offers a potentially lucrative option in the South Asian market as part of Turkmenistan’s diversification strategy. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline offers a promising alternative for Turkmenistan to diversify gas exports. It offers the opportunity to reduce the risk of overreliance on a single player. Turkey and Iran also offers the huge the potential to be significant players in Turkmenistan’s diversification strategy.