Russia wins new natural gas deal, undermining rival U.S. plan

By Henry Meyer Bloomberg News

Published: May 14, 2007

MOSCOW:

Russia agreed to build a new pipeline to import more natural gas from Turkmenistan, bolstering its dominant hold on supplies to Europe and heading off a rival U.S.-backed plan that would bypass Russian territory.

President Vladimir Putin of Russia met his counterparts from Turkmenistan and Kazakhstan on Saturday and reached a preliminary agreement on the pipeline, with a final accord expected to be signed by Sept. 1. The three leaders also agreed to improve an existing pipeline, part of which runs through Kazakhstan.

Russia relies on imports from Turkmenistan to meet its energy export obligations to Europe, where it sells its own natural gas for more than twice what it pays for Turkmen supplies. Russia is also seeking to head off a rival U.S. plan for a trans-Caspian pipeline that would reduce European dependence on Russia.

"Russia will have first call on Turkmen gas," Roland Nash, head of research at the Moscow-based brokerage Renaissance Capital, said. Turkmenistan may still use the U.S.-proposed pipeline as a "bargaining chip" to persuade Russia to pay more for the natural gas, he said.

The new pipeline agreements will increase capacity by about 20 billion cubic meters, or 706 billion cubic feet, a year by 2012, Putin said in comments broadcast on Russian television from the Caspian port city of Turkmenbasi. Russian state-run media said the new pipeline would cost $1 billion, compared with $10 billion for the U.S.- backed alternative.

Russia already buys about 50 billion cubic meters of natural gas a year from Turkmenistan, equal to four-fifths of the country's production. It buys the gas at $100 per 1,000 cubic meters and sells its own production to Europe for $255. The Russian natural gas export monopoly, Gazprom, supplies about a quarter of European natural gas needs.

Construction of the new pipeline, which would run along the coast of the Caspian Sea through Kazakhstan to Russia, is scheduled to start in the second half of next year, the three leaders said in a joint statement issued through the Interfax news service.

The president of Turkmenistan, Gurbanguly Berdymukhammedov, said that the U.S.-backed pipeline project was still "on the table," in comments broadcast by Russian state television. That pipeline would run from Turkmenistan to Europe via Azerbaijan, Georgia and Turkey.

"Keeping the door to the U.S. is sensible for Turkmenistan, but the country is in Russia's backyard," Nash said.

The Kazakh president, Nursultan Nazarbayev, said the agreement was dictated by "pragmatism" and was not an attempt to "go around" U.S. interests. U.S. energy companies have invested billions of dollars in Kazakhstan.

Valdas Adamkus, president of Lithuania, one of the smallest members of the European Union, threatened to block a trade and energy treaty between the 27-nation EU and Russia if Moscow failed to restore oil supplies. Russia shut a pipeline supplying Lithuania in July after an accident.